Source: Baidu.

Like key areas of the U.S. tech industry in the 1990s and 2000s, an arms race is in full swing in China today.

The stakes?

Technology giants foreign and domestic are vying to determine who will dominate the tech industry in the world's most populous country. With trillions of dollars of sales hanging in the balance, the stakes couldn't be any higher.

Many of global tech's most powerful names aim to challenge the cadre of homegrown incumbents in this space, a theme typified by e-commerce leader's (NASDAQ:AMZN) recent partnership with Chinese search leader Baidu (NASDAQ:BIDU).

Baidu and Amazon team up
Earlier this month, Amazon announced the official launch of its Fire tablet in China. Sticking to its usual low-cost pricing, in a move that should surprise exactly no one, Amazon will charge RMB 499 (US $78) for the Fire.


Amazon also enlisted Baidu to serve as the default search provider for all Fire tablets it sells in China. In addition, Baidu will provide Chinese-language apps and online video services for Amazon's incoming tablets, which should give Amazon's Fire OS the necessary Chinese-language software to compete with domestic white-label tablet OEMs. As with any attractive deal, Baidu and Amazon jointly benefit from this arrangement. However, from an investors' perspective, who benefits more: Amazon or Baidu?

The bigger winner
As I see it, Amazon stands to benefit far more from this deal than Baidu for a few reasons. As of this spring, Alibaba and controlled an estimated 90% of the Chinese e-commerce market, an unpalatable reality for Amazon and its ambitions for global domination. Amazon needs a way to tap into the booming Chinese e-commerce space, and given the outsized success of tablets in driving online shopping, introducing Amazon's own branded tablets seems like the perfect method for creating inroads into the Chinese e-commerce market.


Still, its efforts will probably take many years to fully bear fruit. In entering the market, Amazon is taking on powerful domestic incumbents, akin to a smaller upstart trying to disrupt Amazon in the United States. However, Amazon has proved time and again that its competitive drive and willingness to think long-term shouldn't be overlooked. The potential rewards appear worth the effort. Researcher Kantar predicts that by 2020, China's e-commerce ecosystem will cater to 891 million users and produce total sales of roughly $2.2 trillion at today's exchange rates. That's too massive an opportunity for Amazon to watch develop from the sidelines.

Baidu, meanwhile, should benefit from this alliance with Amazon, but probably to a lesser degree. I see this as more of a defensive move on Baidu's part. Baidu dominates the Chinese search market allows Baidu to routinely turn out sizable profits. Furthermore, with tantalizing long-term growth prospects, Baidu remains one of the most obvious long-term tech investments anywhere. However, its competition doesn't operate in a vacuum, and Baidu has seen several new challengers in search in recent years from the likes of Qihoo360 and's Sogou search engines.

Credible research on the state of the Chinese search-engine and services market is scarce, but what research we have tends to support the notion that Baidu's market position remains largely unchanged. By adding Amazon as a new partner, Baidu appears to have further solidified its position. So while both Amazon and Baidu stand to gain from this recent deal, I think Amazon investors have more to celebrate by pushing deeper into one of the most massive growth markets in all of tech.

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.