Boom & Bust! What can we learn from China?
Published on September 22, 2022
China has come a long way over the years. The success of this powerhouse of the East and its US$17 trillion economy did not, however, happen by chance.
There is massive tech disruption happening in Asia, across all sectors and verticals. In particular, Southeast Asia (ASEAN) was already thrust into rapid digitalization when even more consumers migrated online due to the pandemic’s lockdowns.
Because an increasing number of life’s essential transactions are now online, that’s simply where the markets are going to be for modern businesses. But if we’re to learn from China’s blueprint, this paradigm shift is not just a phenomenon that will ‘work itself out.’
From my experience, there are a lot of lessons that startups and investors in ASEAN can readily learn from China. Let’s zoom in on a few key trends over the last decade, and compare them to how they might play out here.
Conventional wisdom says the ASEAN market is still small relative to China – consider about 600 million versus 1 billion people respectively. It is also arguably harder to monetize products and services across the board effectively given the region’s low GDP per capita.
While both may be true to an extent, one should not forget that the competitive intensity and the overabundance of capital in China make the Chinese market more prone to boom and bust cycles.
The good news for us is that, unlike in China, startups in ASEAN do not generally face the same level of intensity, competition, and over-funding. Also, GDP per capita is rising, following continued economic growth and a rising middle class. If a company executes well, I believe it can expand its market in the region beyond its home turf.
On tech giants
It is important to note that China’s government disallowed global internet giants such as Facebook, Google, and YouTube to operate there. This means that an entire crop of Chinese social media companies such as ByteDance’s Douyin, Tencent’s WeChat, and Sina’s Weibo became behemoths.
However, ASEAN governments like Malaysia or Indonesia do not have such policies, thus allowing global internet giants to thrive instead. ASEAN startups are also heavily dependent on these global platforms, whereas Chinese internet companies had to adapt as they started expanding overseas.
Complexities in the supply chain
The Chinese supply chain is remarkable in terms of breadth and depth, so you can see consumer-to-manufacturer (C2M) models such as Pinduoduo and Shein (where platforms can leverage user data to determine what is being produced or sold).
However, most of ASEAN’s manufacturing sector remains underdeveloped. As such, e-commerce companies may not benefit from C2M models, as they’d need to import more goods from China by holding more inventory, instead of a Just-In-Time highly flexible supply chain.
Within the B2B space, we see that supply chains in ASEAN are still inefficient and there are several layers of distribution in the value chain, unlike in China. Hence, the opportunity is in B2B marketplaces taking out the middlemen, and monetizing via fintech. The digitalization of Indonesia’s economy is still happening at a rapid clip. Hence we believe there is still plenty of space to invest.
In certain sectors such as fintech and crypto, the Chinese government has not allowed startups to flourish. Conversely, in ASEAN, we see governments encouraging digital inclusion and innovation within the regulatory framework. Fintech startups have done well in places such as Indonesia and Malaysia.
Further, ASEAN comprises the largest amount of under and unbanked customers, translating into higher demand for fintech services. Of course, governments also need to be vigilant and protect consumers.
I believe that the spread of financial literacy must keep pace with the fintech sector, but there are good sentiments coming from the central banks in the region, who are generally receptive to digital assets.
On e-commerce trends
China is at the forefront of embracing digital technologies to better understand and interact with customers. Arguably leading e-commerce, it has innovated on trends such as live streaming and social commerce – what some would deem ‘shoppertainment.’
At the other end of the spectrum, things like live streaming are still at a nascent stage in ASEAN but look set to grow quickly. TikTok has about US$6 million per day of GMV in Indonesia, for one. You also have homegrown giants such as Lazada and Shopee have embraced live streaming in their apps as well.
Online education in China came under pressure due to the government’s goal of a higher birth rate, hence lowering parents’ burden on tutoring became a key policy. Also, there was a huge concern about teachers not teaching properly in schools. This resulted in a cultural push to make children want to attend their private tutoring classes.
This trend doesn’t generally apply to ASEAN, however. The online education market is still small, compared to where China and even India markets have developed. There was a time when freeway billboards and bus stops in China and even cities in India were plastered with advertisements from online education, and celebrities were used to promote these services. I have not seen that in Southeast Asia. In fact, I have seen a healthier use of content-based marketing. As such, we don’t foresee draconian attitudes by ASEAN governments toward this sector.
So where do we go as investors?
There is a lot – and I mean, a lot of investment opportunities in ASEAN, if its projected digital economy of US$1 trillion GMV by 2030 alone is any indicator.
As an investor, I will always say this: product-market fit is the key thing we look for when we invest. The key is to figure out which of the above will be primed for growth in the next few years. Taking lessons from China, entrepreneurs in ASEAN would do well to conduct fast iterations of their products, automate more of their processes through technology, and leverage societal resources to ensure higher scalability.
Lastly, it’s important to have a feedback loop so that data and lessons can be continuously applied to products and workflows. We find that the best Chinese companies are constantly learning and pushing the envelope to make themselves stronger.
Investors need to be mindful of policy changes, and whether government support (or withdrawal of support) will make or break an entire sector.
Because the region is seeing an increase in interest across multiple trends, pinpointing the best tech investment opportunity isn’t very easy. A lot of these trends run concurrently – digitalization of consumer and enterprise sectors, climate change-related efforts, and even crypto or digital asset interest.
That is what makes Southeast Asia so fascinating for me – with all its similarities to and differences from China.