The turbulence seen on its stock market this August has focused minds on whether the precarious state of China’s economy will impact Asia’s fast growing technology and IT sector.
Asia, in particular India and China, has become a new playground for investors looking to find the next big start-up. In the past year, more than $30 billion (£19 billion) has been pumped into this sector, a jump of 45 per cent on the previous year, according to a report by the auditing group KPMG.
There are many regional success stories to whet investors’ appetite. Headquartered in Hangzhou, China, Jack Ma’s Alibaba Group is now one of the biggest internet companies in the world. Generating annual profits of around $3 billion, the group’s businesses include the business to business trading platform Alibaba, the shopping site Taobao and online payments channel Alipay. In India, online retailer Flipkart has seen off the global giant Amazon to secure a large slice of the market. Flipkart has become so successful that Amazon is having to invest $1 billion just to maintain a foothold in India.
The driver behind the boom in IT and internet shopping is the emergence of an Asian middle class – 340 million in China out of a total population of 1.3 billion and in India 250 million are middle class out of a population of 1.2 billion. The growth in consumerism has led to an explosion in IT startups. Responding to a strong demand for online shopping and services, we see the internet applied to online restaurant and hotel bookings, taxi hire, as well as match-making and matrimonial websites. There is a lot of money out there and consumer spending is increasing, underpinned by the emergence of credit cards.
Internet entrepreneurship is taking off across the region because of the explosive growth of smartphones, fuelled in part by frugal innovation and low-cost manufacturing. For example one can get smartphones for as little as £60 as opposed to around £400 to 500 for an Apple iPhone or similar competing product.
Reason for sucess
Underpinning this growth is the global oil price crash. Dependent on imported oil, India, is saving huge amounts of foreign exchange which it can put into infrastructure spending – road and rail. Engineering and technology companies are most likely to benefit from this boom in investment.
Asia’s tech and IT sectors are interconnected with supply chains stretching right across the region. As a manufacturer of microchips and microprocessors, China supplies India’s developing mobile phone industry. The popular Micromax smartphones, for example, are designed in India and made in China. There is a large amount of trade between the two countries.
So what impact will the Chinese stock market wobble have and what are the long-term prospects for entrepreneurs who are in it for the long haul?
Firstly, stock market falls will almost certainly lead to a decrease in the number of technology companies exiting through IPOs. Confidence has been undermined. If the stock market falls, it is not a good time to raise venture capital or sell a business. Venture capitalists are not making the returns they need to cover their investment. As the crash only took place in August, evidence so far is anecdotal. There are too few deals taking place to compare with previous quarters.
Smart VCs are looking at the longer term and the next wave of growth. This will come from what the late management guru C.K. Prahalad refers to as “the bottom of the pyramid” – a great mass of people on low incomes and at the bottom of the rung in terms of the class structure. People working in service sector jobs such as housemaids or security guards.
This vast market is largely untapped but as their income slowly increases so do their aspirations. There exists potential demand for basic versions of the smart technology now available to the middle classes.
In China and in India there is a massive new marketplace to go after and we will start seeing standardised products manufactured in huge volume at a low price that more people can afford. Reduced profit margins will be more than offset by returns on the huge numbers sold. I can think of many new products that would catch on. A good idea could be an “Uber” taxi cab mobile phone app for ordering rickshaws. Why not? That’s what entrepreneurship is all about.
As for raising the capital in this market this is not dependent on risk averse venture capitalists. Much of the investment in “bottom of the pyramid” start-ups is coming from a mix of personal savings and boot strapping. There are government business start-up grants available that entrepreneurs can tap into. And some businesses are using family funds or crowd funding based on local business networks of small investors. Barriers to entry are very low.
Asia’s technology boom will outlast the present stock market downturn. The potential market for new start-ups is vast on account of the huge unmet domestic need. In Asia we are at the very early stages of a product life-cycle. For technology entrepreneurs, life is going to be very good for the next 20 years. Going forward, investors should not be scared of stock market fluctuations. The questions investors who are in it for the long term should be asking are:
- Is this product an economically viable proposition?
- Is it a scaleable model?
- Does it bring added value?