Chinese investors are going to find it difficult to replicate their investment approach in Southeast Asia
With Alibaba, JD.com and Tencent investing in and acquiring Southeast Asia-based startups like Lazada, it’s no secret that the region has become the new theatre of war for Chinese tech giants; for Chinese investors, Southeast Asia companies gives them a new avenue for bountiful returns — and at lower buy-in when compared to their home market.
At a panel discussion at SWITCH (Singapore Week of Innovation & TeCHnology), VCs from Southeast Asia-based firms went in depth about the impact of growing Chinese interest in the region, and whether Chinese investors are adopting the right approach.
The panel was moderated by Nic Lim, Founder and Managing Partner, 8Capita, and featured the following panellists:
- Jefrey Joe, Co-founder & Managing Partner, Alpha JWC Ventures
- Chua Wee Liang, Partner, Cowin Capital
- Chua Kee Lock, Group President and CEO, Vertex Venture Holdings Ltd
Here are some key takeaways from the panel discussion:
It isn’t just the BAT guys who are interested in Southeast Asia
While investments by the star players Baidu, Alibaba and Tencent (BAT) have been grabbing headlines, there are Chinese firms trying to address the Southeast Asia market, but they do so under the radar. Chua Wee Liang said that he is currently helping a Chinese drone company expand into the region.
According to Joe, in Indonesia, there has been an influx of Chinese companies, some of which are consumer-facing applications. They are testing the market to see whether it is viable to do business in the country.
For Chinese investors, they are attracted to the startups’ low valuations and small fundraising rounds. In China, a Series A round could go for around US$80 million while in Southeast Asia, these rounds typically range from US$2 to 10 million. So for Chinese investors, such deals are a bargain.
China and Southeast Asia are two very different markets and thus require different strategies
Southeast Asia, unlike China, is a complex and fragmented region, comprising different cultures, traditions and languages. Even putting country differences aside, Indonesia is itself a fragmented market: a company in Jakarta may operate differently from one in Bali, for example.
According to Chua Kee Lock, the region has 3 main markets: Singapore, which receives around 50 per cent of funding deals in Southeast Asia (many companies like to incorporate there due to its business-friendly environment); Indonesia, where there is a vast population and addressable market; the third one would either be Malaysia or Thailand (both healthily growing ecosystems).
If Chinese VCs and startups try to replicate their business or investment model in Southeast Asia, they would face a lot of pushback from the market. Chinese companies who intend to do so should be reminded that the US was met with strong barriers when they wanted to expand into their backyard, simply because the Chinese market is unique and different — and so it goes the same for Southeast Asia.
For example, while most people in China rely on online services like e-commerce platform Taobao for purchases, in Indonesia, the participation of the offline economy is still crucial. Joe said that more than 95 per cent of the population in the country still participate in this offline form (for example, topping up of phone credits via retail outlets).
So while pumping in money can help a company with growing and scaling operations, the participation of this market segment is absolutely crucial for businesses in Indonesia to stay relevant.
Chinese companies who buy over Southeast Asia-based startups and then operate them should also take time to thoroughly study and familiarise themselves with their new environment. Jefrey Joe says that Lazada’s new boss, Alibaba, may have had brought in their own leadership team, but in terms of traction and growth, there is still not much change on that front. So it will take some time for the team to adjust and process new learnings to adapt to the market.
Companies who focus on creating Southeast Asia-based copies of platforms or applications that were successful elsewhere should also be wary of wanting a quick exit (hint: Rocket Internet). While millions of Chinese money have been poured into buying such companies, Chua Kee Lock cautions that we could see a winding down of such voracious appetites in the next 12 to 18 months due to the trade war between US and China; Chinese companies may turn their attention back to their home market.
But this bodes well for Southeast Asia because it means that there will be less of a “momentum play”, which would mean that Southeast Asia startups’ valuations will be more realistic and entrepreneurs will be more grounded and focus on good products.
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