Chinese Internet Giants in LatAm

BUENOS AIRES – Baidu, Alibaba and Tencent, China’s largest Internet companies, are turning to Latin America’s under-developed markets in the hope of replicating their successes in other emerging economies.

Baidu, the world’s No. 2 search engine behind Google, in July launched a Portuguese service during a ceremony at the Brazilian presidential palace attended by Chinese President Xi Jinping and his Brazilian counterpart, Dilma Rousseff.

Three months later, it paid an unknown amount for Peixe Urbano, an online discount voucher distributor. The Rio de Janeiro-based business has some 25 million registered users in Latin America’s largest economy and more than 30,000 merchant partners.

Alibaba’s retail site, AliExpress, also available in Portuguese, has become Brazil’s most popular online marketplace.

Tencent, meanwhile, is pushing its WeChat app and other services in Brazil and the rest of Latin America. Tencent is China’s largest Internet company by revenue; its market capitalization is over $130 billion.

Baidu, Alibaba and Tencent — sometimes grouped together by the acronym BAT — are part of a wave of Chinese technology companies expanding in the region. Another is Xinwei Telecom Technology, which has a mobile license in Nicaragua and leads a consortium in the country that is building a controversial canal.

China’s strategy

The Internet companies’ expansions in Latin America are part of Beijing’s policy to strengthen ties with the resource-rich region.

Chinese corporations have invested about $10 billion per year in Latin America since 2010, according to a 2013 report by the U.N. Economic Commission for Latin America and the Caribbean. Earlier this month, Xi reaffirmed “the deepening of mutual and beneficial cooperation in all areas” between China and Latin America and the Caribbean. He vowed to double trade between his country and the region to $500 billion in 10 years.

Chinese Internet companies have a unique role to play in Latin America as they help expand China’s soft power and internationalize the yuan.

Lourdes Casanova, academic director of the Emerging Markets Institute at Cornell University, said applications like WeChat are free but can be tools to draw a new customer base for Chinese video game and online payment services.

Latin America’s allure

The region’s own digital companies have largely failed to position themselves as market leaders because of weak competition, expensive and slow services, as well as inadequate Internet coverage.

Margaret Myers, director of the China and Latin America program at Inter-American Dialogue, a think tank, said the Chinese companies expect the region to offer promising business opportunities as Internet penetration improves along with the economy — which is what happened in China.

China went from more than 22 million Internet users in 2000 to 641 million in 2014, according to online database Internet Live Stats. At the same time, Latin America has the highest mobile penetration rate among emerging regions, according to Casanova. This makes it an ideal market for a mobile Internet pioneer like Tencent.

The comScore, an Internet analytics research company in the U.S., finds that Latin American Internet users spend about 26.1 hours online a week, more than in other emerging markets. Brazilians use the Internet for 35.6 hours a week, as much as Americans and Canadians do.

With incomes rising and improved mobile and broadband networks, the regional market is set to grow much faster.

Total online retail spending in Brazil, Mexico and Argentina is set to reach $47.3 billion by 2018, compared to $19.8 billion in 2013, according to Forrester Research. The projection is seven times what consumers in the three countries spent online in 2009. The annual growth rate is expected to be 19%.

Challenges into opportunities

One of the problems Internet companies face as they expand into Latin America is the region’s low credit card penetration rate. E-commerce sites may have to set up their own collection or payment systems, said Tina Lu, senior research consultant at Counterpoint Technology Market Research, in Buenos Aires.

Logistics is another headache, especially when delivering orders to rural areas.

“Most online retailers see their first customers come from the big cities — Sao Paulo, Rio de Janeiro, Buenos Aires or Mexico City,” said Zia Daniell Wigder, vice president and research director at Forrester Research in New York. “But with time, the highest growth comes from shoppers in smaller cities and towns.”

Baidu, Alibaba and Tencent know how to cope with poor infrastructure in China, where demand from small cities and rural areas has outstripped that from the country’s first and second tier cities. Yet, in Latin America, they have to deal with significant cultural barriers and different needs.

Also, in Latin America they will not have the same government regulations that protect them from ebay, Google, Facebook and other U.S. powerhouses.

“None of the [three] companies have much experience outside of China,” said Doug Young, a professor at the Fudan University Journalism School, in Shanghai. “And their limited experience outside China hasn’t been very successful. Alibaba’s biggest foray was in Japan, and that was largely a failure.”

Young said both Baidu and Alibaba have failed to crack Japan because Japan is a mature market with its own, strong brands.

Young thinks the BAT has learned its lesson and has since set its sights on emerging markets similar to China’s. Besides Latin America, Baidu, Alibaba and Tencent are also trying to build their brands in India and Southeast Asia.

“They surely know how to build a business,” said Lu, the Buenos Aires-based researcher, “but building brand awareness is not easy. It will take time and cost loads of money.”

In Argentina, for instance, e-commerce platform MercadoLibre remains the market leader after spending years building its brand.

So far, Chinese companies have shown great determination.

Alibaba in July inked a deal with the Brazilian postal service Correios to speed up deliveries. It has also set up a joint venture with China Shipping Group so clients can track where on the sea their surface orders are, a service bound to give it an edge in Latin America.

 

This article was published in Nikkei Asian Review (Japan) on February 2, 2015. Click here.


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