This Analyst Note evaluates the current state of technology startups' innovation and VC investment trends in key Asia Pacific markets - China, Japan, India, South-East Asia and Australia-New Zealand. And, provides an outlook for the direction of each of these markets, and emerging technologies (AI/ML, Robotics & Drones, Blockchain and IoT) based innovation in the future.
In the recent years, Asia has witnessed rapid emergence of digital technology startups and venture capital (VC) backed investments for this sector. According to CB Insights data, USD 106 billion has been invested in over 5,000 deals between 2012 and H1, 2017. The key sectors of focus and growth in APAC include Mobile, Consumer Internet, E—Commerce, Fintech, Ride Hailing (cab and bike hailing & sharing), Media and Games.
Asia: A Mobile-First Market
Asia, and in particular, China, India and South-East Asia, are rapidly transitioning from low-wage, low-tech manufacturing and services powerhouses to more technologically sophisticated markets. And, this recent trend can be attributed to the rise of Mobile and Internet adoption in Asia. China, India, and Southeast Asia are three of the largest mobile internet and smartphone markets in the world. There are over 700 mn, 350 mn and close to 300 mn mobile internet users in each of these markets respectively. Smartphones are a primary catalyst behind Asia’s digital growth, connecting millions, launching social networks at scale, and spurring e-commerce and large-scale digital transactions.
The smartphone has become the first and primary computing device for an average Asian consumer. Most of the mass-market Asia’s internet users have never experience desktop internet, they only know mobile internet. It truly is a mobile-first region. This mobile-first market and consumer dynamics and economy has resulted in the evolution of multiple apps-within-an-app model in Asia. Chinese tech giant Tencent’s popular mobile messenger – WeChat – is a great example. WeChat users in China can access services to hail a taxi, order food delivery, buy movie tickets, play casual games, check in for a flight, send money to friends, access fitness tracker data, book a doctor appointment, receive bank statements, pay utility bills, find geo-targeted coupons, recognize music, search for a book at the local library, meet strangers around them, follow celebrity news, read magazine articles, and even donate to charity… all in a single, integrated app.
Different Markets in APAC Are At Different Stages of Maturity
And, are emulating one other’s dynamics and growth trajectories
Purely basis digital technologies adoption, growth trajectories, investment trends, market dynamics and consumer behavior, APAC can be classified as five key market segments:
- Japan and Korea: These are two most advanced markets for digital technologies adoption, not just in Asia, but even globally. Both these markets have similar dynamics of being first to launch technologies, proprietary standards and versions for their own markets, catering to domestic demand. And, domestic corporate giants are the big investors in the technology startup ecosystem in these markets. According to CB Insights data, in 2016, close to 70% of technology startup investments in Japan were made by Japanese conglomerates such as Mitsui, Fujitsu and Hitachi. The technology startups in both these markets focus on entertainment, media, gaming, and mobile consumer internet, while the deep technology focused startups get acquired by domestic technology giants. However, Japanese and Korean technology startups tend to lack the agility to pivot (when required), and expand globally, which hinders their growth beyond a certain point.
- China: China is fast evolving to be the technology and investment powerhouse to beat. Having led the domestic mass market to being digital-first, the first generation technology companies (which have also evolved to global scale), such as Baidu, Alibaba and Tencent (BAT trio) are now calling the shots in terms of type of technology adoption, investment size, valuations and speed of growth, not just China, but across Asia and some western markets as well. These three companies are emulating Japanese, US and Korean technology giants in terms of investing in innovative technology startups, and are scaling them at a much faster rate. Currently, there are two key investment trends (and options for VCs) in China – Either invest really early and be one of the first investors, before BAT trio scoop in, or go big in terms of investment size and participate in multiple rounds (Mobike and Ofo cornering 95% of USD 2 Bn invested in bike-sharing, while three bike-sharing companies closing in the same duration is a good example of these trends). The Chinese technology startups investment market also follows two or three themes (per year) that attract most of the monies. In 2017, the three key themes were Phone Charger Sharing, Bike Sharing and New Retail.
- India: India is currently transitioning through to the second phase of technology startups based innovation and investments cycle. There is an ongoing consolidation of the first phase consumer internet and mobile startups, and emergence of first generation, VC investments-backed technology giants – Flipkart and PayTm. Both these companies are not only rapidly influencing and changing the digital consumer dynamics in India, but are also attracting majority share of VC investments in the country. India, unlike Japan, US or China lacks big name domestic investors, and the technology startups in the country are dependent on US-based VCs, and in the recent past, China’s Alibaba and Tencent, and Japan’s Softbank. Innovation and entrepreneurship in India is slowly shifting towards middle-India to tap the potential 300 mn to 500 mn mobile-first consumer segment, and move from high value-low volume transactions based digital economy to high volume-low value transactions economy.
- South-East Asia (SEA): Currently, SEA (6 major countries including Singapore, Indonesia, Malaysia, Philippines, Thailand and Vietnam), from a technology startups innovation, VC investments and growth opportunities perspective, is exactly where India was five years ago. The current internet economy of this region is USD 50 billion in size and is expected to grow to USD 200 billion by 2025, with significant room for growth in terms of mobile adoption. There exists tremendous opportunity for growth and investor returns in this maret for the next few years. According to Temasek-Google’s “SEA Spotlight” reports, the VC investment, which was USD 1 billion in 2015, grew to over USD 12 billion in 2016-17. And, the average time spent on mobile internet by consumers in this market is 3.6 hrs/day/user (as compared to 3 hrs/day/user in China). Online Media, Ride Sharing, E-Commerce and Fintech are going to be the key focus areas for this market. This region could potentially witness an investment of USD 40 to 50 billion over the next 10 years. And, we are witnessing both US and Asia based VC firms and Chinese technology giants such as BAT trio eagerly investing in this market.
- Australia and New Zealand (ANZ): The technology innovation, startup ecosystem and VC investments in ANZ markets, especially in consumer internet, are still at a nascent stage. With Amazon and Uber recently entering these markets, the scenario is expected to change very quickly. ANZ currently is highly Enterprise Tech and SaaS driven market and the innovation in these markets, similar to western countries is focused in and emerges out of universities.
Going Forward, The Unique Characteristics of Each APAC Market Will Require Independent Strategies
And, investments will follow realizing market potential and deep tech innovation
With significant focus on platformization and mobile payments across various countries, each market in APAC has a different leader and approach. While in China, WeChat – primarily, a mobile IM – has evolved into a platform catering to ride-sharing, local delivery, and eventually evolving into a mobile payments platform, in Indonesia, Go-Jek – primarily, a bike taxi hailing app – has evolved into mobile payments and mobile-first lifestyle platform. In India, PayTm, which started as Mobile Commerce company and later delved into payments is now a platform of choice for various mobile-first lifestyle activities of digital consumers.
Also, within Asia, what works in one country is not guaranteed to work in the other. WeChat’s popular “Red Envelope” product in China (gifting money during special occasions) failed to take off when it was replicated (as “Blue Envelope”) by Tencent’s India-invested company – Hike Messenger. However, a similar product by PayTm (called “Lifafa”) has garnered traction, primarily due to the power of the platform along with cultural fitment (in this case, colloquial branding and timing of launch). So, each of the Asian markets require separate product and feature development and go-to-market strategies, in line with their cultural fitments. Copy-paste strategies will not work.
With WeChat in China, PayTm and India Stack in India, Go-Jek in Indonesia, there is a push towards API’sation of digital consumer economy, converging on mobile payments and commerce, with the primary objective of capturing the market opportunity at a rapid pace. Along with this trend, focused innovations in emerging, deep technologies such as AR/VR, Quantum Computing, Quantum Encryption, Robotics, Drones and horizontal deep tech such as AI/ML, Blockchain and IoT are being driven in APAC by both domestic technology giants with global ambitions and VC community as well.
Two of the world’s biggest economies – China and Japan, and two of the fastest growing economies – India (USD 2.1 Tn GDP, growing at 8%) and SEA (USD 2.5 Tn GDP, growing at 5%) belong to Asia. And, with technology-led innovation coming out of this region with rapid pace and confidence trying to cater to both local and global markets, the world cannot afford to ignore or take this region lightly anymore.
An abridged version of this Analyst Note was originally published as an Op-Ed in APAC CIO Outlook magazine: Special Edition on Enterprise Startup in December, 2017