China-based venture capital Gobi Partners and AirAsia’s cargo and logistics arm Teleport –previously known as RedCargo– announced on July 16 plans to co-invest $10.6 million in the B round of Malaysian e-commerce and parcel delivery platform EasyParcel.
The funding will be used to expand the startup’s offering for small-and-medium-sized enterprise customers in existing markets like Malaysia, Indonesia, Singapore, and Thailand.
While the deal, announced at Gobi Partner’s Malaysian headquarters in Kuala Lumpur, may seem run-of-the-mill, it highlights a recent change in sentiment among Chinese venture capitals, which are attaching greater importance to the SEA market.
Gobi Partners is one of the first Chinese venture capitals to set its sights on SEA. The Shanghai-based investor first set foot in the region in 2008. Growing with a global vision, Gobi Partners manages over $1.1 billion assets and is gradually expanding its scope of investments outside of China to include countries such as Australia, the UK, Britain, Indonesia, Malaysia, Singapore, the US, and Thailand.
It’s no secret that Chinese tech companies are pivoting to the SEA market amid a slowing domestic e-economy, a saturated local market, and more recently, tougher relations with the US. A preference for the market is gaining momentum among Chinese VCs as well. They are following the footsteps of their portfolios in doubling down on SEA expansion.
The shift has become increasingly obvious since the turn of the year. Chinese startups are caught up in a capital shortage with the amount raised plunging by 52% annually to $23.2 billion in the first half of 2019, according to data from consulting firm ChinaVenture. However, their investments in SEA hit $3.4 billion in the first half. Although the overall size is still relatively small when compared with that in China, that’s a nearly four-fold increase from the same period a year ago.
From China to SEA and beyond
With a young population, increasing GDP per capita and rising internet penetration, the ecosystem in SEA is expected to achieve exponential growth, much like what China was experiencing a few years ago. In addition to its huge potential, the market is also attractive to Chinese firms because they expect easier entry to the market by leveraging expertise and know-how learned from China.
“Gobi Partners has been about for 17 years. That in itself is a whole wealth of experience. We operated in China in the first ten years and then expanded to SEA. We are still growing, but with the good and bad things we have gone through in China, we are making wiser investment decisions when investing in SEA,” said Jamaludin Bujang, managing director for Gobi’s Malaysian operations.
In addition, Gobi is spreading to more areas by drawing upon the experiences gathered through SEA expansion. “We are setting up funds in the Middle East as we see the fact that places like Pakistan are perhaps two to four years behind SEA. We are repeating the pattern all over again in other parts of the world,” said Khairul Khairi, partner at Gobi Malaysia,
“We apply the data collected in China to SEA and now we are implementing the evolved data in Pakistan as well. In that sense, hopefully, our pattern recognition is better,” Khairi added.
To some extent, SEA is playing catchup by following the development tracks of China — the rise of e-commerce, and associated enablers like payments, supply chain, as well as a series of other infrastructure services like cloud computing. However, an advance look into China’s current situation allows the SEA to fast-forward and possibly leapfrog it, much like the way in which China’s ecosystem has gone when it significantly lagged behind the US.
“Two or three years back in SEA, every investment went into e-commence marketplaces, but now VC 2.0 in SEA is moving towards more e-commerce enablers in the supply chain, mobile payment, etc,” said Khairi.
Some of the most recent tech trends in China are also gaining traction here. Much like the social e-commerce boom led by Taobao merchants, SEA individual and part-time sellers on Facebook, Facebook Live and Instagram, are contributing to half of the total e-commerce volume in the region, Clarence Leong, CEO of EasyParcel points out.
Leong believes the social e-commerce boom put EasyParcel at the right juncture to cash in on the opportunity to empower small merchants by bringing more transparency in pricing, parcel tracking abilities, and different service levels.
“The social commerce merchants are at a disadvantage because they are small in the transaction as an individual business, but as a group, they already take a big chunk of the e-commerce transaction. But they don’t have the bargaining power with the couriers,” said Khairi.
China’s recent shift from consumer-faced to enterprise-targeted services is also already visible in SEA companies, according to Khairi. “We are seeing more SAAS and enterprise-startups coming. For example, fintech is more B2B than B2C now. When we started two years back it was always P2P lending for consumers. Now it is B2C and eventually it will be B2B,” he added.
Localizing with adjustments expected
Even though we look at trends in China, it doesn’t mean things can be 100% replicated here,” Bujang warned. Khairi echoed his point. “It will always require a certain level of customization, and fine-tuning,” he added.
While setting up a local office and hiring a local team are the first steps to building a SEA presence, localization also requires a change in mentality, according to Bujang. “Chinese startups are so used to having a big scale and big market. When coming to a smaller market, you really have to adjust the expectations as well. You have to adjust to slower growth,” he said.
The same applies to VCs. “Chinese VC is used to high valuations. You have to be really careful when entering a smaller market,” Bujang points out.
China’s on-going capital winter is a good lesson for the SEA region. In a strange way, it has helped the SEA VC and startup ecosystem to be realistic and adjust expectations to make more sustainable plans in the long-term, according to Khairi.
SEA is a more complex and fragmented region compared with China and comprises different cultures, traditions, and languages. Unlike China where the market is divided into camps led by tech giants like Alibaba and Tencent, the market has yet to form market dominators that control the whole value chain, thus providing different competition dynamics for startups.
“The market is so fragmented; we are all frenemies. Your so-called competitor in Malaysia might be your friend in Singapore or Indonesia, you just have to be flexible to be able to work with everybody instead of one,” said Khairi.
Chinese companies usually adopt a cash-burning marketing strategy to grab market share, but in SEA, subsidies are very selective, only happening on a small scale in few sectors like ride-hailing, Bujang noted. “The companies are mainly competing through market forces,” he added.