Note: a version of this article was originally published in Venture Beat with the title Chinese Investors Target Latin American Startups as US Investors Shy Away. This version has more background and information about Magma Partners.
China, a country with deep roots as an industrial powerhouse, is now determined to center its economy around technological development and innovation. With government support and outward investments on the rise, China is positioning itself to have a much greater role in the global technology market.
According to Yilong Du, Managing Partner at Latham & Watkins, there are many factors stimulating the growth of the technology sector in China. Firstly, economic growth is driving the Internet market and an explosion of Internet-based companies. In China, 731 million people have access to the Internet and 95.1% of these people access the Internet via mobile devices, according to the China Internet Network Information Center. A budding, Internet-savvy middle class, coupled with a strong supply of talent, is driving China’s technology sector and increasing the demand for innovative products and services.
Shenzhen Capital Group Co Ltd, a State-owned venture capital firm, is just one example of a firm increasing its investments abroad to bring new technology to China. Through investments in innovative companies overseas, the firm hopes to strengthen China’s technology and industrial structure, said Ni Zewang, chairman of the SCGC. Zewang also stated that by connecting more Chinese startups with overseas resources, they can help local companies mature faster. While SCGC’s investments overseas account for only 6% of its current total, it plans to increase the figure to 15% by 2020.
In the first 11 months of 2016, China’s VC and PE firms made 265 investments worth 31.7 billion yuan (around USD $5 billion), according to Zero2Ipo Research, a Beijing-based researcher of financial institutions. Although Zero2Ipo Research data only shows reportable investment deals and the number of unrecorded deals much greater than this, it shows that the number of investments and the amount of money invested increased 105% and 189% respectively year-on-year from 2009 to 2015.
Venture capital investments, as well as mergers and acquisitions, overseas are helping Chinese technology companies grow their international footprint. What’s more, these investments have been flying under the radar – and even increasing – in a region of the world where most people might not expect it: Latin America.
China woos Latin America with financing
Traditionally, Latin America has turned to the United States for trade and financing opportunities from institutions such as the World Bank and the Inter-American Development Bank (IDB). However, under the Trump Administration, economic relationships between Latin America and the United States are more uncertain than ever. As a result, Latin American countries are strengthening ties with a new major trading partner: China.
Unlike many US investors, Chinese investors are generally less afraid of Latin America’s past and right after the 2016 elections, China pledged to increase trade with Latin America by $500 billion and foreign investment by $250 billion. To show they mean it, both of China’s development banks now provide more financing for development to Latin America than the World Bank, the IDB, and the Andean Development Corporation (CAF), combined.
China also set up USD $35 billion in multilateral finance platforms for Latin America – the USD $20 billion China-LAC Industrial Cooperation Investment Fund and the USD $10 billion China-Latin America Infrastructure Fund which were established in 2015. China also pumped another USD $5 billion into the China-Latin America Cooperation fund that was set up in 2014.
While trade between the US and Latin America has doubled since 2000, China’s trade with Latin America has multiplied 22 times, according to OECD economist Angel Melguizo. China is now the top trading partner for the major economies of Brazil, Chile and Peru. Furthermore, Argentina, El Salvador and Guatemala are well-placed to profit from China’s booming demand for global food. In Mexico, China’s JAC Motors invested over USD $200 million into a factory with Giant Motors, a company backed by billionaire investor Carlos Slim.
Tech giants like Alibaba are making their move
In addition to trade deals, Latin America’s burgeoning tech scene is also capturing the attention of China’s biggest technology companies and venture capital firms.
Alibaba, the largest Internet retailer in China and the world, has been steadily examining the Latin American market over the past few years. So far, the e-commerce giant has signed three memorandums of understanding (MOU) with governments in Latin America. The first, to establish a partnership with Brazil’s national postal service, Correios in 2014. Then, earlier this year, Jack Ma flew to Argentina to work out an agreement that would help bring food and wine from Argentina to China. In September, Alibaba also created a special program specifically for Mexico, in which it agreed to share best logistics and payment practices with Mexican companies so they can bolster their cross-border business activities.
So why does Alibaba have such a strong interest in educating and helping online merchants in Latin America? The main reason is that the e-commerce space in Latin America is incredibly under-developed compared to other regions of the world and Latin America consumers are already buying direct from China on AliExpress. Over the next five years, the region’s e-commerce market is forecast to grow 18% annually, however, it still only represents just 2% of the world retail market despite being 9% of the population.
Additionally, after almost 40 years of development, China’s middle class is one of the largest and most powerful in the world. There is an increasing demand from Chinese consumers for the best products from all around the world, for example Argentine wine, and bringing those products to Chinese consumers is just one more part of Alibaba’s strategy.
MercadoLibre, the largest e-commerce marketplace in Latin America with 174.2 million users in 15 countries, will try to make it very challenging for Alibaba to grow its presence in the region without a fight. Still, considering the fact that Amazon still doesn’t have a widespread presence in Latin America, it makes sense that Alibaba is strategizing early, should it decide to ramp up its presence, or even acquire MercadoLibre, as some have rumored it might try to do.
Growing VC interest in Latin American startups
Founded in 2012 by young Brazilian entrepreneurs, 99 (formerly 99Taxis) is an app-based, on-demand ride service much like Uber. 99 took off quickly in Brazil, reaching more than 10 million user downloads in the world’s second-fastest-growing Internet market. 99 is available in 550 cities in Brazil and is the leader in both São Paulo and Rio de Janeiro, two of the largest consumer markets in all of Latin America.
This year, Didi Chuxing, China’s largest ride-sharing companies, announced a sizeable investment in 99 to help the company expand its services into other countries in South America. Though undisclosed, a 99 spokesperson claimed the investment was in excess of USD$100 million.
“We welcome Didi to Latin America. Didi’s financing, state-of-art technology, and operations knowledge will play a key supporting role as 99 actively expands our network and services in Brazil and reshapes the competitive landscape in Latin America,” said Peter Fernandez, CEO of 99. Cheng Wei, the founder and CEO of Didi, highlighted their cooperation with more global partners: “China and Brazil are the world’s foremost emerging markets with enormous opportunities for our rideshare industry.”
99 isn’t the only startup to attract interest from Chinese investors. In 2013, Brazilian antivirus company, PSafe, raised a USD $30M Series C round of funding led by Qihoo, the largest online security service in China. Of the USD $30M raised, USD $25M of that came from Qihoo to help the company take their security services worldwide.
Early this year, Bluesmart, a smart luggage startup with back offices in Latin America, also announced a USD $12M Series A round led by Tsing Capital, one of the largest venture capital firms in China.
The potential of a tech partnership
The biggest names in China are already making their mark outside of China and now they’re ready to make their mark in Latin America.
What’s more, the Chinese government is making it clear that its goal is to build strong relationships with Latin America’s young and most innovative leaders. For instance, the “Future Bridge” Training Program aims to invite 1,000 young Latin American leaders to China over the next ten years. Magma Partners’ Jie Hao was invited to attend the 2017 China-CELAC Forum, and hosted the “Future Bridge” Training Program in Beijing earlier this year.
This type of talent exchange is not only happening at the Chinese government level. Over the last two years, I’ve been approached by a number of talented entrepreneurs with businesses in Latin America interested in learning about opportunities in China.
As a result, my firm Magma Partners, which now has offices in Santiago, Chile, Bogota, Colombia, Mexico City, Mexico and Los Angeles, CA opened a new office Beijing, China, is working with organizations like 36kr, one of China’s largest technology media companies, to provide Chinese investors and partners with a full review of Latin America’s technology environment and opportunities.
Led by our partner Jie Hao, we’ve published 40 educational articles with 36kr and have already established additional partnerships with 30+ other Chinese media companies. Magma Partners will work with the Chinese technology media, our established connections in the Chinese venture capital ecosystem, and with our connections to the 40+ Chinese incubators, to keep the educational exchanges going. We are also educating young entrepreneurs and startup teams in Latin America on the many ways they can find opportunities in China and how the regions can work together to build a better future for Latin America.