After Beijing’s tightened regulatory control over its tech sector wiped out billions of dollars in value from internet giants, investors and entrepreneurs are increasingly shifting sights to overseas opportunities to diversify risks, with Southeast Asia among their top options.
China’s regulatory crackdown on its tech sector, which has by far erased about $1.5 trillion of value from the country’s tech stocks, started in November 2020 when the regulators pulled the plug on the initial public offering (IPO) of Jack Ma’s fintech juggernaut Ant Group. The suspension of Ant’s $34.5-billion IPO was followed by a slew of new legislations over the past months, ranging from anti-monopoly rules to user data security and protection laws, that have put high-profile tech companies under investigation and big-ticket fines.
In its latest move, China levied a 3.44-billion-yuan ($533.9 million) fine on food delivery giant Meituan for abusing its dominant market position on October 8. The fine, which accounts for 3% of Meituan’s 2020 domestic revenue, is the second major penalty this year after it hit e-commerce giant Alibaba with a record $2.8-billion antitrust fine in April.
“I think there are many Chinese founders – especially in e-commerce, but really across all sectors – that are now looking at globalising [their businesses] with much more seriousness,” said Rui Ma, founder of Tech Buzz China, which delivers a series of podcasts on China’s innovations, during a panel discussion at the recently-concluded Asia PE-VC Summit 2021.
It’s “a combination” of concerns over regulatory overhauls that could potentially affect their sectors, and increased confidence in their ability to go overseas, especially the neighbouring SE Asian market, she said.
China’s Internet plateau
Coupled with China’s trade tensions with the US, some of the country’s biggest tech companies have already started raising their stakes overseas. Many of them are training their sights on SE Asia, where a growing smartphone-savvy population represents a market that could potentially bring faster growth than their home ground.
Singapore, a country widely viewed as more politically neutral by Chinese tech firms, is arguably the biggest beneficiary.
Social media and gaming giant Tencent last October picked a co-working space as its first office in the city-state. The move came after Alibaba acquired a 50% stake in a 50-storey office tower in Singapore in May, valuing the property at S$1.68 billion ($1.2 billion). TikTok-owner ByteDance was also reportedly planning to invest billions of dollars and recruit hundreds of employees in Singapore over the next few years.
Smaller Chinese tech firms followed suit. Online video platform iQIYI last December announced the launch of its international headquarters in Singapore and in March 2020 disclosed its plans of setting up a talent agency in SE Asia to cultivate its own entertainers. In March, online brokerage Futu Holdings made its SE Asia debut by setting up headquarters in Singapore, as its first market entry outside of China.
Driven by increased demand, Singapore saw tech companies take up 22% of new office space – a portion that has almost tripled between 2015 and 2020, according to estimates by real estate consultancy Jones Lang LaSalle (JLL).
There is “a feeling of uncertainty and insecurity” among entrepreneurs in China’s Internet field, said venture capitalist Helen Wong during the panel discussion. The period of regulatory upheavals is “positive” for venture capital companies who can help them expand into the overseas market and set up headquarters outside of China, she said.
Wong recently departed from Qiming Venture Partners, where she had led the VC firm’s investments in SE Asia, to set up her own venture. Prior to Qiming, she was a founding team member of GGV Capital.
Besides regulatory risks, this seasoned investor in both China and SE Asia saw “a bigger impetus” behind this trend of Chinese players’ SE Asian expansion.
“People have been shifting attention away from Internet platforms, simply because we see the Internet market plateau in China and the concentration of most traffic in the hands of Internet giants,” said Wong, whose early investments include Alibaba and Mobike, a bike-sharing firm that was sold to Meituan for $2.7 billion in 2018.
“There used to be more Internet companies [going overseas]. But in recent times, we saw AI companies, B2B supply chain companies, and even consumer brands like Haidilao [China’s biggest hotpot chain] and Genki Forest [a soft drink brand in China] going to SE Asia as they look for further growth,” said Wong.
As more Chinese entrepreneurs and businesses head towards SE Asia, risk capital investors have also jumped on the bandwagon, propelling many firms with a China background to outshine competitors in the local market.
“There is a diversion of capital that would have otherwise gone into China now interested in going elsewhere… with Singapore and SE Asia at the top of their minds,” said James Tan during the panel discussion. “… I think many of these Chinese individuals who are coming over [to SE Asia] will become a natural bridge to raising Chinese capital.”
Tan, who co-founded VC firm Quest Ventures to invest in the digital economy in Asia, cited Sea Limited, Southeast Asia’s most valuable firm with Tencent among its top backers, as an example. The rise of Sea Group has turned its China-born co-founder and CEO Forrest Li into Singapore’s richest person with an estimated net worth of $19.8 billion as of August, according to the Bloomberg Billionaires Index.
The fundraising model can also be seen in regional champions such as logistics startup Flash Group, which was co-founded by ex-Alibaba executive Di Weijie. Flash became Thailand’s first unicorn in June with a valuation of over $1 billion after raising $150 million from investors including China’s Buer Capital, and Alibaba’s eWTP Capital.
Indonesian courier startup J&T Express, launched in 2015 by two senior executives of Chinese smartphone maker Oppo, is in talks with investors including Tencent to raise $2-2.5 billion at a valuation of $20 billion, Reuters reported in September. Investors in its latest $1.8-billion round include China’s Boyu Capital, Hillhouse Capital, and Sequoia Capital China in April 2020. Ant and Qiming-backed Akulaku, Indonesia’s largest consumer finance startup led by its Chinese founder William Li, is raising a pre-IPO round this year before a public listing in 2022.
“There are still plenty of opportunities in China. It’s just that… there are opportunities elsewhere [that] really present themselves better,” said Tan, who expects Beijing’s heightened scrutiny over its tech sector to last for another one to two years.
“If you don’t want to deal with the regulatory pressure in China, you can come to SE Asia,” he said. “There are regulations [across the region], but at least they are not interfering in the [tech] space.”