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Chinese tech company setbacks in India create opportunities for US firms, say experts

Over the past five years Chinese tech investors have injected an estimated USD 4 billion in Indian startups.

Photo by Hitesh Choudhary on Unsplash

India’s pushback on Chinese tech since a deadly border clash and amid recriminations over the COVID-19 pandemic, has created opportunities for US firms to fill the void, according to analysts.

Following Google’s announcement last Monday that it would set up a USD 10 billion fund to invest in India’s digital services over the next five to seven years, the company revealed its first deal two days later: a USD 4.5 billion investment in telecom firm Jio Platforms. Google’s move came less than four months after Facebook said it was pumping USD 5.7 billion into Jio Platforms.

Google’s fund, publicly endorsed by Indian Prime Minister Narendra Modi and Electronics and Information Technology Minister Ravi Shankar Prasad, came after the world’s fifth largest economy moved to restrict foreign direct investment (FDI) from China to prevent “opportunistic takeovers and acquisitions” during the COVID-19 outbreak.

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India’s restrictions on Chinese tech are part of a global trend in which democratic nations are becoming increasingly wary of Beijing’s global tech ambitions. On the geopolitical front, a deadly border clash last month saw an anti-China backlash in India. After many years of relatively friendly cooperation in technology, countries such as the US, UK, Canada and India are now looking to reduce their reliance on Chinese tech investment and products alleging national security and human rights issues.

India’s new FDI curb, which bars investment from any bordering country without official clearance, has raised concerns that the drop off in Chinese investment may leave a “void” in India’s tech space, which has grown to rely heavily on Chinese funds in recent years. But US companies’ recent commitments to the country’s digital economy show that American firms are ready and willing to fill in that gap, say analysts.

Dev Lewis, a fellow at Hong Kong-based think tank Digital Asia Hub, said US firms are stepping in to fund Indian tech companies through equity investment, an approach more commonly associated with Chinese tech giants.

Read this: Will ByteDance erode Alibaba’s e-commerce dominance? 

“Typically, companies like Google, Facebook would have their own operations in India in a big way but not necessarily going down the equity investment route. Chinese investors came in and they preferred to invest in Indian start-ups typically through equity investments,” Lewis said.

While Google has a strong presence in India, including many research labs and data centers, it is not known to make big equity investment bets in local companies like Chinese companies have. That said, Google and its private equity investment arm Capital G have made some notable deals in India, including investments in delivery service app Dunzo, fintech company Aye Fiance and online car marketplace CarDekho.

In contrast, over the past five years Chinese tech investors have injected an estimated USD 4 billion in Indian start-ups, while the accumulated investment level in 2016 was well under USD 1 billion, according to research firm Gateway House.

Chinese-funded Indian unicorns

Alibaba Group, parent company of the South China Morning Post, has invested in Indian e-commerce company Snapdeal, digital wallet Paytm and food delivery platform Zomato, while Tencent Holdings has backed Indian messaging company Hike and ride-hailing app Ola. Over the past five years, 18 of India’s 30 unicorns were Chinese-funded, according to Gateway House.

A USD 100 million investment by Chinese fintech company Ant Financial into Zomato is currently going through the new FDI review process, according to a report in the Financial Times. Ant is an affiliate of Alibaba.

Alibaba and Tencent did not immediately reply to questions about their investments in India.

Analysts say Chinese investors have been particularly keen on injecting equity into e-commerce, on-demand delivery, ride-hailing and mobile gaming companies, all of which have seen tremendous growth in China.

No pressure to sell

But as India changes its stance on FDI, it won’t be business as usual for the Chinese. “The investment barriers truly impede Chinese giants from staking their claims in the Indian internet market,” Beier Kan, an analyst at Equal Ocean, wrote in a report.

Lewis said the new FDI policy has altered Chinese investors’ strategies and outlook when it comes to India. “From what I’m hearing, big Chinese investors like Alibaba and Tencent have no reason, and are not under much pressure, to sell. But they are going to pause future investments,” he said.

Lewis expects some Chinese investors with smaller stakes to prepare their exit from Indian start-ups in the coming months. “You might see American [or Indian] investors come in, or even Indian VC funds, who will negotiate [with the Chinese] for a reasonable exit,” he Lewis.

Ujas Shah, research analyst at The Economist Intelligence Unit (EIU), said that Google’s public pledge to invest in India augurs well for the country’s tech sector in the absence of Chinese private equity and venture capital.

Bridging the gap

“Google’s investment definitely has been helping bridge the gap that Chinese investments have left … But I think more investment will be needed,” Shah said.

Matt Sheehan, a fellow at the Paulson Institute’s Macro Polo think tank, said that in terms of raw funding American investors may fill some of the void if Chinese VCs pull out, Indian tech companies often favor Chinese investors for the intangible benefits.

“Beyond just the money, lead investors also end up providing a lot of guidance and connections. Chinese investors are often attracted to Indian companies because they’re working on many of the same developing world problems that investors built their own fortunes on in China,” Sheehan said.

“There’s a lot of mentorship and knowledge-sharing that can’t necessarily be replicated by an American investor living in Palo Alto,” he added.

Capping ownership

Liuqing Yu, another analyst at EIU, said there are further risks if tensions between the two countries continue to rise, such as possible imposition of a beneficial ownership cap for funding from China, which would require Indian government approval for investments over the stated limit.

“Beneficial ownership for the Chinese can be capped at 10%. That could be an escalation,” Yu said.

Investment aside, Chinese tech companies are facing a huge challenge with Indian consumers, especially after Indian soldiers were killed by Chinese troops during a dispute at the Himalayan border last month. India banned 59 Chinese mobile apps, including the viral video platform TikTok, and many Indians are now waging Boycott-China campaigns and shunning products with Chinese ties.

The harsher policy environment is already making life more difficult for Chinese tech companies in India. Reuters reported that following the app ban, Alibaba’s subsidiary UC Web planned to cut staff in India and ByteDance, operator of TikTok, was asked by the government to answer 77 questions, including whether it censored content, worked on behalf of foreign governments, or lobbied influencers.

“Hard to wean off the consumers”

While curbing tech investment and banning apps may be easy actions to take, analysts said India is unlikely to be able to cut off its reliance on Chinese hardware and smart devices any time soon. “The anti-China sentiment is really strong right now. But one thing to watch is whether it lives on because it’s really hard to wean the consumers off of Chinese tech,” Shah said.

“This is pretty apparent in the kind of share that Chinese companies have in terms of smartphones in India, which is about 70 per cent with all the Chinese companies combined. For example, the One Plus Eight Pro phone [from Chinese smartphone maker One Plus] still managed to sell out in just minutes [despite the border tensions],” he added.

Before Chinese tech giants kicked off their investment spree in India about four years ago, US tech companies had already laid down a strong foundation in the country. Analysts say US firms’ big expansion into the Indian market was bound to happen anyway, with the Google and Facebook investments in Jio Platforms just two recent examples of that trend.

Gravitating towards the US

In January, Jeff Bezos announced that Amazon would invest USD 1 billion to bring small and medium businesses in India online through Amazon’s own platforms—a move that itself sparked a backlash from the country’s neighborhood shop owners who feared cut price online competition would put them out of business.

Apple also revealed plans to ramp up local manufacturing in India, with its primary manufacturing partner Foxconn pledging this month to spend USD 1 billion to expand a factory in the country. Last week, retail giant Walmart was reported to have injected another USD 1.2 billion into Indian e-commerce platform Flipkart Group, in which it is already the majority shareholder.

The fact that India’s policymakers became wary of Chinese tech and gravitated towards the US did not come as a surprise to some analysts. “A lot of Chinese thinking is around the fact that India is going to move towards the US anyway,” Lewis said.

“When you look at the last few months, it’s very clear that the Indian tech ecosystem is a natural partner with the US. And no matter how much Chinese investment has come in so far, that’s not going to change that dynamic,” he added.

This article was originally published by the South China Morning Post