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​How Chinese money is driving Southeast Asia’s tech start-up scene

Published on: 06-Oct-2019

Chinese investment in Southeast Asian start-ups ballooned to US$1.78 billion in the first seven months of this year, an eightfold increase over the same period in 2018, according to fintech firm Refinitiv.

The saturation of the tech scene in China and the opportunities offered by Southeast Asia’s maturing mobile economy are two of the factors driving the influx of Chinese money, analysts say.

The region’s unicorns – firms valued at US$1 billion or more – and aspiring unicorns have been among the chief beneficiaries. In July, Gobi Partners, in collaboration with AirAsia’s cargo and logistics arm Teleport, co-invested US$10.6 million in Malaysia’s EasyParcel. In May, Chinese social network YY acquired Singapore’s live-streaming platform Bigo in a US$1.45 billion deal.

Other deals in recent years saw Chinese tech giant Alibaba – the owner of the South China Morning Post – buy control of Southeast Asian e-commerce firm Lazada Group, Tencent invest in Singapore-listed company Sea and JD.com lead a US$19 million investment in Thai fashion brand Pomelo.

Meanwhile, in what appears to be a push to penetrate the regional market, two of China’s biggest venture capital firms – Qiming Ventures and GGV – have opened offices in Singapore.

Indonesia’s e-commerce companies have also been bagging funds from Chinese tech giants. Last December, Tokopedia secured funding of US$1.1 billion from Alibaba and Japan’s SoftBank, while Bukalapak considers Ant Financial as one of its backers.

MOBILE MARKET

Boh Wai Fong, a professor at Singapore’s Nanyang Business School, said an increasingly saturated tech market at home had nudged Chinese venture capitalists to look elsewhere to park their money.

They were also attracted by the similarities between the Chinese and Southeast Asian markets.

People in Southeast Asia were seen as “comfortable with” mobile technologies, she said, pointing out that China had been “very successful because of its mobile economy”. “[In China], people reacted to the mobile economy well … [using] mobile phones for online shopping. People are expecting the same trends to play out in Southeast Asia.”

A recent report by Singapore’s state investment firm Temasek, Google, and Bain & Company found the number of internet users in Southeast Asia had rocketed. Ninety per cent of Southeast Asians could now go online using mobile phones, the report found, while as recently as a decade ago almost four in five had no or limited internet connectivity.

The size of the market – Southeast Asia’s internet economy is set to hit US$300 billion in 2025 – has also been a key attraction.

Chua Joo Hock, managing partner at Vertex Ventures for Southeast Asia and India, said Chinese investors saw Southeast Asia as a “new market opportunity with strong GDP growth and the right macro factors”.

He cited the region’s young population, rising income levels, and high usage of social media as among its attractions. “Southeast Asia may seem to offer better valuations vis-à-vis China and the Chinese venture capitalists may also think they can bring their China experience and model and replicate them in Southeast Asian start-ups,” said Chua.

Chinese investors were also hungry for greater market share worldwide, said Kay-Mok Ku, managing partner of Gobi Southeast Asia.

“If you look at the Chinese, they are not content with just being number one in China. Alibaba and Tencent, they are all expanding,” Ku said.

THREE KINDS OF INVESTOR

Ku said there were three kinds of Chinese investor: tech giants which had corporate venture capitalist arms, venture capitalist firms with Southeast Asian partners, and former employees of tech giants who had set up their own venture capitalist firms.

These investors looked at the “bigger picture”, he said, and moving into emerging markets was the “most logical path” now.

Southeast Asia was a first stop, but venture capitalists would soon look to the Middle East and Africa, where investments were trickling in, he said. “China went from being a developing market to a developed one within 10 years. The Chinese have seen market-driven innovation so this is a back-to-the-past trip for them,” said Ku.

Other investors saw branching into Southeast Asian start-ups as a form of “risk mitigation”, said James Tan, managing partner of Quest Ventures.

Chua from Vertex said Chinese money flowed to sectors such as e-commerce, ride-hailing and peer-to-peer lending, that were already mature in China, while Ku said investors were most attracted to start-ups with similar business models as successful Chinese enterprises. “If you position yourself as a Chinese start-up of Southeast Asia and there is a reference model, it is easier for [Chinese investors] to understand,” said Ku.

Chinese investors were interested in the consumer sector, including logistics and fintech, while American companies were more focused on deep tech, start-ups that engage in hi-tech engineering innovation that requires long research and development periods, Ku said. This difference meant there was no direct competition between them.

Justin Hall, a partner at Golden Gate Ventures, felt American companies were missing an opportunity.

“Chinese firms are building a meaningful presence in Southeast Asia. US venture capitalist firms are not,” he said. “In all honesty, unless they begin taking this region seriously within the next five years, the US is likely going to lose Southeast Asia as a viable market to the Chinese.”

A spokesperson for Grab, a Singapore-based tech company behind ride-hailing and food delivery services, said geography was less of a factor in attracting global investors than the importance of shared common values and “strategic fit”.

“We also ink partnerships with companies that can complement or strengthen our offerings to customers,” the spokesperson said.

Even so, Chinese firms feature heavily in the company’s future. Grab has signed up to a partnership with the Chinese online insurance provider, ZhongAn International, and a joint venture with Ping An Good Doctor, China’s leading online health-care platform.

Similar coverage in Business Times.

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