Why are Baidu, Alibaba, and Tencent investing in FII?
It might seem unusual for Baidu, Alibaba, and Tencent to invest in FII, since all three companies generate most of their revenue from advertising, transactions fees, or software instead of hardware. However, investors should remember that all three companies are also expanding their presence in cloud computing, data centers, and connected cars.
Therefore, FII could become a valuable supplier of networking equipment, 5G chips, or automotive components for all three companies. FII could also reduce its dependence on big customers like Apple and evolve into a first-party device maker -- just as Samsung did over the past few decades.
Servers in a data center.
Image source: Getty Images.
These investments are also likely politically motivated. Many of FII's other top investors are Chinese state-owned enterprises. Baidu, Alibaba, and Tencent are China's three biggest internet companies -- but none of them are listed on Chinese exchanges.
China recently started urging its tech companies to launch new listings at home, and FII's IPO is being promoted as a marquee listing to kick-start its domestic IPO market. That's probably why FII's filing was approved in just over a month, versus wait times of one to two years for typical IPOs.
That fast-track approval was also likely related to the fact that Foxconn is a Taiwanese company. A mainland IPO for Foxconn's high-growth manufacturing unit allows Chinese firms to own larger slices of the Taiwanese company -- which wasn't previously possible due to Taiwanese restrictions on Chinese investors owning large shares of Taipei-listed companies.
Lastly, Chinese tech companies are now pooling their resources as a hedge against the escalating trade tensions between the U.S. and China. Tencent CEO Pony Ma recently called the U.S. ban on sales of components to telecom equipment maker ZTE a "wake-up call" for Chinese tech companies, noting that "without the mobile (devices), the chips, and the operating system," Chinese companies couldn't compete.
If China's state-backed enterprises and top tech companies nurtured the growth of their domestic hardware companies, the country could gradually reduce their dependence on overseas tech -- a long-term goal that has been repeatedly touted by the Chinese government.
Will this affect Baidu, Alibaba, and Tencent?FII's market debut will likely generate immediate paper gains for Baidu, Alibaba, and Tencent -- but they can't sell their shares anytime soon. Therefore, investors should see if their investments in FII will eventually help them expand into adjacent markets -- like data centers and cloud computing -- over the next few years.
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