The Third Wave

Jayadevan PK July 12, 2018 9 min

Steven Liu landed in Bengaluru on 6 January 2016, a cloudy winter morning, he recalls clearly. At the time, he was a management trainee at a leading discount retailer in China. A few weeks into his trip, he quit the job and tried his hand at a business venture: a cross-border tech media platform called OnionFans. That didn’t work out so he joined AdView, one of China’s largest advertising technology companies. He’s now the CEO of AdView in India. In less than a month, they plan to launch a video app tailored to the Indian market.

Sitting across the table from me at Bangalore Mandarin, a 24-year-old Chinese hotel, he reels off facts about the Indian market– the ups and downs in e-commerce valuation, smartphone penetration and so on– with striking clarity. “We see India as the new opportunity,” he says. If AdView’s new app traces the Chinese playbook, it might soon hit the top charts on the Indian app stores.

Over at Sequoia Capital, partner Shailendra Singh, ‘amazed by the sheer number of Chinese startups targeting India’ has a word of advice for Indian entrepreneurs: “India/SEA founders, buckle up for more competition,” he tweeted. A Pune entrepreneur tells me that two fresh graduates from China have recently rented a two-bedroom flat in the city after backpacking through 18 Indian states. They plan to build a local language app. But they don’t want to be talked about in the media, so we drop it at that.

Steven Liu, CEO, AdView India

At breakfast meetups and startup events in Bengaluru, word is that the Chinese are coming for you. They’re aggressive. They don’t have the concept of taking it slow and they work hard. Indeed. A new wave of Chinese entrepreneurs– young, intrepid and spirited, are starting to make their way to India, as they see a growing market where a few Chinese companies have started tasting success. With access to Chinese capital, an undying appetite for growth and a playbook that’s perfected in China, they’re in it to win big.

“We’re too naive about what’s going on. They can sweep up the whole market,” says Gurpreet Singh, Beijing-based founder and CEO at ATM Ventures tells me over a WeChat call (Pro tip: for you to get any reporting done on China, you need to have WeChat). “They’re asking if Xiaomi has become number one…if Newsdog has become number one, then why can’t we?”

This hasn’t gone completely unnoticed in India though. Almost all venture capitalists have taken founders from their portfolio companies to meet Chinese companies like Tencent and Alibaba. Group trips to Beijing, Shanghai, Hangzhou and Shenzhen are an annual affair now. Venture capitalists who previously backed companies like Flipkart that sold to urban, affluent Indians, have now started investing in companies like ShareChat, that are roping in first time Indian users from smaller cities and towns.

Xiaomi’s success in India has echoed heavily in China. The phone maker was a late entrant in India’s smartphone market. But for the third successive quarter now, it has sold the most number of smartphones in India by replicating its strategy (one which banks heavily on flash sales online) in China. Xiaomi, which raised $4.7 billion at a valuation of $54 billion in a public offering earlier this week, has 30% market share in the country. It has displaced incumbent Samsung and nearly wiped out Indian phone maker Micromax. The company is now growing its offline presence and has also set aside $1 billion to invest in 100 startups in India.

It’s not just Xiaomi. Alibaba’s UC Browser is second only to Google Chrome in India. Its news app, UC News, has also notched up tens of millions of users. Singh, who advised Xiaomi in its early days in India, says that Chinese companies like Xiaomi and Huawei bring in hundreds of fresh graduates to India. “There are more coming every year,” he says. These fresh graduates could end up becoming entrepreneurs themselves, like our secretive backpackers in Pune. Xiaomi India chief Manu Jain did not respond to an email request for an interview (understandably busy with the company’s public offering).

If Xiaomi and UC Web (which came in with a team of five freshly minted graduates to India sometime in 2010) are the second wave of Chinese tech companies after Huawei and the telecom companies of the 2000s, a third wave is in the making now. Newsdog, a Chinese content app similar to Jinri Toutiao (China’s biggest content app), has quickly risen to become one of the most used apps in the country. Bigo Live, a massively gamified video app is a viral hit in India. Musical.ly, Vigo Video, and News Republic– all three owned by Chinese app maker Bytedance known for its AI prowess— are climbing the charts quickly. More, like AdView’s video app, are on their way.

Also see: Inside DailyHunt’s bid to become India’s content King

Capital Flight

India lags starkly behind China in many ways. WeChat claims 963 million users, payments have almost completely gone digital, internet penetration is over 50%. India, on the other hand, has only about 300 million smartphone users, cash is still king here and internet penetration is under 50%. A telling data point: Alibaba’s singles day sale in 2017 was about $25 billion. That’s more than all of India’s e-commerce business put together. But this is exactly why India is attracting Chinese investors. They realise that there’s scope to build large companies on the back of India’s growing mobile Internet market.

Farid Ahsan, COO, ShareChat

Moreover, under Donald Trump, the United States hasn’t been very receptive to Chinese companies and their money. “Now they have to figure out more growth opportunities to keep their retail investors happy and India and Southeast Asia are the best possible markets for them,” says Farid Ahsan, the co-founder of Sharechat, a social networking app that raised $18.2 million from Xiaomi and Shunwei Capital. “We’ll end up seeing a lot more money coming in from China,” says Ahsan, who has met over a dozen Chinese venture capital firms.

Chinese investors have amped up their investments in India over the last five years. As per data from Tracxn, their participation in investment deals have steadily gone up since 2014. Besides the BAT trio (Baidu, Alibaba and Tencent), Meituan Dianping, Toutiao and Didi (MDT trio) have been active in India, Chinese journalist Hu Jianlong, based in Bengaluru, wrote in his newsletter in March, a week after he met executives of Meituan in Delhi.

Nearly a dozen Chinese firms including NGP Capital, Axis Capital Partners, Swastika, Shunwei Capital, Fosun, Xiaomi, Tybourne Capital Management, and Tree Line Investment Management have made bets in India so far. There are more coming: Morningside VC, Carror VC, also called Ganesh Ventures (backed by Jack Ma), Cheetah Mobile, 01VC, XVC, Vplus, and Qiming Venture Capital are some of the firms that have held meetings with startups in India.

Chinese investment in India has grown over the years.

Sceptics argue that India’s gross domestic product per capita is $1800, whereas it’s $8100 in China. This means the purchasing power of Indian users is very low compared to Chinese users and therefore it might be a long time before the investors hit paydirt.

But for many of these investors, it’s just a matter of time. “These companies just need to be patient. Wait 3-5 years till mobile consumption grows,” says Liu of AdView. The mobile economy typically takes off when the GDP per capita hits about $4,000 as we’re seeing in Indonesia, only a fifth of India by population. All the Chinese VC firms have set up shop in Indonesia and internet giants like Google have started focusing on the market now.

Chinese playbook

“Almost all Chinese investors see mobile content consumption the most attractive space in India,” says Shanti Mohan, the founder of LetsVenture, a platform for startups to raise funds. Besides the obvious fact that content consumption on the mobile is growing, Chinese investors are betting on a unique insight they’ve gleaned by watching companies in China. They believe that content or communications is the easiest way to reach the user. Once the platform acquires a large number of users, they typically see gaming, microtransactions, and, finally, e-commerce grow on those platforms. That was the path WeChat took to become the all in one app that it is today. WeChat was launched as a messaging app. But soon, it’s parent company Tencent, married years expertise in gaming with WeChat. Games and gamified features induced users to make small transactions for virtual goods. These days, WeChat is an accepted payment method not only online but also offline. “You don’t need your wallet if you are in China,” says Liu.

The Chinese content companies have a pattern. They rapidly acquire users without giving much thought to the quality of users by showing them racy content, gamifying the user experience and in some cases paying them to spread the word. Take for instance how NewsDog has become one of the biggest apps in India. It is taking a leaf out of the Toutiao playbook, marrying cutting-edge technology like artificial intelligence and heavy personalisation with racy and often risque content.

Also see: NewsDog, the anything-but-news app that gamified its way to reckoning in India

There’s no guarantee that the Chinese playbook will work in India. Because unlike China, where most users speak Mandarin, India has many languages. It also has a deep socio-economic divide — broadly classified by experts into India one, two and three– which makes it harder to acquire and monetise users. China’s large middle-class fuels consumption. In India, a majority of the population is still poor.

Indian companies are starting to find their own ways of getting to the next generation of users. Sharechat, for instance, has dozens of language experts who understand the nuances of content consumption in regions in its team. Similarly, DailyHunt, which nurses ambitions of being India’s content king is investing heavily into machine learning to surface relevant stories to users.

As Mohan of LetsVenture puts it: Nothing is given to you in a platter if you are an entrepreneur in India. It’s a lot more competitive, fragmented and diverse than any market you can think of. So the Chinese, even with the upper hand they hold, have their work cut out if they are to win here.

Visuals by: Rajesh Subramanian


Updated at 03:15 pm on July 12, 2018  to correct a typo in a graphic.

Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.