Extra Buzz 013: India vs. China
Dear Tech Buzzers,
It’s been a few weeks since I last wrote … and so much has happened! Last week was the Fourth of July holiday here in the US, which happened to coincide with a few home improvement emergencies for me, so while I had been wanting to comment on the burgeoning situation for the company du jour, ByteDance, it was good that I had to let a few days pass, since more information continues to stream in on a nearly daily basis.
Meanwhile, we do continue to try our best to shed light on the China tech scene, which is as frenetic as ever, and have two events coming up that may be of interest to you:
Thursday July 16 Post-Covid Trends from alternative data company BigOne Labs and their data partner TalkingData.
Tuesday July 21 State of SaaS in China with serial entrepreneur Randy Wan, whose newest company, inDeco, was featured by The Information as one of 5 SaaS startups to watch in China. A key theme of this chat will be the fact that SaaS looks very different in China than it does in the West.
And oh yeah, a good supplement to this newsletter is probably the full translation of the Zhang Yiming interview at Tsinghua University that we completed annotating this week. It’s quite long but well worth reading if you’re trying to get a grasp on not just ByteDance but get a feel for the “new” generation of Chinese internet companies established post-2010. Spoiler: fearless expansion into new businesses and geographies is a big part of it. (Parts 1, 2, 3, and 4.)
Best,
Rui
India vs. China
The biggest news since our last letter, at least from the perspective of our global readers and listeners, is probably the Indian government’s ban of 59 Chinese apps on June 29, 2020. (If you were in China, you might have found that your screen was equally overtaken by the ludicrous Tencent / Laoganma Spicy Chili Sauce dispute or the detention of Dangdang founder Guoqing Li in the ugliest divorce battle in Chinese internet history instead.)
Here’s the TL;DR for those who didn’t follow it closely:
China and India had the deadliest border dispute in over 50 years on June 15, 2020. At least 20 Indian soldiers were killed. (If you are curious, I found this op-ed helpful in giving the necessary historical context to the conflict.)
It seems that almost everyone believes the tragic conflict above was the proverbial straw that broke the camel’s back and sent recent anti-China feelings in India into overdrive. *I’m not an expert on this, so I am only repeating what I’ve read, but this seems to be the widely-accepted perspective, although I am also well aware of the fact that mainstream narratives do not always correlate (positively) with accuracy.
The Indian government then made the decision to ban the above mentioned list of 59 Chinese apps because they are engaged in activities “prejudicial to sovereignty and integrity of India, defence of India, security of state and public order,” such as “compiling, mining and profiling” users’ data that posed threats to “national security and defence of India.”
TikTok was the first of the apps to willingly submit to the ban and was already showing error messages that it was complying with government regulation. CEO Kevin Mayer (who we wrote about previously) wrote a letter to his 3500 Indian employees and contractors that he is optimistic for the 200mm users in India who are on TikTok.
In addition to appstores, ISP-level bans were requested by the government and have been mostly instituted. So now, a week later, the ban has been accepted as “for real.” While it’s true that some apps are trying to get around the ban with various shenanigans such as alternate domains, these are temporary hacks, not a real solution.
Update: The government has sent a 70+ question list to the banned apps to be answered within three weeks, dashing their hopes of an immediate meeting with officials.
Given these facts, I’m sure you had some of the same questions I did. Let’s see if I can answer some of them for you:
1. Did Chinese entrepreneurs operating in India see it coming?
The answer, as far as I can tell, is a pretty resounding “no.” Of course, it’s not that they were not aware of the escalating tensions -- the border conflicts were covered thoroughly in Chinese media, although at least in my feeds it was always well below other more pressing concerns, such as reviving the domestic economy post-covid. But anyone who has operated in India knows that the internet is very much at the mercy of the government, who shut it down a record 95 times in 2019. And of course, TikTok had already been banned once there last year for two weeks. In addition, by mid-June, there were already rumors circulating that the government was planning to ban Chinese apps, which it flatly (and officially!) denied as fake news. Chinese entrepreneurs were aware of this, but believed the government’s reassurances. Too naive? Anyway, while this kind of action wasn’t outside of the realm of possibility, it was very much unexpected. Their enthusiasm wasn’t entirely unwarranted -- despite the escalating tensions and calls for boycott, business was not suffering and growth was still health.
2. How did they react at first?
Apparently, no one took it seriously initially. It’s such a large-scale ban, they thought, that it would be very difficult to enforce without cooperation from the entire ecosystem (appstores, ISPs, etc.). In the beginning, it seemed that they didn’t expect Apple and Google to comply. Again … too naive? Anyway, it was only when more news came in the next few days and TikTok made itself inaccessible and ISPs began implementing the ban that panic really began to set in. Oh no … it hit them, this is for real.
3. But … what exactly was banned?
List of all the banned apps, their Chinese equivalent, the company behind it, and their approximate appstore ranking by AppAnnie. Made by LatePost.
It was a hodgepodge of stuff with no obvious logic, but by category / function, it was 26 tool-based apps (6 search, 3 news, 17 anti-virus / file-sharing etc. types) followed by 20 video-related apps (7 short video and 13 related tools such as selfie apps), 7 social media (WeChat, Weibo), 3 e-commerce, and 2 games. But that’s not the whole story, because not all of the banned apps were popular or even available by the time of the ban. For example, 15 of the 59 named apps had actually already been removed from appstores and were already unavailable, like the ones by Cheetah Mobile, globally banned from Google Play since earlier this year. Another 26 ranked below 1000 and were probably just being used by the Chinese diaspora, like Weibo. So 41 of the 59 were either already unavailable or very unpopular. While it is true that of the 18 that’s left, all ranked in the top 200, and 12 in the top 100, there weren’t too many other similarities. Again, there are a lot of short video and livestreaming apps, but there were also selfie apps, browsers like Alibaba’s UC Browser, e-commerce apps like Shein and Club Factory, and even more boring tools like Xender and Shareit for file transferring. But then Aliexpress, also e-commerce and clearly Chinese owned, wasn’t banned like its siblings Vmate and UC Browser. So what gives? I have no idea, do you?
4. Who is most affected?
Now that we’ve gone through the list with some level of detail, you can see that Alibaba was hit with UC Browser and VMate, but the latter lagged far behind its short video competitors and wasn’t even in the top 100. JOYY (formerly known as YY) had 4 apps that were all banned, Hago, Bigo, Likee, and Vfly, some of which we talked about in Tech Buzz Episode 56, A Short History of Chinese Short Video Abroad. Kuaishou only has one entrant, U Video, but ByteDance had TikTok, Helo and Vigo, although the latter was already going to be shut down and absorbed by TikTok, much like its analogues in China were also going to be integrated into Douyin (which we covered in Tech Buzz Episode 67). So really, it’s just TikTok and Helo for ByteDance, although that has to hurt, given TikTok supposedly has 200mm (or 30%) of TikTok’s international users, and Helo was doing quite well as well, being a clone of an existing successful Indian app but supported by ByteDance’s large coffers and AI knowhow. So … in summary, of the large Chinese internet companies worth at least $5Bn and above … BAT escapes relatively unscathed, with UC Browser being the chief casualty. The main victims are really JOYY, ByteDance, and Kuaishou, although Kuaishou hasn’t invested nearly as much money globalizing as the other two, so it is really just primarily JOYY and ByteDance. And that’s the sentiment you’ll see echoed by Chinese entrepreneurs. They largely don’t know what to do and are looking to these two companies for guidance on next steps since they are the ones suffering actual damage on the operational front -- investment-wise, we’ll get to that later.
5. What will JOYY and ByteDance do?
Well, as we’ve already seen, ByteDance was the first to voluntarily shut down its apps in India, but who knows how much goodwill that will get them in a situation where they have been very visibly labeled as collateral damage. Bigo (a JOYY product), it is rumored, might try to contest the ban on the grounds that they are a Singaporean company (albeit owned by a Chinese one!). At the very least, the courts will probably be involved in some way (you can read an extensive headache-inducing legal analysis here, which says pretty much what you would expect: there are constitutional reasons both for and against the ban, depending on which arguments the administration and the companies choose to pursue).
As Zhang Yiming has said before in his interviews, there is no precedent on how to effectively globalize a Chinese internet company. Hardware, yes, but internet? No. And ByteDance, as well as others, like JOYY, have been doing so at breakneck speed. Remember, TikTok only became available outside of China in 2017 and in the US in 2018. As an industry insider noted, the companies are flying blind when it comes to working with international governments. In fact, out of the internet companies, it seems that ByteDance is the only one who’s savvy enough to be actively hiring folks to work on this task. I am sure that is changing as we speak. But one thing is certain, the road ahead of ByteDance, JOYY and others who hope to follow in their footsteps out of China is going to be long and difficult -- yes there have been successful examples of Chinese companies working with governments all over the world, i.e. natural resource companies, but the process of growing those businesses is much slower and therefore much more manageable. Not so for internet companies. I’d also add to that there’s not a well-understood playbook yet of how to regulate internet businesses, in any country. Not even for domestic leaders, much less foreign players. Even Google and Facebook’s fates are constantly being challenged and re-written. I can’t imagine ByteDance and JOYY were expecting it to be smooth sailing. So … I don’t know exactly what they’re going to do either, but I am pretty sure they’re going to stick it out (and fight, whatever that entails). After all, they’re getting booted at the height of their popularity but beginning of their monetization, not exiting in a cloud of failure like Amazon or eBay from China.
6. What do Chinese people think about the India ban?
Well, I only want to share reactions of value, so nothing from the all-noise, no-signal parts of the Chinese interwebs, ie Weibo or some other gigantic hive of trolls.
Every single well-reasoned, fact-based post on the situation had commenters remarking below that this kind of ban was in fact what the Chinese government practices on certain Silicon Valley companies. So if you were afraid that the irony of the situation would be lost on Chinese netizens … fear not, it is not.
And maybe it is the ultra-pragmatic nature of Chinese people, but virtually everyone I spoke to in China, and I spoke to investors, entrepreneurs and other tech folks I know who have a vested interest in seeing ByteDance win … everyone said that they “could understand the actions of the Indian government,” with some even saying “they would do the same.” Chinese companies are too strong, too determined, too well-funded, they thought. Too competitive. Of course, no one thought the ban was “fair” in any way, but they could understand the strong sense of threat. In their minds, even if the spark was political, the consequences (and benefits to Indian competitors) are commercial. No one bought the security argument. Taking selfies threatens national security? Strong headshake here. But push your advantage? Oh yeah, that’s pretty easy to understand. And why would that go away any time soon? Is that not the nature of how things are?
Most people I spoke to (and their feelings were largely echoed in this mega Zhihu thread I perused) were pretty resigned that this will be the status quo between India and China for the foreseeable future. Even if the bans are reversed, it seems that the honeymoon (if there ever was one) is permanently over and a much more contentious status quo is expected. Most companies felt that this is outside of their control and that they will have to find new markets elsewhere, although none were abandoning ship just yet, just adjusting their plans. I didn’t speak with anyone who was investing directly in India but the news is that investments may be similarly restricted soon. Ant Financial’s investment in Zomato, for example, is supposedly stuck in government review, with just $50mm of the promised $150mm delivered despite the deal having been announced in January. Which brings us to our next point ...
7. Who loses more from the ban -- China or India?
Actually, I think this is the wrong question to ask, even though it’s the default question. Because implicit in this question is a lot of qualifiers, since your answer very much depends on the perspective you take. Are you talking about consumers? Founders? Investors? Regulators? And even for each of these groups the answer can be completely different depending on the individual or specific entity and its end goal. If you think that this is a cop-out answer … I am sorry, but that’s how I truly see it. That being said, let’s look at some of the stakeholders and how it affects them broadly:
Chinese tech startup founders: ie small companies with a presence in India. Of course, for this group, it varies a lot depending on how much of your business was India-specific. And for that, what I really mean is how much money you were able to raise for your business based on your metrics / story in India. Because let’s face it, no Chinese tech business was really raking in cash / profits in India. The ARPUs are a fraction of what they are in more developed markets. But there is the “user dividend” just like in China in 2012 (the explosive growth of smartphone adoption, ~10% in 2018 & 2019, although projected to drop this year), and so people are willing to be patient. Everyone understands clearly that they should be in “investment” AKA money-losing / pouring in not taking out mode. The common word used by Chinese entrepreneurs with regards to the Indian market is 养, which means to nurture and feed, indicating that it’s a long way from harvest time. Most entrepreneurs interviewed seemed resigned to re-allocate their resources elsewhere, if they weren’t already diversified geographically. For this group, they are hit hard, but are not despondent. Most startups are not India-only, although a few might be India-first. This is consistent with the list of banned apps -- virtually all of them are Chinese companies with multiple products active in multiple markets. Club Factory, which has raised $220mm, is probably the only one that’s close to “India-only.”
The BATs, ie large Chinese internet companies that are primarily investing and not operating directly in the country. This gets a little harder to tell but if the state of Chinese investment into the US is any indication, it may very well disappear as quickly as it appeared. Chinese internet companies have been investing in India in a big way since 2014. According to Gateway House, 18 of the 30 unicorns in India have some Chinese investment. According to ITJuzi, Alibaba has invested $3Bn in India, followed by Tencent with $2Bn. But can this continue? As mentioned above, even before this incident, there was evidence that the government was putting in more friction when it comes to accepting foreign investment. In the long run, it may hurt the BAT, but in the short run, the prevailing opinion seems to be that it probably hurts local Indian entrepreneurs more, unless others step in to fill BAT (and Hillhouse, Steadview, Meituan, etc.)’s shoes. I don’t know if I agree with that take. It seems that Facebook and Amazon are more than capable of picking up the slack … if they so choose. But when it comes to sources of capital, the more the better, of course, so it is definitely a loss. (Although I really must add here that they are by no means BFFs with the Indian government either: new draft policy indicates they might have to give their source code to the government, and last week, they were banned as well … by the Indian Army.)
The JOYYs and ByteDances, ie large Chinese internet companies who are operating in earnest in the country instead of mostly via strategic investment. So we already know ByteDance has an impressive 200mm users in India, accounting for 30% of its global users. It’s also been throwing around a rather incredulous number from the ban: “$6Bn in losses.” That seems unlikely given the entire digital advertising market in India in ALL of 2019 was just around $2Bn, and ByteDance only captured a tiny fraction of that, leading many to speculate this was referring to valuation not actual foregone revenue. Either way, it’s obvious that this group is the most negatively impacted, but just like with their smaller-sized comrades, this probably wouldn’t have made much of a dent on their financial statements in the near or even medium term.
The Xiaomis, Vivos, and whatnot. Consumer electronics-wise, there seems to be much more confidence that these companies are not so easily kicked out or replaceable. For Chinese smartphone makers, who dominate Indian shipments, their lowend offerings are considered pretty much unbeatable at this point. Of course, anti-China sentiment has resulted in some disturbing demonstrations against Chinese brands in the past but I think that at least part of the reason why Chinese companies are unfazed is that it happens with regularity in China as well (ie anti-Japan riots, anti-Korean sentiment). And anyway, it hasn’t hurt their commercial success yet, so the bet is that it won’t. Thus, no change here.
The consumers. Chinese consumers are literally unaffected, since there is nothing they use that is Indian in origin that they need worry about being banned by the Chinese government in retaliation. Indian consumers, especially those who made a living off of or supplemented their income on any of these apps, or even just enjoyed using them, are of course much more negatively affected. But how long will it take for them to get over this and become used to the new normal? No one in China is holding their breath that somehow their old users will wait for them, or even remember them, if the ban is extensive / permanent. Again, many Chinese companies have experienced temporary bans by the Chinese government -- they know how tough it is to recover from that in the highly competitive consumer internet space and how quickly competitors can surge ahead.
So as you can see, while the Indian government ban was indeed “big news” in China, it didn’t actually 刷屏 AKA take over my screen as much as some of the topics I’ve written about so far this year for Extra Buzz. Not even close, actually. Initially, I found this somewhat shocking, since it seemed a much bigger deal on my Twitter feed. But then I thought about it and it makes sense. Not that many Chinese consumer internet companies are that deep into India -- low ARPU and high cost of learning to do business -- and even the ban really hurt just JOYY and ByteDance when it comes down to it, and neither on a P&L basis. Alibaba and Tencent definitely have some work to do, but they’ve already made so many solid bets, unless those transactions are reversed it seems that they’re well set up for the next several years, so they could be a little patient. And plus, this is just one (faraway) front … the main battle is still at home, against each other and Pinduoduo and ByteDance. But mostly, this really doesn’t concern any Chinese consumers at all, and very few Chinese entrepreneurs. What it has done, in my opinion, is to help hit home that technology is no longer borderless, and very much “bordered.” For those who can afford to keep fighting, like ByteDance, they will need to up their game and refine their strategy. For those who can’t, it’s onto the next pasture, which for some might be Southeast Asia. Not without risk there, either, by the way, but at least this time, the smart ones will bring more tools and resources … they have been warned.