Model behavior: China to Southeast Asia tech transplants

One of the lessons learned in Southeast Asia by 01VC is beware the Chinese internet giant. In 2017, the venture capital firm – which describes itself as majoring in China and minoring in Southeast Asia – backed a short video app in Indonesia. The start-up was nascent but demonstrated potential. ByteDance, the parent of TikTok, duly took notice and came into a later funding round. Then ByteDance launched TikTok in Indonesia.

"The idea, business model and team were great, and it got traction, but then ByteDance came in and literally crushed them," says Ian Goh, a managing partner at 01VC. "There's not much you can do about it. If the business model is too light and your only barrier to entry is speed to market, internet giants can take it away from you."

For 01VC, this experience marked the end of one opportunity and the beginning of another. The firm initially took a venture building approach to Southeast Asia, bringing together teams, capital and business models that could be transplanted from China. However, by 2018, Chinese entrepreneurs and strategic investors needed no encouragement to target Southeast Asia. 01VC switched its focus to traditional early-stage deals involving local start-ups that already had some of the pieces in place.

"A lot more people in China are looking at Southeast Asia, whether it's e-commerce, payments, fintech, or mobile apps," Goh adds. "And plenty of businesses wants to be the Yuanfudao of Indonesia, the Pinduoduo or Thailand, or the Manbang [Full Truck Alliance] of Southeast Asia. Whether all those business models can work, well, there's a question mark."

Echo chamber

That question mark in fact represents a series of questions relating to the basic applicability of a proven Chinese business model to Southeast Asia, the amount of localization required to make it work, how long it takes to generate positive unit economics, and competitive threats. Get these right and pay-off could be significant: The region's internet economy will be worth $300 billion by 2025, up from $100 billion in 2019, according to Google, Temasek and Bain & Company.

Parallels are routinely drawn between the rise in disposable income and mobile internet penetration behind this growth and what has already played out in China. The four phases of Chinese tech IPOs – telecom infrastructure; ads, gaming, travel and horizontal e-commerce; specialty e-commerce, video, social networking; and mobile and offline hybrids – underpin Asia Partners' expectations for the emergence of 20 more billion-dollar companies in Southeast Asia over the next decade, of which half will go public.

"There were hiatuses between these phases and that is precisely how the IPOs shook out," says Nick Nash, co-founder and managing partner at Asia Partners. "Southeast Asia seems to be following the same trajectory as China, albeit with a 10-year lag. We saw that lag with Sea becoming the first e-commerce IPO in 2017. The affluence of Southeast Asia is exactly where China was 10 years ago."

The GP divides internet businesses into three categories: those that leverage global network effects such as Google, Facebook and TikTok; unique local winners that emerge despite global competition (or, in the case of China, because local regulation stifled global competition); and local players that take advantage of on-the-ground resources and expertise to build businesses, including Alibaba Group, Sea, Grab, Gojek, Tokopedia, and Bukalapak.

Category three is expected to characterize the development of Southeast Asia. It is also a useful starting point when considering the business models investors will and will not back. The Facebook of Southeast Asia is Facebook: the product is entirely digital and required no local plug beyond marketing expenditure. Grab is the Uber equivalent and Lazada, Tokopedia and Shopee are the Amazon equivalents because there is more emphasis on local, and offline, elements.

"Certain business models translate better than others. Those that are purely online – if they don't face regulation – the game is over," says Eddy Chan, a managing partner at Indonesia-focused Intudo Ventures.

"But localization is non-trivial. Southeast Asia is eight different markets, with different power structures and regulations. Even within Indonesia, once you get outside the main metropolitan areas, you must hyper-localize. If you want to sell luxury goods to the 1%, it's all the same. If you want to create a mass-market business, localization is so important."

Local flavors

Nusantara Technology, the parent company of Indonesian wholesale platform Super, appreciates these nuances. It was established in 2016 by a team of local millennials to serve the 240 million people who live outside of Greater Jakarta and were paying a premium for goods because of logistics issues. The company is only present in cities in the second tier and below and built a hyperlocal supply chain to reach these areas.

Super is often described as the Pinduoduo of Indonesia, but Steven Wongsoredjo, a co-founder and CEO of Nusantara, believes this is inaccurate. Pinduoduo emerged as a platform that built customer engagement around social networking and brought affordable goods to China's previously underserved lower-tier cities. While Super is similar, its means of execution is different.

First, the company has no WeChat backbone to rely on. Second, its business model is a hybrid of Pinduoduo and Nice Tuan, a Chinese community group buying platform that recruits individuals in specific neighborhoods to aggregate demand for goods, place the orders, and organize collection or delivery.

"We did some surveys and found that [our target customers] are not used to apps and they aren't willing to make calls to action to do transactions online. We need community leaders to aggregate demand in the villages," Wongsoredjo explains. "The first wave of e-commerce in Indonesia followed the Taobao model but the four big guys [Lazada, Tokopedia, Shopee, and Bukalapak] only account for 4% of the overall retail market. We are adapting the model to O2O [online-to-offline]."

Some industry participants are still skeptical about versions of Pinduoduo in Southeast Asia, without singling out Super. David Chang, a managing partner at pan-Asia VC investor MindWorks Ventures, identifies the ability to source goods cheaply from China's vast manufacturing base as integral to Pinduoduo's success. Southeast Asia not only lacks this depth, but it is also vertically integrated. "The manufacturers own the distribution and the end-clients. A platform like Pinduoduo doesn't add value because it has no leverage," he says.

Super is in the process of developing its own white label products for distribution to wholesale customers, chiefly small-scale store operators. Another expansion option under consideration is to become a third-party distributor for digital goods and financial products from other start-ups.

Helen Wong, a partner at China-based Qiming Venture Partners, also highlights the absence of a local manufacturing base and logistical challenges as impediments to a Pinduoduo-like business in Southeast Asia. However, she observes that variants of social commerce on a broad level can work. This is a recognizable trend in several of the five investments Qiming has made in the region since 2018.

Hotel management and booking platform RedDoorz appears to have drawn on India's Oyo for inspiration, creating an umbrella brand for multiple family-run establishments. For Qiming, though, there were echoes of the earlier development of budget hotels in China. The likes of Home Inns Group and China Lodging Group started out with a direct ownership model, but now operate on a franchise basis.

"Franchisees have to pay a huge upfront fee, much like in the US," Wong says. "It's hard to get someone to pay that in Southeast Asia, so what they need is a lower-touch product, but more technology-enabled and more scalable. The model works better that way."

Among Qiming's other Southeast Asia portfolio companies is consumer finance platform Akulaku, where the initial focus was installment payment plans for goods bought online. The company was part of a large group of Chinese financial technology players that turned their attention to Southeast Asia as regulations tightened in the domestic market for peer-to-peer lenders. Navigating regulation and licensing ultimately became the key to localization in Indonesia, and Akulaku is one of few survivors.

Monetization matters

Fintech-related business models aren't necessarily a turn-off. Intudo is a vocal advocate of vertically focused marketplaces because they generate unique datasets that can be leveraged in different ways, including the provision of finance. Kargo Technologies, an Indonesia-based platform that connects truck drivers and shippers, is no exception. The company is said to generate most of its revenue by extending financing to drivers against payments pending from shippers.

In this respect, Kargo's business model is like that of China-based Manbang, which achieved a valuation of $6 billion in its most recent funding round in 2018. However, it remains to be seen whether serving as a risk-trading platform for the logistics industry – rather than getting a fee for each transaction facilitated – justifies the valuation. "Kargo might be trying to do the same as Manbang. The problem is I'm not sure if Manbang's business model is proven," says 01VC's Goh.

The difficulty with looking at Southeast Asia through a China lens is the lag time. If investors are still unsure about the sustainability of a business in China, how long will it take for Southeast Asia to find equilibrium? Moreover, the speed at which a business can achieve scale – compared to equivalents in China – might be impaired by the fragmented nature of the market, even as other investors bid up valuations based on what they have seen in China.

It comes down to a trade-off between accepting a longer investment horizon and getting exposure to what is currently a relatively benign market. Oliver Rippel, a co-founder and partner at Asia Partners, argues that Southeast Asia should be well-positioned over the coming few years, given it has a larger affluent addressable customer base than India and less big tech competition than China. This could help drive unit economics nearer to a profitability proof point. There is also relatively less overfunding in Southeast Asia than in China or India, and scarcity of capital leads to entrepreneur sharpness.

"Even if the business model is applicable in Southeast Asia, monetization will likely take longer than it would in China because the average selling price of the product or service is generally going to be lower," adds Choon Hong Tan, co-CIO of Northstar Group. "What is very interesting about this market is that we are still at the early stage of development and there is an opportunity to get in at lower valuations.

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• Topics
• Greater China
• Southeast Asia
• Technology
• Early-stage
• Expansion
• Indonesia
• China
• TMT
• Qiming Venture Partners
• Intudo
• Asia Partners
• Northstar Group
• 01VC