With a favorable demographic, benign investment climate, and accelerating economic growth, Southeast Asia (SEA) has become a hotspot for foreign investment in recent years. On 23 June 2020, KrASIA was delighted to host a roundtable discussion between industry stakeholders in SEA’s foreign investment and startup scene as part of Globiz Webinar.
The following piece is a summary of key highlights from the discussion that ensued. KrASIA and 36Kr Chuhai would like to thank these distinguished participants for their insights as provided to our readers.
Industry growth proceeds at different speeds
Contrary to popular belief, Chinese investment into the SEA region began more than ten years ago. Jackson Phang, Deputy Director of the Greater China Region Singapore’s Economic Development Board was kind enough to trace out the development of this trend over the years.
“At that time, Chinese-funded enterprises went into SEA mostly to trade, but subsequently, they also went into manufacturing and production, and later, innovation,” he said. “Alibaba’s Dharma Institute is a good example of innovation-driven investment.” In recent years, the Dharma Institute has invested in cutting-edge industries such as cloud computing, autonomous driving, and quantum computing, to name but a few. Since its inception in 2017, its focus on basic research and development has reaped dividends in the form of nearly 50 world firsts in top international events.
However, Phang was quick to caution against painting all industries with the same brush and noted that different industries develop along different time scales. In particular, he highlighted the accelerating development of the Technology, Media, and Telecom (TMT) sector in recent years.
Phang’s thoughts are echoed across the board. According to Google, Bain, and Temasek’s SEA report of 2019, the Internet economy in SEA is expected to hit USD 300 billion by 2025, having more than tripled over the last four years and reaching the USD 100 billion mark in 2019.
According to Cento Ventures, the total amount invested in tech companies in SEA totaled a staggering USD 7.7 billion in 2019. Beneficiaries of investment within this sector are varied, ranging from e-commerce to gaming and ride-hailing. For instance, Singapore’s health tech startups raised USD 100 million in 2018, while Indonesia-based online multi finance company Akulaku successfully raised a total of USD 160 million as of December 2019, including USD 40 million from Ant Financial.
A long-term vision is essential to co-operation
Despite SEA’s ripeness for investment, startup and investment failures in the region are more common than are successes. Strategic vision and operational execution, therefore, go hand in hand to turn potential returns into reality.
In particular, strategic vision encompasses not just or even a short-term profit motive. Rather, any sensible foreign investor needs to remember that it is not always viewed as a munificent benefactor – but even with suspicion or as competition against local players.
Ada Tang, CSO of Akulaku, was particularly keen to emphasize the need for having, and communicating, long-term thinking to potential local partners.
“Regardless of whether you are working with regulatory agencies or local consumers, companies need to bear this most important thing in mind – which is that local players want to see that foreign companies have the determination and confidence to stay and serve SEA in the long run,” she explained.
“Some companies may only see that because there has been good development and growth in the past two to three years, SEA is a good place to make money. However, because they lack long-term thinking, they do not invest in infrastructure, compliance, and local management. This very much affects their perception and brand in the minds of potential local stakeholders,” Tang cautioned.
SEA local talent is crucial to global success
SEA comprises at least 13 official languages across its countries, not including dialects and niche regional languages. Across its 11 states, people practice every major form of religion as well. The huge discrepancy in language and culture even within the region poses considerable challenges for foreign entrants looking for interoperability.
However, Li Junfeng, CEO of Shoplazza, sees such diversity as a strength when it comes to human talent. “People in SEA possess an outstanding global mindset and versatile language abilities,” he said.
Li went on to suggest that human talent in SEA could not only be helpful for regional development but also, for breaking ground in other regions as well owing to their open-minded nature and language versatility.
“Local SEA talents can help businesses expand their territory in Southeast Asia….and I think a new business strategy may be to first move production to SEA and then going global from there,” suggested Li.
Michael Chen, CEO of BIPO, agrees. “The overall quality of talent in SEA is increasing because of greater exchange between countries. Language is a barrier, but not a great one because English can be used in these countries.”
Based on his years of experience assisting companies with the recruitment of local talent, Chen was also eager to point out how labor costs in SEA are manageable even when it comes to hiring outstanding talents.
“In terms of talent acquisition, it is possible to find talent in SEA. In China, the cost of talent is becoming expensive, so even if the salary offered in SEA to find talent is higher than the domestic norm, it is still cheaper than in China,” Chen said.
Cultural differences must be managed sensitively
Despite his optimism about the recruitment of local talent, Chen also cautioned against assuming that Chinese working culture could be immediately transplanted into SEA.
” For example, Chinese companies want their employees to be very engaged, but in Indonesia, the Philippines, and Thailand, employees may prefer a different work-life balance. It is important to understand cultural differences.”
In addition, a good balance must be struck when it comes to deciding how decision-making and executive power is balanced across a firm. Rather than adopting a top-down approach, decision-making powers need to be made available at a local level to signal mutual trust and increase operational efficiency.
“Many Chinese companies do not understand the local market well and find it difficult to establish themselves. In many instances, Chinese companies will have to rely on local expertise,” Chen emphasized. “Therefore, a balance between Chinese and local culture must be struck.”
Singapore as a docking point for a fragmented region
SEA comprises 11 countries, with investment dispensed unevenly across the board. However, Chen suggested that based on his experience supporting Chinese companies’ market entry into the region, investment is increasingly being dispensed to a greater number of countries within the region.
“Previously, many Chinese companies aimed to invest in Europe and USA in their global push,” he mused. “Now, however, the trend is to invest in SEA. More and more countries in SEA are benefitting from foreign investment.”
However, SEA remains a deeply fragmented region, with each country possessing its own cultural habits. Although SEA bears certain cultural and economic similarities to China, it remains hard to penetrate a region from scratch with limited ground-level experience.
“Singapore plays a very important role for Chinese companies because it is often their first port of call in SEA,” noted Chen.
In a hat tip to EDB’s considerable resources and regional heft, Phang emphasized that EDB could serve as a docking point for foreign companies making their first footfall into the region. “We can connect investors with large regional family conglomerates in tech companies in SEA to help both parties get an introduction to different partners.”
“There is also the possibility of dispensing preferential tax policies and accomodating the needs of each company,” said Phang. “EDB can provide tailored plans to support business strategy in SEA.”
Covid-19 a test for fintech resilience
Between 2015 and 2019, fintech investments in ASEAN countries hit USD 8.9 billion, representing a compound annual growth rate (CAGR) of 133.1%. The fintech industry has reached a very exciting inflection point, with established global venture funds such as CreditEase, for example, in active diligence with companies in the region for a new SEA push.
However, financial markets have been rendered increasingly volatile due to the Covid-19 crisis. In particular, SEA’s delicate economy has taken a battering.
In Singapore, SEA’s wealthiest country, alone, 60% of consumer spending has been impacted by circuit-breaker measures. In other areas of SEA, incomes have taken a 24% hit in 2020 as well. This poses considerable risk to finance-based startups.
“Financial institutions and startups face particularly large challenges after Covid-19. Because unemployment has increased, risk in the market has doubled,” cautioned Tang.
“In addition, companies will be tested on whether they have truly invested in risk management, technology, big data, financial modeling, and foreign currency hedging over the past two or three years. If these foundations are not there, it is easy to be washed away.”
However, not all gloom lies ahead for startups operating in the fintech sphere. “For fintech companies, this is a good opportunity to lay down a solid foundation and go through this trial. What does not kill you makes you stronger,” Tang concludes optimistically.
Interview insights from roundtable contributors were translated from Chinese and edited for public release. Stay tuned for the next instalment of Globiz 2020 Webinar, this time featuring big names from India’s tech scene you should know about. For the newest event updates, subscribe to our newsletter.