China apps going global: Empires on hold

Last year, social networking and dating service Grindr seemed a prime example of how the politics of an ever bipolar world have complicated cross-border expansions for Chinese apps. Now, the episode seems almost quaint.  

Touted as the most popular gay dating site in the US, Grindr became one of the first cases where regulatory screening aimed at security-sensitive data issues interrupted operations in a seemingly innocuous consumer domain.

This was a story of bureaucracy, the defining of vague technical terms, and establishing procedure. It left investors with a sense that although much uncertainty remained regarding Chinese app entries in the US, at least rules and precedent were being hammered out, leaving the door open for well-meaning workarounds where possible.

That scant optimism all but disappeared last month with the US banning Chinese social media players TikTok and WeChat.

Unlike Grindr, TikTok and WeChat have been targeted by executive orders from the president. In the case of TikTok, it followed an extended review of parent company ByteDance by US foreign investment authorities. For WeChat, a unit of Tencent Holdings, it did not. This has stoked concerns that the orders, which essentially require cessation of US operations later this month, set a precedent for potentially arbitrary sanctions against specific companies.

To some extent, developments in this vein can be chalked up to the litigious nature of the US. Government relations and crisis PR have become increasingly ubiquitous aspects of venture capital in the country in the past decade, impacting all foreign stakeholders regardless of nationality. But it is not only a US issue. In the past two months, India has made sweeping bans of Chinese apps, with more than 100 start-ups getting caught in the proverbial crossfire of the Himalayan border dispute.

In the US, for now, only category-leading players are believed to be at significant risk of attracting unwanted government attention, whereas India has pursued blanket actions on apps great and small. The India approach is not expected to be replicated elsewhere, but it has been responsible for the biggest frustrations on the Chinese side. "They don't even give you a chance to debate. It's just a list of names, including gaming apps," says one industry participant. "It's ridiculous and irrational."

Built to compete

All this helps mark the emergence of Chinese apps as relevant global players. Last year, China became the first country to overtake the US as the leading generator of patents since 1978. Sophisticated, artificial intelligence-enabled businesses the likes of TikTok represent a shift from copycatting to innovation and a new phase of confidence for Chinese apps on the world stage. In the immediate term, however, their political troubles are icing cross-border ambitions.

"Many Chinese apps are delaying US plans. They want to see what's going to happen after the US elections in November, and I don't blame them," says Chuan Thor, founder of AlphaX Partners and previously head of China at US-based Highland Capital Partners. "You can skip that one for now and do something else first. China and Asia are big enough, and you don't want to get into trouble. This is not a good time to do any aggressive global expansions."

Still, Chinese apps appear uniquely suited to this challenge. There is a sense that those able to survive the intense competition and strict regulatory oversight of their home market are well placed to navigate the political pitfalls of overseas business. The skills required to overcome legal hurdles in the US may not be the same as those in China, but the patience and risk tolerance needed is comparable.

Chinese apps planning to leverage these strengths will do well to learn from the failures of US tech players attempting similar moves in China, where the ability to thrive has proven as much about operational flexibility as local regulations. Google China, for example, suffered a dramatic fall in market share during the past 10 years largely due to government blocks on its content. But its parent company's failure to sufficiently empower the local team may be just as relevant.

"We don't intend to take care of the details of the daily operations in a global market, but we inject ideas into a management team to make sure they're open-minded when they plan for global expansion," observes Wei Zhou, founder of China Creation Ventures. "They have to adapt to local customer behavior and be prepared for the local legal system, but more importantly, they have to give the local team decision rights to change the product and the business model."

While local teams are seen as the key to making smarter moves on the ground, their experience with the target market can only go so far in mitigating the new uncertainties that come with business innovation in the digital era. Indeed, one of the core lessons of the TikTok affair is that the fine line between business-level user privacy issues and national data security issues has become even finer in both legal and political terms.   

Informed targeting

Avoiding these challenges can be as simple as targeting strategy. In markets where data is a particularly sensitive concern, investors may do well to prioritize entertainment and e-commerce over social media and financial technology, although the lines separating these areas also tend to blur. Gaming is commonly cited as one of the least vulnerable categories. Niche plays such as fitness app Daily Yoga are difficult to scale but often benefit from being culturally frictionless.

Apps looking to become household names are going to have to lawyer up and monitor best practice in whatever jurisdiction they target. To some extent, this can be achieved by checking feedback from industry watchdogs such as the University of Toronto's Citizen Lab. It can also be useful to refer to local data technology leaders, keeping in mind they too have their shortcomings. Facebook, for example, has a decidedly mixed record on privacy issues and facilitating user account deletions.

"US apps are not necessarily great at security and privacy, but if you're a Chinese app, I would recommend you try to be better than the US apps because people here love exposing bad actors," says Rui Ma, founder of US-based Euzen Labs and formerly an Asia-focused investor at 500 Startups.

"There's not just varying laws but also social expectations of how to use data well in terms of what you can access, what you can delete, and how transparent those processes need to be. Chinese apps today shouldn't just be minimally compliant and shoot for what seems like a passing grade; they must shoot for an A plus."

Geographies where it's easier to comply with privacy and data security expectations logically present themselves as preferred expansion markets in this context. Southeast Asia is usually the first port of call for Chinese apps due to its proximity and cultural familiarity. The Middle East is often next on the developing-market trail, with app investors such as MSA Capital citing incentives such as a high mobile penetration, high average revenue per user, a large youth population, low e-commerce penetration levels, and large unbanked populations.

Concerns remain, however, that while developing markets with large populations can translate into large user bases, monetization can be elusive. This can be seen in digital advertising spending, which is on track to be around $150 billion in the US in 2020, versus about $100 billion in China and less than $1 billion in both Indonesia and Egypt.

Chinese apps designed for lower education and lower income populations are therefore advised to focus on rural China markets until the post-pandemic recovery trajectories of the developing world become apparent.

Soap opera?

Even outside the context of the COVID-19 downturn, developing markets can still be a risky alternative for Chinese apps looking to sidestep the data politics of a US or European expansion.

Opera, arguably the most successful China-owned app operator in Africa offers a case in point. The plan was to establish a comprehensive ecosystem in Nigeria with payments service OPay and a range of consumer apps branded as ORide, OFood, OCar, and OExpress. All of these, with the exception of OPay, have now been folded, with Opera citing a vague government ban.

It is unclear to what extent the crackdown can be connected to Opera's Chinese ownership, but the flap coincided roughly with the India and US bans, which contributed to a freezing effect on Chinese appetite for the region. ORide is a flagship app for Opera, and Nigeria the continent's prize market. This magnified the sting for investors and reinforced in dramatic fashion the idea that politically dispassionate cross-border business may be a thing of the past. 

"From a soft power standpoint, Western influence is still strong in Africa and affects how people feel about China, even though there are more and more African countries breaking away politically from US viewpoints," says Stephany Zoo, founder of China Africa Tech Initiative. "It's a very viable market for Chinese apps, but would I brand an app in Africa as Chinese? Probably not. I would just focus on the product. The current holding off is mostly because of COVID-19, but the geopolitical landscape certainly plays a role as well."

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• Topics
• Greater China
• Technology
• Early-stage
• North America
• Southeast Asia
• MENA
• Regulation
• China
• TMT
• AlphaX Partners
• China Creation Ventures