Why Chinese Tech Companies Are Now Pivoting Aggressively Toward Southeast Asia 1

Chinese tech investments are turning towards the ASEAN

Chinese (FXI)(MSCHI) tech companies are shifting their focus to new markets to seek growth as competition in home markets intensifies. Chinese giants like Alibaba (BABA), Tencent (TCHEY)(0070.HK), Didi Chuxing, JD.com (JD), and WeChat are turning towards high-growth markets in Southeast Asia, home to the largest Chinese diaspora in the world, in search of international customer acquisition. Southeast Asia is twice as populated as the United States, and the IMF expects the ASEAN countries of Indonesia, Malaysia, the Philippines, Thailand and Vietnam to all grow at 5% annually through 2022. Further, soaring mobile and internet penetration in these markets present a huge opportunity for these tech companies.

Grace Xia, Tencent’s senior director of corporate strategy and investment stated, “The opportunity in Asia is just unparalleled.” These Chinese tech companies believe they can replicate their success stories from China in South East countries. Poshu Yeung, Tencent’s vice president said, “What we have learned in China, we can apply the fastest in Southeast Asia.”

China invested $37.8 billion in technology abroad last year, nearly double that of 2015 as per data from Pricewaterhouse Coopers.

E-commerce giant Alibaba is leading the way for Chinese tech companies in Southeast Asia. The company raised its stake in Lazada Group that it acquired last year to 83% in June 2017, just ahead of Amazon’s entry into Singapore. Alibaba’s acquisition of Singapore based Lazada Group was the largest tech deal in the Asia Pacific last year at $1 billion and gave Alibaba access to the Philippines, Thailand, Indonesia, among Vietnam among other APAC countries. The combined entity is now the leading e-commerce player in the region. Alibaba has also invested in fintech players in Thailand, the Philippines and Singapore to create a strong network in these countries. More recently, Alibaba invested $500 million in Indonesian e-commerce player Tokopedia.

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Tencent Holdings, the company behind WeChat and web portal QQ.com invested $100 million into Indonesian ride-hailing startup Go-Jek in May this year and is also a large stakeholder in Sea Ltd, regarded as Southeast Asia’s most valuable start up. The company also holds equity in ABC360 – an educational tech company based in the Philippines as well as Thailand’s Ookabee U and Sanook.

Matthew Wong, senior analyst at CB Insights stated in an interview with Nikkei Asian Review, “The reality is that China’s leading internet giants need to look outbound for untapped markets.” He continued, “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.”

As per a report by the Wall Street Journal, Southeast Asia was the third largest region for technology deals by Chinese companies last year. Data from Dealogic indicates deal values in the region climbed to $1.9 billion in 2016, from $193 million in the previous year.

Some experts believe this region still presents a huge opportunity for consolidation and acquisitions. Even though Grab, Go-Jek, Tokopedia and Lazada have a significant presence, no single player occupies a dominant market share in any segment. Comparatively, in China, Tencent, Baidu (BIDU), Alibaba and Didi are dominant players in their respective segments.

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