Baidu (NASDAQ:BIDU) and China Mobile (NYSE:CHL) recently signed a sweeping strategic partnership that pools their resources in "frontier areas" including AI, big data, 5G networks, and driverless cars. China Mobile, the largest wireless carrier in China, will also offer exclusive discounted data plans for 13 Baidu products, including Baidu's core app, its iQiyi video streaming platform, and its Reddit-like PostBar social media network.

The two companies will also collaborate on image recognition, voice recognition, and natural language processing tech for telco applications, smart devices, connected homes, and driverless cars. China Mobile's upcoming 5G network will support Baidu's driverless car efforts, which include its open-source Apollo platform and the integration of its virtual assistant, DuerOS, in connected vehicles.

A woman sits in a driverless car, reading while behind the wheel in traffic.

Image source: Getty Images.

China Mobile will also join Baidu's growing list of Apollo connected car partners, which already includes over 100 companies. Let's see how this partnership could benefit both companies.

How this deal helps Baidu

Baidu controls about 70% of the search engine market in China, which makes it the 800-pound gorilla of the internet advertising market. But in recent years, Tencent and Alibaba emerged as major threats to its long-term growth.

Tencent owns WeChat, the top mobile messaging app in China, and it's expanded the platform's ecosystem into adjacent markets like e-commerce, payments, search, and online-to-offline services like ride hailing and deliveries. Alibaba, the top e-commerce player in China, also owns Shenma, the second largest mobile search engine in China.

Baidu, Alibaba, and Tencent are all expanding their sprawling ecosystems into the cloud and AI markets. All three companies offer commercial cloud services, and they're all using AI algorithms to process their search, shopping, and social data into actionable information. Therefore, China Mobile's support could help Baidu widen its moat against those two formidable rivals.

Artist's rendering of a connected smart city.

Image source: Getty Images.

Meanwhile, Baidu enjoys a clear advantage in the driverless car market, since Baidu Maps is the most popular mapping service in China. The expansion of DuerOS into these vehicles could serve to keep passengers tethered to its services. Working directly with China Mobile ensures that those vehicles stay well-connected to the country's new 5G networks.

How this deal helps China Mobile

Shares of China Mobile tumbled about 16% over the past 12 months due to ongoing concerns about the saturation of China's smartphone market and higher expenses from the expansion of its 5G network.

Its mobile customer base grew by just 0.1% (1,121 customers) month-over-month to 899.7 million in April, compared to 0.4% growth in March. China Mobile is offsetting some of that softness with its newer landline business, but that growth is also slowing down, with 2.6% month-over-month customer growth in April -- versus 3.4% growth in March.

Therefore it makes sense for China Mobile to diversify its wireless business into adjacent markets like Internet of Things (IoT) devices, smart homes, and driverless cars. This is similar to AT&T's strategy in the US. In recent quarters, AT&T offset the sluggish growth of its smartphone subscriptions with fresh wireless subscriptions for other connected devices -- including wearables and connected cars.

This is an imperfect strategy, since connected devices generate lower revenues per unit than postpaid smartphones, but it allows mature carriers like China Mobile and AT&T to continue expanding their networks and ecosystems. That's why partnering with Baidu -- which already has a strong presence in IoT devices, smart homes, and connected cars -- makes perfect sense.

The key takeaway

Baidu and China Mobile's partnership won't move the needle for either company overnight. But over the long term, it will likely help Baidu and China Mobile expand beyond internet search ads and smartphone subscriptions -- making it a win-win deal for both companies.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.