July 25, 2017 11:06 am JST

Chinese tech companies take the lead in battle for Southeast Asia

Digital wallets the ultimate target of the groups' aggressive pursuit of startups

JOYCE HO, Nikkei staff writer

SINGAPORE -- The $2 billion investment by China's Didi Chuxing and Japan's SoftBank Group into Southeast Asian riding-hailing company Grab marks a new record for venture fundraising in the region. But it may be surpassed sometime soon as Chinese technology companies look to Southeast Asia as the perfect nesting place for their first overseas strongholds.

Chinese tech players have increasingly courted Southeast Asia startups since late 2015, investing at least $3.27 billion so far, according to CB Insights, a New York-based research firm focusing on startups.

Leading the game is e-commerce giant Alibaba Group Holding, whose chairman Jack Ma Yun has vowed to build a worldwide customer base of 2 billion in a decade. Ahead of Amazon's entry into Southeast Asia via Singapore slated for this year, Alibaba had raised its stake in regional online retailer Lazada Group to 83% in June, while buying local allies in the fintech field such as Thailand's Ascend Money, the Philippines' Mynt and Singapore's M-Daq through Ant Financial, the $60 billion unicorn that runs Alibaba's online payment services.

Shenzhen-based Tencent Holdings, which operates mobile messenger WeChat and web portal QQ.com, likewise poured at least $100 million into Indonesian ride-hailing startup Go-Jek in May, after beefing up its content business in the region with Philippines educational tech company ABC360 as well as Thailand's Ookabee U and Sanook.

The tie-ups also extend into the infrastructure that incubates startups, with Shanghai-based co-working space operator naked Hub merging with Singaporean counterpart JustCo last Tuesday. The latter is planning to add nine locations across Southeast Asia by the end of the year, including in Jakarta, Bangkok, Kuala Lumpur, Manila and Hanoi.

The merged entity, according to local media, is expected to close its Series C financing as early as August, raising around $200 million from investors such as tech-focused investment bank China Renaissance.

Digital Wallets

"The reality is that China's leading internet giants need to look outbound for untapped markets," Matthew Wong, senior analyst at CB Insights, told the Nikkei Asian Review. He noted that Tencent's WeChat represents nearly a third of China's entire mobile usage, while Alibaba's e-commerce business would have to outgrow China's online shopping market to meet revenue targets.

"Southeast Asia thus represents a market that China's internet giants see as attractive for reasons including growing mobile penetration, a younger population, and a cash-heavy society that can leapfrog into mobile payments," said Wong. "It also helps that Southeast Asia has the largest Chinese diaspora in the world."

Ku Kay Mok, an investor from pan-Asia venture capital firm Gobi Partners, also said Southeast Asia is a "logical market" for Chinese expansion given these companies' established presence at home and the dominance of the "prepaid service and micropayment-driven business model" in the region's emerging economies, where users generally opt for lower-priced devices, such as those manufactured in China.

But he emphasized that the ultimate goal for a lot of Chinese tech players foraying into Southeast Asia is to control the "digital wallets" of the unbanked, or some 73% of the region's 600 million people, according to a KPMG report in 2016. "Ultimately, the big payoff [is] to be an infrastructure service provider," said Ku. "To become the banks in Southeast Asia."

In the case of Go-Jek's GoPay, drivers have become a point of sale, mirroring Wechat Pay's integration of Didi to drive transaction growth. Go-Pay has also expanded its money transfer service during the Ramadan holiday, just as WeChat Pay offering red envelop feature during Chinese New Year. 

Noting that Chinese players typically need local partners to navigate the ethnically diverse Southeast Asian market, Ku suggested that the potential for attracting Chinese follow-on investments has become a strong deciding factor in whether a Southeast Asian startup makes its way into his portfolio.

Local startups keen for Chinese courtship

Such an expansion trajectory for deep-pocketed Chinese tech players has also prompted local startups to expedite their plans for scaling up in the region.

"One or two years ago we kind of expected that the Chinese players, after building a certain critical mass within China, will start looking at neighboring markets," Kelvin Teo, co-founder of Singapore-based Funding Societies, told reporters last Monday.

Having expanded into Indonesia and Malaysia, the company is also trying to enter its fourth market. It now claimed to be the largest online peer-to-business lending platform in Southeast Asia by loan origination and the amount of loans outstanding, which have exceeded 50 million Singapore dollars ($36.7 million) and S$20 million, respectively.

"We have been actively going into China to introduce ourselves, to share what we do, so that we can serve as an excellent partner for Chinese players coming in," said Teo, noting that his company enables "fast market entry" for Chinese tech players seeking to expand abroad and go public.

Last year the company raised $7.5 million through Series A financing, and is targeting another funding round next year, hoping to receive strategic investments from Chinese players, banks and venture capital funds.

He said the participation of Chinese tech giants in Southeast Asia, with their technology and expertise, will accelerate market consolidation. "There are 30-plus [peer-to-peer lending] players in Singapore for a market of 5.5 million people," said Teo. "That is a lot of players in a small market."

"To me it's a good sign because you don't want the market to be overcrowded," said Teo.

Challenges

Vinayak H.V., a Singapore-based partner who leads McKinsey's digital banking practice in the Asia-Pacific, said that Chinese tech companies might face some challenges when expanding into Southeast Asia. While adopting the acquisition or partnership model, as opposed to organic growth, is almost a given for product localisation, Chinese companies might have trouble exerting full operational control, he said.

Besides, tightened capital controls and deleveraging at home also add complications to Chinese outbound investments. But Samson Lo, head of Asian mergers and acquisitions at UBS Investment Bank, said that Chinese tech companies venturing abroad will be a secular trend. "Such transactions are normally in the form of fundraising to prepare the targeted companies for IPOs in the future ... not really M&A in the strictest sense," said Lo, adding that the deal scale is rather small at around $100 million to $200 million.

Asia300

Alibaba Group Holding Ltd.

China

Market(Ticker): NYS(BABA)
Sector:
Industry:
Retail Trade
Internet Retail
Market cap(USD): 438,974.39M
Shares: 2,555.89M
Asia300

Tencent Holdings Ltd.

China

Market(Ticker): HKG(700)
Sector:
Industry:
Technology Services
Internet Software/Services
Market cap(USD): 473,285.71M
Shares: 9,498.99M

SoftBank Group Corp.

Japan

Market(Ticker): TKS(9984)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 87,280.78M
Shares: 1,100.66M

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