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SINGAPORE: There is a concept among the business community known as the “China plus one (+1)” strategy in which China remains the main source of supply or consumer market for a company, but a company diversifies certain operations to other countries .
Companies with a stake in the lucrative Chinese market may find it imperative to diversify their supply chains for a variety of reasons: rising trade costs in China, uncertainties stemming from the US-China trade dispute, and, more recently, border closures due to to COVID-19.
“It is worth emphasizing that China appears ahead of the global curve when it comes to restarting the economy after months of lockdown, and many of the reasons why companies are in China in the first place remain valid today,” Alan Beebe, president of AmCham China, was quoted in an April 17 press release detailing a joint survey with PwC of 25 US companies in China.
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“As a result, we expect companies to adopt a ‘China + 1’ strategy as a way to diversify supply chain risks while taking advantage of opportunities in the Chinese market.”
CHINA + 1
However, recent trends suggest that China is adopting its own “+1” strategy. Southeast Asia appears to be at the heart of that approach, particularly for China’s tech giants.
Chinese trading companies are not new to the region, as big tech giants like Huawei and Alibaba have a considerable presence in the region’s markets directly or through subsidiaries.
Furthermore, data compiled by the AidData Research Lab, affiliated with the College of William & Mary in the US, titled China’s Public Diplomacy in East Asia and the Pacific 1.0, shows that China has contributed to a steady stream of projects. investment in infrastructure in Cambodia, Indonesia. , Myanmar and Vietnam between 2001 and 2016.
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But the presence of Chinese investments here has intensified in the last two years.
Cambodia’s love affair with China has meant major cash injections for the once impoverished Southeast Asian country. (Photo: AFP / Tang Chhin Sothy)
For example, in the first seven months of last year alone, when the trade war with China accelerated, Chinese companies invested roughly US $ 1.78 billion (S $ 2.44 billion) in tech startups in the region. , including Easy Parcel of Malaysia, Singapore. Indonesian Bigo and Tokopedia live streaming company by Chinese companies.
According to fintech firm Refinitiv, this was eight times higher than in the same period in 2018.
Overall, Chinese investment in the region has nearly tripled in value from $ 3.5 billion in 2010 to $ 10.2 billion in 2018, data provided by ASEANstats shows.
Recently, Chinese tech companies such as Bytedance, Alibaba, and Tencent have been investing in business initiatives in Singapore.
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Bytedance, the company that owns TikTok, announced plans to invest billions of dollars and hire hundreds of employees in Singapore over the next three years.
Similarly, Tencent will open its regional hub in Singapore, while Alibaba intends to invest US $ 3 billion in Grab, the transportation company focused on Southeast Asia.
What has sparked this increased interest in the region? To understand this, it is worth looking at the business ambitions of Chinese tech companies and the constraints they face.
AMBITION AND CHALLENGES OF CHINESE TECHNOLOGY COMPANIES
First, everyone wants to access new markets for revenue growth, as domestic competition within China has become more aggressive. Many of these companies also aspire to become global companies.
The Beijing headquarters of ByteDance, the parent company of video-sharing app TikTok AFP / GREG BAKER
Second, to stay ahead of the competition, Chinese tech companies need to acquire strategic resources such as new technologies, talent with the relevant expertise, and a larger ecosystem network to take them to the next level.
Despite having such strong ambitions, these Chinese tech companies have faced strong headwinds. In particular, the rejection of the United States through its trade war and decoupling with China.
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Tencent’s TikTok and WeChat are some of the Chinese tech companies facing a strong backlash in the US market.
Confidence towards Chinese businesses in general has deteriorated lately due to China’s perceived lack of transparency in handling the COVID-19 outbreak, according to a study by the Brunswick Group.
LOSE HONG KONG AS A DOOR
Hong Kong has lost its luster as China’s preferred gateway to the world. It was the hub where global multinationals and Chinese tech companies collaborated and struck deals until frequent hostile street protests and stronger intervention from the mainland government disrupted this.
Business travel between China and Hong Kong had been further inhibited. The city was not on the list of countries that were granted green lane access to the mainland.
Pro-democracy protesters, including veteran activist Leung Kwok-hung, march during a rally near a flag-raising ceremony on China’s National Day in Hong Kong, China, on October 1, 2020. The banner reads: “There is no celebration of the national day, only national mourning.” REUTERS / Joyce Zhou
A survey by the United States Chamber of Commerce reported that almost 40 percent of its members had plans to leave Hong Kong. The executive director of the Hong Kong General Chamber of Commerce, George Leung Siu-kay, noted on a radio show in Hong Kong that the city is no longer a business haven for companies.
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With having to leave the US and Hong Kong, China’s tech companies’ access to capital markets on Nasdaq and the Hong Kong Stock Exchange will be limited.
This is unhealthy when they need funds to drive global expansion. They will need a new location where they can access more public or private investors.
HOW CHINESE TECHNOLOGY COMPANIES CAN FULFILL THEIR AMBITIONS
Chinese companies are also trying to evolve their status and establish themselves as an international brand to get rid of the negative opinions that come with being considered a Chinese company.
Establishing global operations in a politically neutral country that provide access to talent, financial markets and business networks for growth can help achieve this.
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Chinese technology companies also want access to companies that they can invest in or acquire to strengthen their technology capabilities, regional networks and access to new markets.
For example, Alibaba’s recent investment in Grab could allow it to enter markets in the region where the ride-sharing company already has a strong presence.
WHY SOUTHEAST ASIA?
By November 2019, Chinese companies had already expanded to almost 130 countries in the world. Research by both the Pew Research Center and The Brunswick Group has shown that emerging markets eager to attract investment are overwhelmingly welcoming to Chinese companies.
To strengthen themselves for future tariffs or political waves, Chinese companies are looking for new markets AFP / Greg Baker
Similarly, developed countries also present equally attractive opportunities for Chinese tech companies.
Bringing financial and technological investments to local companies, opening sales channels in China, creating employment opportunities and attracting money from Chinese tourism are some of the main attractions to welcome Chinese companies to its shores.
By 2030, ASEAN is projected to be the fourth largest single market economy on the market.
Therefore, it is not surprising that Chinese investments in the region will reach $ 500 billion by 2035, as reported by the Asean + 3 Macroeconomic Research Office.
This shows that Chinese companies are aggressively looking for ways to deepen their roots in the Southeast Asian market as the United States becomes a more hostile destination.
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With the attractive benefits of the China-ASEAN Free Trade Agreement (AFTA), Chinese tech companies will be interested in increasing their presence in regional markets and forming a new ecosystem.
This may attract even more global FDI to the region, especially from Western multinationals that are forced to withdraw from China and Hong Kong due to recent geopolitical tensions.
That is why Southeast Asia is experiencing great interest from Chinese companies, as they see the region as an attractive alternative to offset their loss of market growth elsewhere.
The dispute between the United States and China may see more investment flow into the ASEAN region, boosting growth and job creation.
For Chinese companies that are hampered to expand into US markets, they now have a new life for internationalization.
In fact, there is a silver lining for everyone.
Dr Lau Kong Cheen and Dr Vanessa Liu are Senior Lecturers in the Marketing Program at the Singapore University of Social Sciences Business School.
