Trump's trade war and the FANG bubble: Good news for Latin America?

Trump's trade war with China continues, but how is it affecting Latin America's tech industry?

Chinese investment in Silicon Valley has been almost completely choked off by President Donald Trump's new regulations, according to reports, even as signs suggest that some major US tech firms have been valued too high by the markets. Meanwhile the flow of investment into Latin America continues to build.

As all the world now knows, there's trouble in the US tech sector. Analysts have warned for years of a new bubble, and now it appears that the iPhone miracle - huge numbers of people clamouring to pay a massive extra premium for commodity hardware running a fairly ordinary UNIX-like operating system - may finally be running out of steam, with unpleasant consequences for Apple's market cap. The other headlining FANG (Facebook, Amazon, Netflix, Google) stocks have been looking sickly for some time and are on average 25 per cent down on recent peaks.

The bubble may not exactly have burst, but it could certainly be said to be leaking a bit. Investors are looking elsewhere.

Meanwhile in Silicon Valley, the place where the FANGs of tomorrow could traditionally be expected to appear, President Trump's new push to prevent foreign powers buying access to strategic technologies is underway. The Committee on Foreign Investment in the United States (CFIUS), the interagency body that reviews foreign investment for national security and competitive risks, will soon have enhanced powers: and it's widely believed to be gunning for China. In 2018, more than $3bn flowed from China into US startups: this year is unlikely to see more than a small fraction of that sum.

"Deals involving Chinese companies, Chinese buyers and Chinese investors have virtually stopped," Silicon Valley lawyer Nell O'Donnell told Reuters in early January.


Red star rising

The new CFIUS powers are just one facet of President Trump's ongoing trade war with China, whose fallout is landing all across the tech sector and beyond. Trump is also perceived as being no friend to Latin America: his administration has clashed with Mexico and other Latin nations over migration, and separate disputes are simmering with Brazil and Venezuela. Perhaps still more significantly, many Latin governments are beginning to view China as more important to them than the USA. Last September, America withdrew its ambassadors from El Salvador, the Dominican Republic and Panama after the three nations broke off ties with Taiwan. (China does not recognise Taiwan as an independent nation: the US is Taiwan's most important foreign ally.)

One of the reasons that China's star is on the rise in Latin America is Chinese president Xi Jinping's signature Belt and Road Initiative, a colossal global lending programme under which China finances the construction of new infrastructure. Much of this is concerned with transport, but it also includes major technology projects such as telecommunications networks in Latin nations. Chinese networking companies Huawei and ZTE are major players all across Latin America, often furnishing handsets for consumers as well as network equipment for the local telcos.

As early as 2013, Huawei could proudly boast that it was:

"A leader in market share across a range of different technologies and infrastructures in the [Latin American] region, including being the largest provider for IP DSLAM and Next Generation Network applications, and second in market share for optical networks, routers and LAN switches for the entire region," and that it had built mobile "infrastructure in Brazil, Mexico, Argentina, Colombia, Venezuela, Chile, Peru and Ecuador."

One of the factors in Huawei's success has been its ability to easily arrange financing for its customers from Chinese banks, often state-controlled: in effect, from the Chinese government.


Can't pay? We'll take it away

There are some risks to accepting major infrastructure investments from China. In Sri Lanka, for example, the new billion-dollar Chinese financed container port and dockyard at Hambantota has now been handed over to China on a 99-year lease, in a deal perhaps a little reminiscent of colonial history. (The New Territories, which make up more than 85 per cent of the area of Hong Kong, were leased to the British for 99 years in 1898.) Nonetheless, Latin nations need new infrastructure, especially new telecommunications, and it's widely felt that if China will come up with funding when the US will not, China will get the business.

"You left some space and the other guy moved in," one unnamed Latin American diplomat told US news service McClatchy recently, discussing rivalry between the US and China in the Latin nations. "The region will work first with the people who bring the money."

Then, quite apart from the Chinese government and its telecommunications projects, China's tech industry has joined the global rush into Latin America with the aim of helping people use their new phones and new bandwidth.

"I became very excited when I saw the opportunity with investment and guidance from China," Brazilian tech executive Alex Tabor recently told Bloomberg. "Historically, Latin America has looked to Silicon Valley and New York for business, but there are innovations in China that could be even more applicable to the Latin American reality."

Tabor is one of the founders of Brazilian e-coupon giant Peixe Urbano, which was built up with significant investment from China's Baidu. Other notable Chinese deals in Latin America have included Didi Chuxing's purchase of Brazilian ride-hailing app 99 and Tencent's investment in Nubank, the Sao Paulo based fintech unicorn.


No PC? No bank account? No problem

It's not only Tabor who suggests that Chinese tech companies find the environment in Latin America a natural one, as Latin nations are often facing the same challenges and situations that China has already dealt with. Examples include large numbers of people without bank accounts, people coming online for the first time via smartphone, and other situations not commonly encountered in Western nations. Speaking at an industry conference in late 2018, Michael Zhu of accelerator Accathon Capital said:

"Latin America [is] definitely booming. Investors and corporations have a growing interest in these markets thanks to an increasing population with access to digital platforms but lack of innovation technologies. This situation is causing a rush to seize market opportunities, with many similarities to what China experienced 10 years ago."

Margaret Myers, program director at The Dialogue for China and Latin America, recently told Bloomberg News that China "considers itself a developing country that has experienced rapid growth and leapfrogging technologies. They understand how technological innovation in a developing market like Latin America can be achieved."

The influx of Chinese capital into Latin tech was happening even without Donald Trump's trade war and would surely also be taking place to some degree even without Beijing's Belt and Road initiative in the background. Now, with Silicon Valley largely closed to China, it seems certain that still more billions in Chinese startup investment will be focused south of the US-Mexico border: and they will increasingly be joined by capital from around the world, all the more so at the moment with the US-based tech sector in the throes of a market readjustment.

For those in Latin America with the smarts and agility to deal successfully with the Chinese, these are promising times.