Opportunity and Regulation Push Chinese Tech into Southeast Asia
Chinese investors and tech companies are focusing more on ASEAN markets as the trade war, domestic market saturation, and Chinese Government regulations lower China’s market desirability. Alternative lending firms, video-on-demand (VOD) service providers, and venture capitalists (VCs) have been particularly impacted by these developments.
Chinese VCs are responding to domestic market saturation by investing in Southeast Asian tech companies. Year over year, total VC investment in Southeast Asian tech firms increased by more than 300% to US$3.4 billion in 2018, while China’s share of that investment quadrupled to US$667 million. Though 70% of total funds were invested in just 5 firms (Tokopedia, Sea Group, Grab, Go-Jek, and Lazada), the greater surge confirms that the region’s tech firms are ripe for American investment. Over the past five years, however, Chinese firms have invested US$2 billion in Southeast Asia, making America’s US$500 million in investment seem paltry.
In 2018, the Chinese Communist Party (CCP) closed nearly 1000 peer-to-peer (P2P) lending platforms after mobile P2P applications (including some supported by the CCP) caused widespread financial losses. Under such scrutiny, many P2P firms looked to Southeast Asia, where cities are friendlier to alternative lending and supportive of fintech regulatory sandboxes. ASEAN populations are increasingly tech savvy and often underserved by formal lending institutions. Meanwhile, regulations on P2P lending in ASEAN are nascent. Chinese P2P lending platforms are becoming popular in Indonesia, though the Financial Services Authority of Indonesia (OJK) recently blocked more than 400 P2P applications due to regulatory noncompliance. In contrast, Vietnam’s government has considered legalizing P2P lending as the market is becoming dominated by firms from China, Indonesia, and Singapore. Alternative financial services are taking off in Southeast Asia, with PricewaterhouseCoopers (PwC) Indonesia estimating that P2P lending could contribute nearly US$1.4 billion in loans to Indonesian MSMEs by 2020. This situation represents an opportunity for US businesses to offer safe, innovative financial services solutions for nontraditional market segments; however, international competition is fierce.
Chinese technology companies are also fleeing restrictions on video game production and streaming services by setting up shop in Southeast Asia. After the CCP’s 9-month freeze on video game licenses last year, Tencent – the company responsible for 15% of global gaming revenues in 2018 – pursued streaming instead by launching WeTV in Thailand. Tencent’s project in Southeast Asia marks one of China's first major entertainment ventures in foreign markets, given that China’s domestic entertainment firms often struggle to bridge cultural gaps. With China’s strict regulations and Southeast Asia’s rising internet usage rates, ASEAN markets are becoming prime real estate for foreign service providers like Tencent. US companies, which are traditionally strong players in the entertainment industry, can expect stiffer competition here as well.
On June 11th, the ASEAN-Hong Kong, China Free Trade Agreement (AHKFTA) became effective for Singapore, Thailand, Vietnam, Myanmar, Laos, and Hong Kong, resulting in lower barriers to trade in services (a boon for Asian tech industries). Regional restrictions on foreign capital investment and employment have also been lowered or removed altogether. Thanks to AHKFTA, US-invested companies in China can now export to ASEAN countries more easily, and domestic Chinese companies are following the same trade winds. Meanwhile, the trade war has accelerated the exodus of Chinese manufacturing production into Southeast Asia, especially in low-tech manufacturing. In aggregate, it is difficult to say whether the AHKFTA and the trade war are giving Chinese tech firms an advantage over US firms in Southeast Asia. However, increased trade in services, higher capital investment between regional players, and global market adjustments will certainly change the makeup of the ASEAN tech scene.
Rising global investment will support a better ASEAN tech ecosystem regardless of its source, but US tech investment is somewhat underwhelming in this growing region. Chinese companies fleeing government restrictions and the shocks of the trade war will increasingly compete with American firms in Southeast Asia's tech markets. Still, US firms can leverage increased Chinese investment and production as a sort of primer for American companies' own investment in ASEAN's growing digital economies, both in the underserved sectors like financial services and in the established sectors like VOD. Southeast Asia's young and technologically advanced populations will continue to fuel demand for these tech services for the foreseeable future - the only question is who will fill it.