Last week, bite-sized video content sharing platform TikTok, from China’s ByteDance, was banned for new downloads in India.
China is now, on a nominal basis, a $12Tn economy, $7Tn short of the United States. On a purchasing power basis, the Chinese economy is the largest in the world. In 1980, China was 1/10th the size of the US economy, today it is more than 60%.
The years of incredible growth in China have also resulted in the creation of wealth, and globally influential technology companies.
Baidu, Alibaba and Tencent created more than $1Tn of market value and have changed the landscape of technology in China and the world.
These three (known as BAT) have influenced AI, data, e-commerce, fintech, logistics, content – not only through their own companies but also through their investments. Tencent, the maker of the everything platform WeChat, has invested in the most Chinese unicorns, beating even “traditional” VC firms.
These three firms contribute to investing in startups in as big a way as their own companies. “Smaller” firms like Xiaomi have also expanded aggressively, creating anecosystem through intelligent investing and acquisitions.
But after forty years of breathless growth, the Chinese technology economy is finally starting to show signs of slowing down.
Other’s Grass is Always Greener
China’s economic slowdown, although on a large base, strongly influences the strategies of technology companies and their investing strategies.
The slowdown in consumption impacts the financial health of the Chinese technology giants, who now have lesser capital to “play with“. With lesser capital, Chinese corporate giants need to pursue more efficient growth strategies which provide better return for capital.
The tech cash crunch is already beginning to show warning signs, with funds struggling to raise capital, and startups facing the same fate. Chinese startup funding has dropped drastically in 2018, with the last quarter seeing $17Bn of funding, almost half of Q2’s $34Bn.
There are strong fundamental reasons for this.
China’s slowing consumption is driving slower value creation, and hence the opportunities for new companies to arise and startup. After growing 2x from 2008 to 2013, the number of internet users has grown only 30% from 2013 to 2018. This was going to happen, as the number of people in China is finite, and they already have 800MM internet users. To top all this, the population is ageing.
Slowing consumption, flatlining internet users and an ageing population are not as attractive for new startups and investments. With all the capital created over four decades, China needs to look for an attractive market. Where would you find the opposite?
India, of course.
Looking Slightly West
India is the only country outside China to have a bilion people, and will soon have people than China.
Despite fuzzy GDP numbers, it is the fastest growing trillion dollar economy. Only 20% of the population is online. It has the largest population of millennials (ergo, young people). Faster growing, young, with exploding internet potential.
India is like China looking at itself 7 years ago.
205MM Indians are also coming online for the first time and will experience the internet as early users did in the 90s. They will communicate, consume content and buy online, in ways that we will soon see evolve.
Numerous startups have grown rapidly to take advantage of this growth, and India now has 26 $1Bn+ companies. India added 16 last year alone, only 9 shy of China’s 25 – which is a far larger and more developed ecosystem.
Immense value creation is occurring, resulting in $38Bn of FDI inflows in India last year – pipping even China in terms of investment.
To its credit, China has been creating the foundations to capitalize.
In 2015, one of the BAT trinity, Alibaba, made its maiden investment in One97’sPayTm.
Alibaba was closely followed by Ola’s fundraising from China’s cab giant Didi Chuxing. Didi Chuxing itself was created from Kuaidi Dache and Didi Dache, which were backed by Alibaba and Tencent respectively, so Ola was indirectly funded by one of the BAT.
After a slow start, Chinese’s investors put in $660MM in 2016, $2Bn in 2017 and a record-breaking $5.6Bn in 2018 – which outpaced investors from any other country. Tencent, Alibaba, Xiaomi or a combination would end up as part of almost every Indian unicorn.
Flipkart, Snapdeal, Dream11, Ola, PayTm, OYO, Zomato, First Cry, Big Basket, BYJU’s, Swiggy would all receive capital from one or more Chinese investors.
Chinese companies would also look to capitalize on the growing Indian story directly. Xiaomi would make a big push in India to become the largest smartphone maker, pipping Samsung.
But the ones that would make the biggest splash wouldn’t be the BAT, but social apps.
ByteDance’s two apps TikTok and Helo would rocket in 2018 to the top of the Indianapps chart. TikTok would acquire 200MM users in India, while Helo would add 20MM. PUBG, ShareIt and Clash of Kings are now household names but Made with Love in China.
China was clearly looking at India for growth, and for good reason.
Imparting China’s 3Cs
Being an Asian demographic, India has a lot more similarities to China than the West.
China pioneered the concept of the “super-app”, the one stop shop for everything. WeChat would be the flagbearer of this concept. The same app would be used for messaging, payments, transport, travel, food. This would explain why Tencent (WeChat’s owner) would invest in a cab aggregator like Didi Chuxing.
This was in direct contradiction with “individual apps” for everything in the West. One would have individual apps for communication, payments, travel, food.
Over time, Western apps (e.g. Facebook’s Whatsapp) have tried to evolve into a one stop shop (e.g. Tencent’s WeChat) rather than the reverse. This is inspired at the core by the 3C strategy.
Community, content and commerce.
Practising Best Practices
These best practices translate into the path most Chinese giants have taken.
The order of creating value is as follows. Build a strong community, provide engaging content and enable transactions on the same platform.
Having executed this playbook in an Asian demographic in China, Chinese companies want to replicate the same in the Asian demographic in India.
You can now see why PayTm is trying hard with PayTm mall, after building a “community” (i.e. user base) through its payments ecosystem. Think Alibaba.
A lot of Chinese investors have therefore brought in thoughtful capital that has helped bring learnings. These experiences have helped and coached Indian entrepreneurs to scale well, within the constraints of the Indian ecosystem.
It is the same strategy that ByteDance is employing with TikTok, by creating a community (scale) and engaging it content (retain), with the final step beingcommerce (monetize).
This focus on getting scale first and bothering later has resulted in myriad implications.
Disasters of Scale
While Chinese companies have helped Indian companies scale or scaled themselves, the growth at all costs has resulted in deeper issues to solve.
The issues are nowhere clearer than in TikTok, which has added more than 100MMusers in the first quarter of 2019, beating every other app in the market by miles. The video-sharing app, through its byte sized content, also has no controls for the kind of content that is shared.
This is not the first time this has happened with a Chinese app, especially TikTok. With strong censorship in place in China, the app was similarly in the docket in Indonesia. The company had to set up a censoring team after being banned in Indonesia.
With a much larger base in India, and having unregulated access to Indian users, these apps have scaled wildly – with disastrous implications for users and themselves.
With the ban in place for TikTok, some commentators believe TikTok is being singledout. The claim is that this is only more of the same, being brought earlier by US counterparts such as Whatsapp or Facebook.
Comparing TikTok, which has interactive videos at scale, to relatively closed communities like Whatsapp or Facebook is not correct. TikTok could scale problematic content much faster and wider.
Managing Gold Diggers
The investments by Chinese companies and investors are largely positive for the Indian ecosystem, as it helps Indian companies scale with relevant know-how.
India is seen as a gold mine, and there is a scramble for Indian users. China provides both capital/know-how through investments and exits, having “been there, done that”. Similarly, Chinese companies are looking to acquire and monetize India’s new internet users. Despite the ban, ByteDance committed $1Bn to India, signalling how positively it perceives the market.
Managing this strong interest is critical, and it has to be done through a balanced mix of competition and regulation.
For example, the scale that Chinese apps have achieved could be curbed through competition. I had highlighted how ShareChat faces a complex path ahead due to TikTok’s blistering rise, and it could capitalize on TikTok’s present problems. While it may not have as deep pockets as ByteDance, it has local advantage.
I think the regulations in place protecting user privacy and data are also relevant. India is still to get sophisticated on the importance of both, and we must be careful before exposing users to sophisticated data-harnessing applications.
Overall, China’s involvement is likely going to benefit both Indian entrepreneurs and consumers. If done right, it could have a widely positive impact on the Indian ecosystem.
China could play a defining role in helping turn India into an ecosystem that rivals China itself.