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Mar 20, 2018 | 15:16 GMT

6 mins read

China's Tech Giants Are Racing the West Into Southeast Asia

China's tech giants see Southeast Asia as a market ready for development.
(LINTAO ZHANG and SEAN GALLUP/Getty Images)
Highlights
  • Chinese tech and internet giants have charged into the dynamic Southeast Asian market as they seek to globalize and challenge U.S. and Western dominance overseas.
  • Southeast Asia is neither a purely Western nor a purely Chinese market, making it a level playing field and one that China will not easily give up.
  • The region's growing e-commerce, digital economies and smartphone penetration rate will drive interest there as it undergoes a substantial economic transition.

China's tech giants are drawing a line in the sand in Southeast Asia. From internet heavyweight Alibaba to smartphone maker Xiaomi, Chinese companies have singled out the region as a critical market to push back against their Japanese, South Korean and U.S. rivals. The 10 countries of the Association of Southeast Asian Nations (ASEAN) have a population of more than 620 million. And whoever can cultivate the region through smartphone adoption, internet commerce and other spreading technologies will have prime access to one of the world's most important generators of growth over the next two decades.

The Big Picture

Stratfor's 2018 Annual Forecast noted how China will take advantage of economic conditions as it continues trying to wrestle the global economic system out of the United States' hands. It all starts with Southeast Asia, where China's giant tech companies, including Alibaba and Tencent, have led the charge. And if these tech giants are successful, they will be primed to take advantage of the long-term growth coming to the countries in the Association of Southeast Asian Nations.

The Chinese Way

Over the past five years and with the government's help, China's tech giants have become household names. Its internet trinity — Baidu, Alibaba and Tencent — now have a combined market capitalization of over $1 trillion. Alibaba and Tencent are now among the world's top 10 publicly traded companies and close behind such U.S. rivals as Amazon, Google/Alphabet and Facebook. In the smartphone market, the United States' Apple Inc. and South Korea's Samsung Electronics remain at the top, but China's Huawei, Xiaomi and Oppo round out the top five. 

And while China shields its giants at home, it also expects and pushes them to compete fiercely with one another for supremacy within that protected domestic market. Adding foreign global giants to the competition for the world's largest market — China — makes for intense rivalries. Now that tournament is heading to Southeast Asia as the tech giants battle to set up a digital beachhead.

The Contest for Southeast Asia

The geography of Southeast Asia and its burgeoning development make it an attractive market for tech expansion. Its island chains lead to disconnection and a need for smartphones, and cash payments remain common because few people make digital transactions. But with the fast rise in internet and smartphone penetration rates, Southeast Asia's digital economy is growing, with a nearly 50 percent increase in the consumer base in the past year. Still, digital transactions are less than 5 percent of overall retail sales. 

The expansion, with Chinese help, is happening on multiple fronts. For example, Alibaba made its first big move in 2016, acquiring a controlling share in the Southeast Asian-focused e-commerce company Lazada. In June 2017 it raised its stake to 83 percent, then announced on March 19 a further $2 billion investment during 2018, bringing its total input to $4 billion. Lazada is now trying to adopt a business model similar to Amazon's in the United States. It is focused on building up logistics hubs to deliver directly to customers, though with Southeast Asia's geography, this is proving to be a tall order. 

And Alibaba is not the only one. Within China, Tencent's strategy has been to challenge Alibaba by focusing on the mobile, e-commerce and payments side of the tech sector, and it is attempting to replicate the strategy abroad. For example, it is backing the Singapore-based Sea, which raised over $1 billion in its initial public stock offering in October 2017. An e-commerce rival to Alibaba, JD.com, based in Beijing, is now following a similar strategy with investments in Thailand and Indonesia, which it hopes to use as a springboard into e-commerce and logistics in neighboring ASEAN countries. Despite the initial fanfare and comparisons to Tencent, Sea has struggled to find success after its IPO. It recently announced a greater loss than expected in 2017 and its president is expected to depart at the end of 2018. 

The Chinese Advantages

As e-commerce and mobile payment systems move into Southeast Asia, Chinese companies may well have the advantage. China has gone through a similar development process as those technologies spread across it. In five years, Alibaba's Alipay and Tencent's WeChat Pay could be as ubiquitous in Southeast Asia as Apple Pay and Google Pay are becoming in the West. But in this digital transition, one crucial difference separates Southeast Asia and China from the West: the former lacked an established credit banking system. Because of this, the transition to a digital economy is looking to be easier for the many small businesses and the growing number of smartphone users than for users in developed countries. This situation may give Alipay, WeChat Pay and Chinese internet companies an edge in markets like Southeast Asia. And China has other advantages, including deep ties to the region's economy and a close overlap between the business communities as well as cultural linkages.

One big question remains: Can Chinese-focused internet companies attract a loyal fan base?

But one big question remains: Can Chinese-focused internet companies attract a loyal fan base? In a world where e-commerce, the digital economy, digital payments and the accompanying operating systems are consolidated and interconnected, the battle can be between ecosystems. In the United States, these fights have included Google's Android vs. Apple's iOS and Google vs. Amazon in cloud computing. In the Chinese tech ecosystem, users have been flocking to giants Tencent and Alibaba (In China, mobile apps are essentially self-contained ecosystems in terms of cultural adoption, much like the way operating systems are in the West). In short, lines will be drawn around ecosystems where companies will want to partner with a tech giant to ensure market access through them. In China, this has worked well for companies such as Xiaomi, which has an avid fan base thanks to its heavily user-centric business model. Similarly, Alibaba and Tencent have catered their business model and strategy to fit a specific market: China's.

The Downside

While China appears to have the advantage, there are drawbacks. What works inside China may not work outside China and Chinese consumer-centric ecosystems may not be accepted in Southeast Asia. One consequence could be a consolidation battle to the death among China's own companies that leaves only one winner. Furthermore, U.S. and South Korean tech giants will not give up without a fight and have their own advantages, especially when it comes to smartphones and hardware. So, in the battle for Southeast Asia, Chinese and Western tech giants are going head-to-head in a contest where neither has the home-field advantage.

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