Can China Be a Blueprint for Success in ASEAN’s Digital Economy?

The following op-ed was contributed by Adrian Li. Adrian Li is the Founder and Managing Partner of AC Ventures, a leading venture capital firm in ASEAN, with more than USD 500 million in assets under management. The firm is a generational partner to founders driving positive societal change and economic impact in Indonesia and beyond.

A frequent assumption we hear is that “Indonesia is just like how China was ten years ago.” However, tech investors need to stop looking at China as a blueprint for success in ASEAN’s digital economy.

Often referred to as the “time capsule” approach, this school of thought in markets like Indonesia is not – and perhaps never was – instructive for wise dealmaking.

As we all know, a car that will work in one country will probably work in another. However, for localizable technology plays, this macro approach is likely to lead to both backing incorrect business models and also missing out on some potentially high-returning ones as well.

While there are business models and novel tech from China that could play well here, most often, the degree to which they must be localized is such that by the time a company achieves product-market fit, it looks drastically different than the original version. Much of what makes an early-stage tech company live or die in any market depends on local nuances.

Single vs regional market

Let’s zoom out for a moment to look at the region. In the past, some Chinese and Western investors I’d spoken with thought of ASEAN in an overly simplistic way, as a single market that startups could capture with the right playbook strategies. While the region’s total population is large and the aggregate middle class is surging, this kind of monolithic thinking misses significant differences across the ASEAN countries.

China is one nation with its own highly centralized government, five-year plans, funding subsidies, and a well-oiled supply chain. Its digital economy functions like clockwork and an investor’s ability to predict what the near-term regulatory landscape will look like is also incredibly important.

ASEAN, on the other hand, is a collection of smaller nations — each with its own government, language, culture nuances, multi-year plans, capital markets, logistics challenges, incentive programs, and regulatory and corporate governance climates. Further, anyone who says they can confidently predict how regulation and macro policies will unfold regionwide is likely painting with too broad a brush.

Universal appeal vs localized adaptation

When it comes to tech companies, the strategies of those in China and ASEAN markets, such as Indonesia, significantly differ. Chinese tech firms, often product-led, have thrived within their immense domestic market, creating world-class products and services that resonate globally. This approach often prioritizes universal appeal over localized adaptations and, while successful in China, can face challenges in culturally diverse markets.

In contrast, many tech startups in Indonesia have adopted a different strategy. Rather than aiming for product-led universality, they focus on the effective localization of their operations. This strategy, rooted in a deep understanding of local cultures, behaviors, and market peculiarities, equips them with a profound advantage in their home markets.

Operational localization is more than just language translation or superficial adjustments. It involves adapting products and services to meet unique local demands, whether it is Astro’s 15-minute grocery service that has figured out how to cope with Jakarta Metro’s sprawling geography and debilitating traffic issues, or Ula’s light-weight mobile app for low-spec phones and an ultra-simple user experience that caters to tens of millions of small shop owners.

While China’s product-led tech companies have certainly reaped considerable successes, the more localized approach of ASEAN startups allows them to tap into the diverse and complex nature of their markets in a way that more universal models simply cannot. In a world that is becoming increasingly globalized yet culturally diverse, this strategy of effective localization is the key to securing a strong foothold in the Indonesian market.

Asymmetrical regulatory environments

China’s government has tightened its grip on the fintech sector in recent years, with increased regulation, fines, and forced restructuring, leading to the downfall of major players like Ant Group.

Draconian regulations have also hit China’s edtech sector, once a favorite of Wall Street and venture capitalists. In 2021, drastic regulations from the central government severely disrupted the multibillion-dollar industry, banning for-profit tutoring services tied to the public school curriculum and imposing strict class schedules. This resulted in significant stock value drops for companies like New Oriental Education and Technology Group and TAL Education Group, leaving them scrambling to survive.

Given China’s unpredictable regulatory environment and market risks, global investors are increasingly wary of investing in entire categories of the Chinese digital economy.

In contrast, Indonesia presents a far more favorable landscape for fintech initiatives. The Indonesian government consistently supports fintech innovation, promoting financial inclusion, facilitating partnerships between startups and state-owned enterprises, and establishing a regulatory sandbox for new fintech product testing. This supportive regulatory climate makes Indonesia a more hospitable environment for high-potential tech plays across the board, compared to China’s increasingly restrictive one.

The massive MSME opportunity and optimizing supply chains

With local startups now making neo-banking plays, underbanked Indonesians have the chance to open savings accounts, obtain car loans and home mortgages, and invest in the stock market, many of them for the first time. Banking startups can also be extremely helpful for small businesses.

One such successful company, KoinWorks, focuses on providing financing and credit cards to 64 million MSMEs, and in doing so has become a significant driver of job creation in the archipelago.

On the supply chain front, China has already maintained efficiency for a long time. There really aren’t many opportunities there for further innovation. This makes it hard to draw a meaningful and contemporary comparison in the context of startup innovation and investment potential.

Meanwhile, supply chains across ASEAN remain highly fragmented, ripe with problems that need solving, and loaded with layers of middlemen.

One example of this is Indonesia’s agriculture supply chain. Food wastage is a major challenge in the local B2B food supply chain. This is so much the case that the amount of food lost and wasted in the country per year between 2000 and 2019 could have fed up to 47% of the population.

As a direct adverse effect of this, studies have found that food wastage contributes to more than 7% of greenhouse gas emissions every year in the country. According to Indonesia’s National Development Planning Agency (2021), the economic cost of this annual waste is somewhere between USD 14.3 billion and 37.1 billion per year.

A startup called EdenFarm is addressing these problems by enabling small share farmers and retail outlets to cut out the middlemen and do business directly, all while operating at near-zero food waste. The company is building an entire supply chain infrastructure for the local B2B food industry.

Another company called Aruna is solving a similar problem in Indonesia’s fisheries space. It solves wastage and lifts fishermen out of poverty by offering a platform that connects them to global buyers, cutting out the middlemen and increasing supplier income. Its tech is also helping local coastal communities preserve the environment, and their livelihoods, by mitigating the annual problem of overfishing.

Investors should seek in-market partners

When it comes to tech investments in ASEAN, smart money from homogenized markets, like China or the US, needs to commit to going micro and doing their homework deeply on the local nuances in places like Indonesia. Institutional capital allocators can also partner with a top-quartile, in-market investment team.

Overall, investors and companies should be wary of any venture firm that claims to understand Indonesia intimately but relies on market comparisons from China or India in their pitch. These market comparisons have proven to be sweeping or inadequate at best, and investments in ASEAN markets need all the necessary nuances of context and color in order to be viable.

>>> Read full article>>>
Copyright for syndicated content belongs to the linked Source : KrAsia – https://kr-asia.com/can-china-be-a-blueprint-for-success-in-aseans-digital-economy