By this time, we all have heard the news of the Chinese hot air balloon hoovering over the United States. Some say it’s an act of espionage, others refute this claim with the notion that it’s a vehicle to collect weather data. Irrespective of who you believe (we can share our thoughts in private 😊), there is no denying that this is another illustration of deteriorating US-Chinese relations which bizarrely can have positive impacts for Latin America. The Chinese president Xi Jinping famously said, “Technological innovation has become the main battleground of the global playing field, and competition for tech dominance will grow unprecedentedly fierce”. More than ever, we are seeing this play out as the world comes to a realization that China and the US are not just military adversaries but economic ones. Both countries are advancing their rate of de-coupling from the other’s economy, and it turns out that Mexico, and in some cases the larger LATAM region are willing and able to pick up the slack.
Over the last few months, we have heard countless stories of nearshoring – the relocation of manufacturing from China to the north of Mexico to reduce the future risk of supply chain disruptions. Chinese companies are also using this tactic as a way to circumvent trade restrictions which prohibit American companies from purchasing certain Chinese goods (who would have thought that a Chinese company manufacturing outside of China with Chinese technology was all you needed to remove the “Made in China” label). Nearshoring has led to countless new LATAM technology companies building businesses to take advantage of these developments. For example, given the resurgence of manufacturing in the north of Mexico, some startups have realized that manufacturers need a better way to monitor machines to increase the life of equipment, thereby reducing capital expenditures, reducing downtime and ultimately reducing lost revenue. We have also seen manufacturing tech models that are focused on improving communication between Mexican suppliers and buyers of finished goods to speed up product delivery times and improve quality control. And last but not least, and it should go without saying, the need for trade finance is set to increase significantly as Mexican suppliers continue to complain about working capital issues related to notoriously long payment cycles. These manufacturers have previously been unlocked out of the financing system and with new fintech models focused on these SMEs they can finally access affordable trade finance.
We have also begun to see greater linkages between the Chinese and LATAM tech ecosystems. Latin America is the leading market for a number of Chinese tech companies – Mexico City and Sao Paulo is one of the largest markets for Didi (the Chinese ride-hailing app); given its ban in India and controversial history in the US, Tiktok has set its eyes on conquering LATAM; Shein, the Chinese fast fashion powerhouse has quickly rose to become one of the top retailers in Latin America. A few Chinese funds are also beginning to spend more time in LATAM, developing strategies to invest directly in startups and in early-stage venture fund managers. Many of these Chinese funds historically saw Southeast Asia (SEA) as their primary market to expand their thesis and now view LATAM as their next golden opportunity (in many instances LATAM and SEA have similar trends with LATAM being at least 5-7 years less advanced). This can create an opportunity for Chinese (and SEA) fund managers to identify trends that have worked in their home region and apply those learnings to support companies in ours.
In our view, Latin America has a strong ability to fill the void that is being created by the US-Chinese tensions. The impacts for the tech ecosystem are clear: knowledge sharing, increased investment capital, and eventually M&A opportunities.
How do you believe these trends will pan out for LATAM? Let us know what you think by answering the following poll and contributing to the dialogue. We’ll publish the results in our subsequent newsletter.
Poll: Do you think that the US-Chinese trade war will have positive or negative impacts for the LATM tech ecosystem?
