China and Latin America still open to trading tech talent

Recent reports indicate that Chinese tech giants Alibaba and Tencent have laid off staff and slowed down the rate of investment in startups, just as China's central government has also reduced state-funded tech financing. This marks an end to the period in which central government welcomed startups from abroad, hoping that their know-how would contribute to Chinese tech supremacy.

However, according to AgencyChina, which provides marketing services for foreign firms looking to enter China, the country still has plenty to offer.

The cooling of China's tech sector "doesn't mean that everything's come to a grinding halt - far from it," AgencyChina's research and strategy manager Michael Norris told BNamericas. "The sector's scale and fierce competition remain, but investors and companies are becoming more level-headed. Strategic discipline, rather than oodles of venture capital, is increasingly the mantra of the day," he added.

Even China's tech giants "will be measured in their approach. They will tend to invest in mature and maturing propositions, rather than early-stage moonshots," Norris said.

Due to the slowing down of China's internal economy, and negative international effects from the ongoing trade war with the US, Latin America is among the high-growth, technologically adapting regions that now look much more attractive to China.

However, there is a risk that countries in this region will eventually introduce more stringent and comprehensive rules, just as governments around the world are increasingly willing to fine for actions retrospectively, said Andrew Kitson, head of telecom, media and technology at Fitch Solutions Macro Research. But Chinese companies accepted this risk and invested heavily in Africa and developing Asian markets, and are now turning to Latin America in the same way, he added.

"Chinese tech investors are very keen to exploit whatever opportunities they can in Brazil," for example.

However, "smaller or more specialized Chinese tech companies have to be more selective and [Latin America's] unsettled political and macroeconomic conditions, combined with a degree of ambiguity in local foreign investment rules make it too risky for some of these players," according to Kitson.

It has been said that acquisition by Alibaba or Tencent is the only option for Chinese startups to go mainstream, since the former hold all the potential users, who are accustomed to finding everything they need on a single platform.

Nevertheless, the Chilean unit of international auditing group BDO recently returned from a government trade mission to China confident that a variety of Chinese investors are keen to participate in Latin America's startup ecosystem.

While it may be that central government has become more wary of taking on startups, it was Beijing's incubator program Innoway that received Chile's trade promotion agency ProChile and agreed to assist startups from the other side of the world.

According to Mauricio Benítez, director of BDO’s Chilean desk in Shanghai, the beauty of working with Innoway is that it is part of an ecosystem of local incubators, accelerators and individual enterprises, implying that overseas ventures accepted by Innoway will be exposed to other potential investors. Also, although Alibaba and Tencent are hugely important, other investment groups exist that are not so well-known in the West, he added.

In October 2017 Alibaba announced a plan to invest US$15bn during 2018-20 in the DAMO Academy, a research institute that would work mainly on AI, but also on blockchain, computer security, fintech, and quantum computing.

Parallel to that the group invested heavily in acquisitions during 2017-18. Research firm IT Juzi estimates that Alibaba bought 94 firms in 2018, while Tencent acquired 149, mostly in entertainment and content.

Considering that the DAMO program will continue through 2020, Alibaba could still be open to acquisitions, in any geography, if it finds firms boasting useful intellectual property.

IT GOES BOTH WAYS

Alibaba recently partnered with Brazilian IT services firm UOL Diveo to act as an intermediary for Brazilian firms looking to do business with Chinese firms or on Chinese territory, where they would probably require cloud services provided by Alibaba itself.

Fitch Solutions' Kitson stated in a recent paper that Alibaba could also provide advanced data analytics, artificial intelligence and remote computing services directly to Brazilian enterprises through this arrangement, as long as data pertaining to these clients resides in UOL's facilities on Brazilian soil.

Alibaba's strategy thus mirrors the trend in recent years for Chinese firms to establish an indirect presence in Latin America, usually through FDI investment in infrastructure or energy projects, and later scout for direct deals with local businesses.

However, it's somewhat trickier in Brazil's tech space, especially where data management is at play, with the 2014 Marco Civil law obligating firms to store data locally. And Kitson thinks local rules will become trickier as time goes on, which is why it made sense for Alibaba to partner with UOL.

"Judicial authorities at the state level are better informed or more sensitive to potential loopholes in the law and could press for change at the federal level," Kitson told BNamericas. When that happens those with a less overt presence, like Alibaba, will ride out the changes better than those with a direct presence, like Microsoft, he said.

In the case of Alibaba, while this indirect presence could result in B2B customers, it could also put the group in a better position for discovering Latin American startups.

With central government leaving it up to the likes of Alibaba and Tencent to get further know-how, "Chinese technology companies (and other sectors) will be encouraged to invest where they can and where such investments can open up new channels for Chinese investment more generally (e.g. infrastructure, financial services etc.)," Kitson said, stressing however that he does not know if there has been an official directive to that effect.

Specifically, China's tech giants are interested in Latin American tech companies that have the potential to grow to entire mobile commerce ecosystems, Norris said, adding that as early as 2016, search engine Baidu identified that Peixe Urbano (since merged with Groupon LatAm) could be Latin America's equivalent of [Chinese food delivery and discount platform] Meituan.

However, with Facebook, WhatsApp and Instagram already so dominant in Latin America, it is doubtful that one of the Chinese groups could replicate the one-stop-shop model (combining social media, e-commerce, fintech and many other services on a single platform) that has proved so successful for them on home turf.

Margaret Myers, director of the China and Latin America program at the Inter-American Dialogue, finds that outcome hard to imagine. China's role in Latin American connectivity could prove of benefit, she sad, but "there are numerous challenges from a regulatory perspective, and on the financial side there are a number of well-established credit cards etc., which have had to navigate very complex financial regulations over the years."

While the flow of tech talent between China and Latin America can go both ways, on balance our guess is that there is more potential for Chinese firms to expand into Latin America than vice versa.

Myers believes this would certainly be true given the potential for Tencent and Alibaba to position themselves overseas. "A lot of the solutions that China has employed at home could be attractive to the Latin American market given that China has in many ways leapfrogged certain technologies, and Latin America could too," she noted.

Outside the tech realm, sone Latin American companies gained presence in China, thanks to exposure on Alibaba's e-commerce sites. Myers cites Juan Valdez coffee from Colombia, various retailers and tequila brands from Mexico, and efforts to partner with Chilean wines.