Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google recently announced that it will invest $550 million in cash in JD.com (NASDAQ:JD), the second largest e-commerce player in China after Alibaba (NYSE:BABA). Google will receive 27 million newly issued JD.com Class A shares at an issue price of $20.29 per share. That's equivalent to $40.58 per ADS based on the stock's volume-weighted average trading price over the past ten trading days.

The two companies stated that they would co-develop retail infrastructure for personalized, lower-friction shopping experiences across several markets, including Southeast Asia. Let's examine how this deal could benefit both companies.

A businessman waters a plant surrounded by gold coins.

Image source: Getty Images.

How this deal helps JD

Back in January, Bloomberg reported that JD was raising funds for an expansion into the US. JD plans to offer some of its marketplace products in the US and Europe through Google Shopping, its product search and price comparison platform. That move could help it counter Alibaba's AliExpress platform for overseas customers, while complementing the growth of JD Worldwide, its subsidiary which lets Chinese consumers purchase goods from other countries. A strategic partnership with Google could also help JD sidestep some of the escalating trade tensions between the US and China.

Google's support would also bolster JD's ability to counter Alibaba's overseas expansion. Alibaba-backed Lazada is currently the e-commerce leader in Southeast Asia. Lazada's top rival, Sea Limited's Shopee, is backed by Chinese tech giant Tencent, which is also JD's top investor.

JD expanded its own platform into Indonesia in 2015, and last year it invested in the country's ride-hailing service Go-Jek and set aside $500 million for e-commerce and fintech joint ventures in Thailand. The company also invested in Vietnamese e-commerce firm Tiki.vn earlier this year.

Singapore's waterfront.

Image source: Getty Images.

Google is the top search engine by a wide margin in top Southeast Asian markets like Singapore, Malaysia, Indonesia, and the Philippines. If Google integrates JD into its search engine across all these markets, it could strengthen JD's position against Lazada. If those efforts pay off, JD and Google could expand their partnership to other overseas markets.

Moreover, Google's investment helps solidify JD's positioning, which has been less certain this year due to ongoing concerns about its rising expenses and competition from Alibaba.

How this deal helps Google

Despite owning the top search engine in the world, Google trails behind Amazon (NASDAQ:AMZN) in product searches and e-commerce. Challenging Amazon in mature markets like the US seems futile, so it's logical to expand into markets where Amazon lacks a meaningful presence.

Amazon controls less than 1% of China's e-commerce market, and only recently established a foothold in Southeast Asia in Singapore. Google likely saw China and Southeast Asia as growth markets for its product search and e-commerce efforts, but realized that market leader Alibaba probably wasn't eager to make a deal. Therefore it made more sense to follow Tencent's lead and invest in JD.

Partnering with JD could also help Google reenter the mainland Chinese market, which it exited in 2010 after clashing with government regulators. This wouldn't be Google's first step back into China -- it announced the development of its first Asia-based AI center in Beijing last year. Those moves could serve as stepping stones toward Google relaunching its search engine in China -- which Google CEO Sundar Pichai has hinted at in the past.

The key takeaway

Google's investment in JD will likely help both companies over the long term.

The deal probably won't move the needle for Google right away, but it could be a smart way to counter rivals like Alibaba and Amazon in high-growth markets like Southeast Asia.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, JD.com, and Tencent Holdings. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, JD.com, and Tencent Holdings. The Motley Fool has a disclosure policy.