Baidu breakthrough as Microsoft's search engine in China
From Baidu’s standpoint, becoming the default search engine on Windows 10’s browser will see it take the majority of the market share away from the Chinese version of Bing. In all likelihood, Microsoft has probably decided that Bing is an unfeasible business in China, and has decided to sacrifice it in return for better sales of its operating system.
The co-operation between Baidu and Microsoft would be beneficial for both firms, because it would help them to stave off competition in their respective markets. Google’s weak relationship with the Chinese government means that Google Search and its many apps are completely banned on the mainland, and even the Google Chrome browser had severe difficulties loading any website a few months ago.
China’s brand-loving consumers are often assumed to offer strong demand for anything that Apple produces. Whilst this may be true, Apple products in China approach double that of the US, which for a country with a much lower GDP per capita, it makes Apple products all but unattainable for the wealthy minority.
This means that PC, and thus Windows, continues to hold a dominant share of the operating system market. Another aspect to this is that Alibaba is developing its own operating system, which is in use on smartphones, smart watches and the soon-to-be-launched smart car, which suggests that a PC operating system may potentially be launched. This would be detrimental to both Microsoft and Baidu (since Alibaba would incorporate the operating system into its services ecosystem), and so both firms have moved to mitigate this risk.
I have discussed before how smaller Chinese firms are using the big three tech firms (Baidu, Alibaba and Tencent) to leverage their business model in China, and this seems to be a valid strategy for large western firms as well.
Management and risk description
China is currently enjoying a week-long national holiday to celebrate the birth of the People’s Republic, which means that with exchanges closed, US-listed Chinese firms won’t be affected by domestic volatility over the coming few days. Nevertheless, this may all be delayed until the opening of the domestic exchanges, when several days of events are priced into the market.
The volatility that Chinese equities have endured over the past few months seems to have died down, and that should help to see US-listed Chinese equities post returns based on company-specific issues.
However, volatility surrounding the health of the Chinese economy continues to linger, and this could derail the thesis of this trade view.
For the purpose of this trade, I will set the time horizon to two months. This will encompass the conference calls of both companies, and from then on, we should get further information on the co-operation.
Time Horizon: Two months
— Edited by Adam Courtenay
For more on equities click here
Non-independent investment research disclaimer applies. Read more