For the first time in their history, American and Chinese tech giants are going head-to-head in coveted emerging markets.
The world’s biggest tech firms have reached combined market caps of over $4 trillion without being in direct competition with one another. China’s “Great Firewall” has blocked American tech firms, apart from Apple, from competing with mainland rivals, while Chinese tech firms have steered clear of the U.S. European markets had already been won by Silicon Valley when China’s tech matured.
Now, rising incomes, expanding smartphone usage and better internet infrastructure are making emerging markets, particularly in India and Southeast Asia, prime targets for U.S. tech firms such as Google, Facebook and Amazon, as well as Chinese heavyweights like Alibaba and Tencent.
Chinese tech firms have come a long way, evolving from imitators to innovators, and are more than ready to range farther afield. Last year $5.2 billion in Chinese tech money went to Indian startups, says data provider Tracxn. According to market research group Forrester, big Chinese tech firms, including Didi and JD.com, spent $6 billion on acquisitions in Southeast Asia in 2017.
While American and Chinese firms are both keen to conquer emerging markets, their strategies for doing so differ markedly. American firms usually fund subsidiaries, which operate under the same brand and offer services very similar to those available in the U.S. Amazon, for example, is investing $5 billion to replicate its offerings in India. It has built a network of warehouses there, and introduced its Prime video and other services.
Alibaba takes the opposite approach: Rather than setting up subsidiaries, it invests in local companies, either buying them or taking a stake. In the past few years it has acquired a host of such companies in ecommerce, online payments and delivery, including Paytm in India, Tokopedia in Indonesia and Lazada in Singapore. Tencent is taking a similar route in emerging markets. It has invested in Indian startups in ride hailing, music streaming, ecommerce and other areas. Data firm CBInsights says that Tencent and Alibaba, along with its Ant Financial affiliate, have backed 43% of all Asian “unicorns.”
Amongst China’s competitive advantages are its strengths in payments processing and distribution. Along with banking and regulatory systems, these tend to vary greatly from one market to the next and can be highly idiosyncratic. Consider distributing packages across Indonesia’s 17,500 islands, for example. A local firm with local talent is clearly better positioned to navigate the intricacies.
On the other hand, Google and Facebook earn most of their revenue from advertising, which easily translates abroad. Likewise Amazon’s streaming video service can be rolled out from one country to the next. The American firms’ record of success and head start of some 20 years also work in their favour. More than half of Google’s and Facebook’s revenues already come from outside the U.S.
There are pros and cons to both approaches, and in the end, the two could start to converge, The Economist opines. Being global may work best for search and social media, while in areas where local knowledge is essential, American firms could adopt the Chinese strategy of acquisition. Amazon and Google are currently both considering acquisitions in India. Google has already invested $550 million in China’s JD.com. In any case, U.S. firms will face far tougher competition in emerging markets than they might previously have imagined.