China's Road to World Tech Domination Begins in Southeast AsiaBy and
Alibaba, Tencent and Didi see the region as a starting point
Deals are rising as the largest players chase virgin territory
Isaac Ho and several investors were watching a pitch from a cancer-detection startup in Singapore when one of the Chinese billionaires present got up and -- without a word -- scrawled “Speed x Market Share” in Chinese characters on a whiteboard. It was a simple formula that meant: be first and be largest, no matter the cost. But that’s when Ho understood how the Southeast Asian tech scene was about to change.
“It was the moment that I understood the Chinese strategy,” said the founder of Venturecraft Group who’s known in local medtech circles for whiskey-fueled networking parties. “If you are not the No. 1, you will become obsolete; if you are the No. 1, you can buy the newer technology. It’s a winner-takes-it-all game.’’
Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Didi Chuxing became titans of industry through a land grab whose velocity and scale took many by surprise: the first two now rank among the world’s 10 largest corporations. Five-year-old Didi out-gunned Uber Technologies Inc. in part through a willingness to spend untold amounts of cash. Now, seeking growth as their home market slows and saturates, the country’s tech overlords are shifting their gaze toward the rest of the planet. First stop, Southeast Asia: a region with twice the population of the U.S. and the largest Chinese diaspora in the world.
Chinese investments in technology abroad more than doubled to $37.8 billion last year, PricewaterhouseCoopers estimates. Among those, Alibaba paid $1 billion in 2016 for control of Singapore-based e-commerce player Lazada Group SA, now its beachhead for the region. WeChat-operator Tencent -- already a backer of Sea Ltd., Southeast Asia’s most valuable startup -- is said to be close to investing in Indonesian ride-sharing giant Go-Jek. Even Didi, Asia’s most valuable startup, backs car-hailing peer Grab and has declared its intentions to go global.
“What you are seeing is a change in mindset,” said Thomas Tsao, founding partner of early stage investor Gobi Partners. “They’re starting to aspire, not just to be the biggest Chinese company, but they are thinking globally.”
China’s laid the groundwork to take the helm of the regional economy for decades. Its ever-wealthier investors have poured billions into everything from transport to real estate, transforming the region. China almost doubled foreign direct investment into the six biggest Southeast Asian nations in 2016 alone, Credit Suisse Group AG estimates.
Little of that largesse went to a tech sector in its infancy. But with deepening mobile penetration and an emergent middle class, the country’s tech giants are beginning to take note. The region hosts the largest ethnic Chinese population on the planet -- a comfort to would-be financiers craving cultural similarities. Growth in the Asean-5 of Indonesia, Malaysia, the Philippines, Thailand and Vietnam is projected to exceed 5 percent annually through 2022, the International Monetary Fund says, outstripping North Asia’s 3 percent on average.
The territory’s still up for grabs. Grab and Go-Jek vie in ride-sharing, Tokopedia and Lazada in e-commerce, but no single player has emerged dominant in any segment. Compare that with China, where just a handful control the major spheres of search (Baidu Inc.), e-commerce (Alibaba), social media (Tencent) and ride-sharing (Didi).
Israeli tech pioneer Yossi Vardi says Alibaba’s moves to aggressively capture market share outside China reminds him of the U.S. in the 60s and 70s, when American companies began looking outward for growth and ended up as multinationals. “This is very, very substantial and it’s just a beginning,” he told a conference in Singapore last month.
More deals are indeed in the works. Alibaba’s Chinese rival, JD.com Inc., is said to be in talks to invest hundreds of millions of dollars in Indonesian online marketplace Tokopedia. Indonesian ride-hailing service Go-Jek is said to be in talks with Tencent to raise $1 billion. In Thailand, Tencent has increased its investments in media: its JOOX was the most downloaded music app in Thailand, Malaysia and Indonesia in 2016, according to App Annie. In January, it formed a joint venture with digital content startup Ookbee.
Alibaba has been the most aggressive thus far. It’s amassing a regional presence in anticipation of Amazon.com Inc.’s eventual entry, starting with Lazada. Co-founder Jack Ma traveled to Kuala Lumpur in March to declare Malaysia its first logistics hub outside of China, a centralized warehousing and distribution launchpad for the region.
It’s also laying the foundation for a financial network. Ma’s Ant Financial, China’s largest internet financial services firm, tied up with Thai conglomerate Charoen Pokphand Group on Ascend Money, which aims to serve 340 million Southeast Asians with limited access to banking. It’s struck similar deals with Indonesian conglomerate Emtek.
“There was first Alibaba looking at Southeast Asia,” said Michael Lints, a partner at Golden Gate Ventures. “We’re seeing more and more of the second-tier Chinese companies also looking at Southeast Asia.”
Unsurprisingly, the region’s investors and financial middle-men are getting pulled into China’s orbit. Hian Goh, founding partner of NSI Ventures in Singapore, is one of several venture capitalists who say a growing number of investors from the country have called on him and his portfolio companies of late. “Chinese interest in Southeast Asia has massively picked up,” he said.
Not everyone welcomes the influx. Alibaba’s and Tencent’s duel for supremacy risks inflating valuations in payments and e-commerce, shutting out all but the deepest pockets, said Peng Ong, Jakarta-based managing director at Monk’s Hill Ventures. “There will be a few companies that will get crazy valuations,’’ he said.
Resentment persists against the ethnic Chinese population’s disproportionate control of the economy in countries such as Malaysia and Indonesia, a sentiment that’s historically erupted in violence. Others fear deep-pocketed Chinese firms will squeeze out innovative local players, given their track record.
“The degree of competitiveness and bloodbath that is often observed in China ... is not visible in Southeast Asia yet,” Leon Hermann, head of South Asia and Southeast Asia at Global Founders Capital, told the Wild Digital conference in Kuala Lumpur.
Still, prompted by Ant’s aggressive expansion in the region, Piyush Gupta, head of top Southeast Asian lender DBS Group Holdings Ltd., already calls Alibaba and Tencent his biggest competitors. Homegrown VCs and startups likewise need to be on the alert.
“They’ve got to wake up because their backyard is getting invaded,” said Khailee Ng, a managing partner at 500 Startups.
Reconnaissance has begun in earnest in Indonesia, the world’s fourth-most populous nation. Adrian Li of Convergence Ventures, one of the earliest venture capitalists to move to Jakarta from China, escorted top angel investors around the capital last year including New Oriental co-founder Bob Xu, Meitu Inc. co-founder Cai Wensheng and Sinovation Ventures founder Kai-fu Lee. They called on local champions Go-Jek and Tokopedia, and later schmoozed with up-and-comers like dating-site Paktor over drinks at the century-old Kunstkring restaurant.
The country draws comparisons with China a decade ago: a lack of retail infrastructure, which powered Alibaba’s ascension; an exploding mobile-user base, which drove Tencent’s messaging service WeChat to almost a billion users; and a growing middle-class craving leisure and quality goods, which underpinned the rise of both.
China’s tech financiers may also be filling a void, as an inward-looking U.S. administration enhances the allure of Chinese money. Reddit Inc. co-founder Alexis Ohanian laments a missed opportunity for American investors. Warburg Pincus -- whose president Tim Geithner attended high school in Bangkok -- is one of just a handful of U.S. tech dealmakers in the region.
“I’m happy to see China taking the leadership role, but it also frustrates me because this has been our secret sauce,” Ohanian told the Tech in Asia conference in May.
In the end, Southeast Asia gains not just the capital and experience of Chinese benefactors, but perhaps also their brand of chutzpah.
“Their capital and knowledge are critical,” said Amit Anand, founder of Singapore-based Jungle Ventures. “But they are also bringing the sense of daring and boldness that is missing here.”