Showing posts with label Alibaba. Show all posts
Showing posts with label Alibaba. Show all posts

Thursday, 5 November 2015

Singapore's Start-up Drive

As Singapore seek new growth sources, the micro-nation is positioning itself to become Asia's start-up hub. By promoting outside the box thinking in the economy, Singapore could see political spillover as the government looses control over the new commanding heights of the 21st century information economy.

Lee Kuan Yew's (LKY) passing in March signaled both the (belated) death of Singapore's 20th century political and economic paradigms. The government, now run by LKY's son, may in the future still maintain a firm hand; however, Singapore's highly educated, mobile, and technologically savvy youth are pushing for a more open society. 2015 has been an auspicious year for the Asian micro-nation as it also celebrates its 50th anniversary.

With LKY notably absent, Singaporeans are understandably nostalgic, but also enticed by the future. While the government is “listening, hearing criticisms, receiving feedback and improving itself” according to Burhan Gafoor, high commissioner to Australia, political change will be spurred by the changing nature of Singapore's economy.

Singapore needs a new growth formula

Singapore's government long fostered growth by controlling the commanding heights of the economy and focusing on specific sectors such as shipping, shipbuilding and the financial sector. Large formalized institutions and their attendant hierarchies allowed the government to keep close tabs on the economy, while garnering legitimacy from their sound economic stewardship. The problem now facing Singapore is that as a mature economy it can no longer rely on these sectors alone to ensure growth.

From 2004 to 2014 Singapore's annual GDP growth declined from 9.5% to 2.9%, largely due to a maturing economy. Companies in the aforementioned sectors have also seen their stock performance decrease, with some being cut from the benchmark Strait Times Index. This is a major issue as shipping, ship building, and commodities have long been behind the lion's share of Singapore's market capitalization. Specifically, the average daily trading volume for these sectors has dropped from $1.24 billion in 2010 to $816 million in 2014.

Hozefa Tapiwalla, head of research for Southeast Asia at Morgan Stanley sums up the paradigm shift that Singapore is undertaking.

"Historically [the Singapore government was] focused on industries and what they wanted and what they don't want. What they are doing right now, as a strategy and philosophy clearly, is saying we clearly don't know what's going to work," he said. "Hence, it's facilitation now, rather than directing which sectors and what's going to work."

In order to maintain economic vitality and public confidence, the long-ruling People's Action Party (PAP) government needs to foster growth in emerging sectors, notably information technology, e-commerce etc. LKY encouraged wise investments and Singapore boasts a robust sovereign investment fund.

Singapore pursues foreign entrepreneurs

Singapore can capitalize on its ethnic and linguistic links with many parts of Asia to help foster the creation of an Asian investment and entrepreneur hub. This strategy is proving successful, as witnessed by Alibaba's decision to base its overseas business headquarters in Singapore. Alibaba also announced that Aliyun, its nascent cloud computing branch will also be headquartered in Singapore. In explaining the decision to be based in Singapore, Ethan Yu, VP at Aliyun stated that “many Chinese enterprises we serve have stepped out of China and come to Singapore.”

Singapore has been proactive in attracting foreign tech firms, launching the EntrePass program, a streamlined visa for foreign entrepreneurs seeking to found and run businesses in Singapore. Unlike similar programs in other countries, EntrePass allows applicants to have raised start-up capital from any source, not just Singaporean investors. Applicants can also apply for permanent residency in two years – or after only one renewal of the one year visa. Similarly, as part of its National Framework for Research, Innovation and Enterprise launched in 2008, Singapore touts the Global Entrepreneur Executives initiative; an investment scheme designed to convince high growth / high tech firms to relocate to Singapore.

Creating a domestic start-up ecosystem

Alongside attracting foreign firms, Singapore is seeking to promote its domestic start-up scene. Singapore's current leaders can take inspiration from LKY's statement that “the quality of a nation’s manpower resources is the single most important factor determining competitiveness.” To this end Singapore is harnessing the creative energies of its population in order to drive innovation. The aforementioned National Framework also include programs for 1:1 funding matching plans for early-stage ventures.

There is also the Technology Incubation Scheme which comprises diverse incentives including offering to provide 85% of start-up capital when investors contribute the remaining 15%. The Infocomm Development Authority of Singapore (IDA), which was created at the turn of the millennium, is fostering local start-ups. Through IDA's investment subsidiary, Infocomm Investments Pte, IDA is promoting its accelerator program which seeks to grow and build high-growth tech start-ups at the seed and early-stage levels.

These various programs have spurred a start-up wave in Singapore, with new firm creation rising from 54,000 in 2010 to 77,000 in 2014. Moreover, Temasek – Singapore's sovereign investment fund – has sought to diversify its portfolio by backing various start-ups; with unlisted private investments now comprising 30% of Temasek's portfolio – up 10% from 2004.

As a result, venture capital investment in the tech sector has risen from less than $30 million in 2011 to more than $1 billion by 2013. Singaporean millennials are also increasing becoming interested in the start-up ecosystem, with investment clubs springing up at Singapore's universities. These clubs accept members from all faculties and are training the next generation of entrepreneurs, with the National University of Singapore (NSU) Investment Society holding a public symposium at the Singapore Stock Exchange. These programs are disseminating into wider society, as 9% of Singapore's workforce are currently employed in start-ups.

Political spillover

As the government encourages people to think outside the box and explore new ideas, it risks more people questioning other elements of Singaporean society. By fostering public input and energy in shaping Singapore's economic trajectory, PAP looses the monopoly on economic leadership which has underwritten its legitimacy. Having said that, by promoting start-up creation via state incentive and investment schemes, the government may well seek to shape the nascent start-up ecosystem so as to be dependent on and comfortable with a government directed capital pool. This would allow the government – in some sense – to continue to exercise a top-down approach. Such a plan is however fraught with danger, and is likely unfeasible given the fluid and fast-paced nature of venture capitalism.

Kenneth Tan, vice dean of the Lee Kuan Yew School of Public Policy, commenting on LKY passing, made a pertinent point about Singapore's situation in stating that he expects

“the opposition to make inroads now, and in part this is to be expected in a more mature society. I hope that they do become a stronger opposition […] so we can go back to being the kind of place that experiments with alternative ideas.”
As Singapore encourages experiments with alternative ideas in the economy, it may well be sowing the seeds of diversification in the political sphere as well.

Originally written for Global Risk Insights

Wednesday, 13 May 2015

Despite Uber raid, Chinese e-commerce remains friendly

The raid on Uber offices in China does not herald a clampdown on e-commerce in China, rather demonstrates the importance of knowledge of China's internal stability concerns. Meanwhile foreign firms continue to profit, and Chinese firms seek new opportunities.

On May 1st the offices of ride sharing app Uber in Guangzhou were raided by Chinese authorities. Officials seized equipment, with Uber's office in Shenzhen also being visited for “routine inspections.” While this is not Uber's first international set-back, as the company has faced serious opposition and bans from various nations, some worry that this event signals a digital clampdown by Beijing.

Initially, these fears seem justified, following the government's decision to accuse Uber of operating without a license. Specifically, the Guangzhou Transport Commission described Uber as an“illegal [business] that disrupt[s] the market and we will not be soft on these activities in the future [sic]” The furor in China surrounds the use of privately-owned vehicles as taxi service providers. In China utilizing private vehicles to such ends is (since January 2015) illegal, with taxi operators having to first acquire a license permitting them to rent vehicles from vetted rental agencies.

Uber Upsets the Balance, Pays the Price

It is important to note that this rule is not merely a vestige of a planned economy, but rather one of China's many sector specific regulations which primarily seek to maintain societal stability. As demand for taxi services has rapidly increased in China, demand has far outstretched supply. This is because in most cases, the government has not issued any new taxi licenses since the early 1990s.

A Popular Convenience: Taxi Stand in China

While initially adequate, this relatively low number of licenses has caused prices to skyrocket, with a license in Shanghai fetching as much as ¥500,000 ($80,745). Moreover, car rental prices have also jumped as taxi firms drive up demand by seeking to maximize their fleet numbers to offset the lisence price. This has led to rental fee prices in places such as Nanjing rises to as much as ¥9000 ($1450) per month. (8)

Recently taxi drivers have gone on strike in various Chinese cities to protest for a reduction in rental fees. It is precisely here where Uber undercuts the established system by utilizing privately-owned vehicles. Consequently, in order to prevent unrest and economic losses, the Chinese government has gone after Uber, arguing it does more harm than good. Moreover, since Uber is a foreign firm, this lessens any fallout for the government, as it does not have to anger Chinese service providers.

China in Localization Push

Uber paradigm shifting businesses practices makes in an ideal (and not wholly unjustifiable) candidate to blame. This scapegoatism becomes more evident when one discovers that despite Uber's $40 billion valuation, it remains a marginal player in the taxi market in China. Currently Kuaidi Dache (Speedy Taxi) and Didi Dache (Honk Honk Taxi) control over 90% of the market. Prior to their $6 billion merger in February, these two firms were backed by top-tier Chinese internet giants. The former was partnered with Alibaba, benefitting from access to hundreds of millions of customers via Alibaba's social platforms; Honk Honk Taxi was backed by Tencent, another internet giant.

Following suit, Uber which debuted in China in February 2014, decided to partner with Baidu in December of the same year, thus gaining access to the leading Chinese search engine's mapping and mobile technology. Partnering with Baidu was an effort to integrate Chinese know-how into Uber's operations; however, following recent events, Uber will have to go further to accommodate Chinese regulations by ensuring vehicles are sourced from rental agencies.

Interestingly, the Guangzhou government agreed that traditional taxis we no longer sufficient to meet demand; with the regional government even announcing that it is considering launching a government run e-booking taxi service. This can be seen as part of wider Chinese efforts in recent months to promote or require domestic product / service use in important projects.

Huawei CEO Eric Xu

In particular, the Central government has pushed for localization over fears of foreign cyberspying, highlighting concerns about national information security. In a rare instance of a top CEO breaking rank with government policy; Eric Xu, CEO of Huawei, recently advocated in favour of maintaining open access in the market. Xu candidly admitted that even though Huawei could gain more contracts if constraints were placed on foreign firms, he would still oppose such constraints. Xu maintains that China's information security can only be guaranteed by attracting the best tech, whether foreign or domestic, to the country.

Xu went on to state that Chinese products could fill the gaps if foreign firms were restricted from various contracts, but that the overall quality would suffer.

China's E-Commerce Biosphere Remains Friendly

While China may seek to increase domestic content in important projects, Beijing is hardly alone in doing so. All nations seek to promote their local industries, with even adamant free-trade advocates such as the U.S. often preferring to utilize domestic firms over comparable foreign ones. In any case, the Chinese government is not going to undertake measures which drastically shake investor confidence, nor risk capital flight on rumors of punitive localization campaigns.

Fears over an impending clampdown on the e-commerce and mobile markets in China are unfounded. Indeed, Uber's plight appears an outlier, the result of having brushed up against the stability apparatus that underpins much of China's economic policies. Foreign firms continue to report stellar growth in China, with TripAdvisor announcing that China is set to become its largest market: Chinese tourists spent $500 billion in 2014. TripAdvisor launched, its Chinese site in 2009, and had capitalized on high mobile usage among Chinese travelers. Surveys by the company indicated stronger than expected willingness by Chinese customers to plan trips via mobile.

Similarly, China surpassed Europe in Q12015 to become Apple's second largest market, with the company posting $16.8 billion in profits. According to David Garrity of GVA Research, “we are seeing a move away from large, form factor phones [running on] Android operating systems to Apple.”

While there is not yet a Chinese equivalent of Apple, mainland firms are taking heed of Xu's words. Instead of pushing for government legislation to promote high-end Chinese alternatives to Apple et al, Chinese companies are seeking new opportunities.

China's key to continued growth is the creation of new markets. This is the mentality of Alibaba, China's e-commerce giant. Alibaba has recently partnered with state-backed China Telecom to sell budget smart-phones in China's smaller cities and rural areas. The partnership gives Alibaba access to China Telecom's 186 million customers. Alibaba is also promoting its own OS with these devices, in a bid to steal share from current market leader, Android.

Ranging in price from ¥299 to ¥699 ($85-113), the devices come with four months of free 2G service. Alibaba has also pre-installed it's Taobao consumer marketplace app; a program which has coined the term “Taobao villages” - highlighting the vital role the service plays in many local economies. The phones will be available via T-mall, another e-commerce site run by Alibaba as it seeks to increase its share of China's e-commerce market, set to expand to $76 billion by 2016.

Originally written for Global Risk Insights