Southeast Asia often looks to mature markets like China as a model for innovation, but at the same time, as more Chinese tech companies and investors navigate the region, they realize that there’s much to learn from Southeast Asia as well. The head of Southeast Asia investments for JD Digits, the technology and financial services arm of ecommerce giant JD.com, shares his thoughts and lessons learned from the region, as well as advice for founders seeking funding from Chinese CVCs. 

Highlights

1. Overseas players from China and the rest of the world might become a catalyst or driving force for market consolidation in respective sectors. 
2. The recent announcement of favorable policies, especially the Regional Comprehensive Economic Partnership (RCEP) will definitely inject more confidence for Chinese companies to invest in the region, and ASEAN is definitely at the top of the list. 
3. Most Chinese companies enjoy a single homogeneous market with a very high market ceiling from day one, so there’s a lot to learn from local champions that are successfully able to manage regional tech start-ups with localized operations in multiple countries.
   
4. Defining context (i.e. contextualizing scale and market conditions) is key to having successful conversations with Chinese CVCs.

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The mindset for the Chinese investor towards Southeast Asia has been pretty consistent. Southeast Asia is considered a close, dynamic, and more “approachable” market with lots of opportunities that are yet to be explored. It has always been one of the top attractive markets for Chinese investors and tech companies to look at, especially under the current geopolitical landscape that we are facing. 

As Southeast Asia’s technology and internet economy is entering into the next phase, there will be fewer “very obvious” opportunities, but for some specific verticals and sectors, there will be more emerging champions. 

The future of Chinese tech investing in Southeast Asia

When it comes to overseas expansion and investment, it is quite natural for Chinese companies to think about Southeast Asia first. The young population and high mobile penetration, the friendly and stable political and social-economic environment — you name it, Southeast Asia checks all the boxes. For Singapore in particular, its unique position as a regional hub makes it attractive in spite of the small market size. 

The region has nine unicorns and majority of them are multi-regional. One can never emphasize enough the importance of going regional and global. For a single country in the region, its GDP is probably 1/7 – 1/30 of the scale of China’s, but if you look at Southeast Asia as a whole, it is about 1/4 or 1/5, and the market potential becomes quite sizable. Regional players might have more upside potential than a single-country champion, and this is something that Chinese investors pay attention to. 

The young population and high mobile penetration, the friendly and stable political and social-economic environment — you name it, Southeast Asia checks all the boxes. 

With this potential, it comes as no surprise that Chinese tech companies have made it a point to invest extensively across the region, and have been doing so through different instruments, including CVCs, JVs, setting up subsidiaries, acquisitions, etc. And many JVs or exciting initiatives in the region are set up between not only Southeast Asia tech companies, but also family-run companies and overseas tech companies. There will be more M&A activities happening in Southeast Asia. Overseas players from China and the rest of the world might become a catalyst or driving force for market consolidation in respective sectors. 

It might be challenging to some extent for Southeast Asia growth stage companies to be listed in large public markets like NYSE, HKSE, or Chinese STAR board. Another potential outcome is to be merged or acquired by a listed company from overseas. This in turn also allows overseas players to gain a valuable footprint into the market. 

Overseas players from China and the rest of the world might become a catalyst or driving force for market consolidation in respective sectors. 

Coming into 2021, there’s a lot to be expected in terms of Chinese companies investing into the region. International travel is resuming gradually in many countries, and things that were not accomplished in 2020 will be all recamped in 2021. My personal view is the recent announcement of favorable policies, especially the Regional Comprehensive Economic Partnership (RCEP) will definitely inject more confidence for Chinese companies to invest in the region, and ASEAN is definitely at the top of the list. 

…the recent announcement of favorable policies, especially the Regional Comprehensive Economic Partnership (RCEP) will definitely inject more confidence for Chinese companies to invest in the region…

What Chinese investors are learning from Southeast Asia

Even coming from China, there is a lot we can learn from founders and investors in the region. Some might argue that the level of competition here in Southeast Asia is less but I would say it might not be the case. Due to infrastructure underdevelopment, technology and internet companies have to build the (digital) infrastructure themselves in costly ways if they still want to bring the best experiences to their customers and clients. 

For example In China, one of the key attributes for fast e-wallet adoption in China is that bank account penetration is pretty high, all customers are banked and KYC has been well-developed. As an e-wallet, you just need to let customers connect their account to your wallet. It’s not the same in Southeast Asia. 

In the digital finance space where JD Digits focuses a bit more, we see this market is interestingly diverse. All players in the region are trying to digitize the online payment space.  Global players are partnering with banks to promote card payments in the region as they do with the rest of the world. Digital wallet players are also adopting users with subsidies and high-frequency use cases. And in rural areas, the agent banking model is also gaining traction and solving fundamental financial challenges for rural communities. 

To be honest, most Chinese companies enjoy a single homogeneous market with a very high market ceiling from day one, so I think there’s a lot to learn from local champions that are successfully able to manage regional tech start-ups with localized operations in multiple countries.

One interesting thing to note is that, Chinese CVCs have witnessed the evolution of many internet business models in China over the past few years, and lots of internal reviews and have been done internally and many lessons were learned. Copying from China directly is not going to work but drawing inspirations from the experiences and understanding the key value creation for customers will still be helpful when founders in this region are planning for long-term strategy.  

There is indeed much to learn from the unique ways that Southeast Asia tech companies deal with the challenges that Chinese tech companies no longer face in their market.

To be honest, most Chinese companies enjoy a single homogeneous market with a very high market ceiling from day one, so I think there’s a lot to learn from local champions that are successfully able to manage regional tech start-ups with localized operations in multiple countries.

Advice on talking to Chinese CVCs 

And it is with a spirit of learning that we often set out to meet founders in Southeast Asia. It can be quite different talking to CVCs versus traditional VCs, as most of them will put strategic focus over or at least in parallel with financial returns. Here are my two cents on engaging with overseas investors including China: 

Paint the context of scale

Gaining a bit more color on their main business and its scale in the home country will always be helpful, as this might help to quickly navigate the timing and approach of the conversation. 

Exhaust all questions

Don’t be afraid of asking questions and making the conversation mutually helpful. (e.g. What is your investment style, are you looking more for control or significant influence, or are you relatively collaborative and supportive as a minor shareholder? is gaining financial returns and having some exposure to the market sufficient, or are you also looking to expand and generate revenue from the partnership? What is the decision-making process? What does the timeline look like?) Those are all questions worth exploring throughout the conversation 

Market context alleviates the weight of ‘time machine theory’

Sometimes overseas investors might benchmark the status of SEA with other markets like China, India etc. They might argue that X happened before and why you should not try X, which is proven in other markets. People are inclined to comprehend new ideas based on their existing context — we call this “time machine theory”, but it might not be necessarily true. So sharing a little bit more background of the market context will be also very helpful. For example, describing a typical client of yours and why you are using certain models in those areas. 

About the author

Sam Yang, Strategic Investment Manager of JD Digits, the technology and financial services arm of JD.com

Sam Yang is the Strategic Investment Manager of JD Digits, the technology and financial services arm of JD.com, one of the largest ecommerce and online retail platforms in China. As Strategic Investment Manager, he is in charge of overseas investments in Southeast Asia. He has had extensive cross-border investment and venture capital experience, specifically connecting China to the global south (Southeast Asia, New Zealand). He graduated from the University of Auckland and completed his Masters in Finance at Nanyang Technological University.