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Startup Comparison: Chinese Play Global, Indian Play Domestic – Morgan Stanley Asia Pac MD

New Chinese companies look outside China to become successful because the Chinese market is dominated beyond belief by Baidu-Alibaba-Tencent (BAT)

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Crawford Jamieson is managing director and co-head for Asia Pacific global capital markets for Morgan Stanley. Speaking about how different China is to India, the biggest insight Mr. Jamieson offered was that Chinese companies look outside China to become successful because the Chinese market is dominated beyond belief by Baidu-Alibaba-Tencent (BAT). So new Chinese companies will have to go for a global strategy while Indian startups focus on the domestic market.

“I’m not Chinese, but I do spend a lot of time there. Believe it or not though I still can’t speak Chinese after 20 years of working there; which is pathetic, I realize that,” the veteran investor laughed sheepishly.

“But let me make a couple of comments on the Chinese market:

1. What are people focused on - China is very BAT than anything else. There is a focus obviously on the big 3 and then you have the verticals and other models developing. What we can see from BAT is significant focus on investing and keeping people on their platforms. Whether it be in video, or any content like Tencent’s companies, we are seeing that this is driving not only domestic investment and consolidation but obviously cross border investments.

Keeping people on your platform is everything. And obviously that creates significant challenges for the unaffiliated verticals. A personal insight on this: as a result of this there’s so much activity around companies that are associated with BAT. In the first quarter of this year, 88 percent of technology banking revenues paid to banks was associated with Alibaba. Perhaps it was one off incident – perhaps Ant was raising some lending money etc. but arguably there is a significant focus.

Right now I have a company doing what they call, ‘test the water meetings’. It’s a US fintech IPO and their model involves 90 percent of their customer sourcing coming from the Ant’s platform. Last year we saw that a majority of the companies are all serving ecommerce. This means for the unaffiliated, it is more challenging in China today.

2. Focus is on beginning monetization - I think most people would know that when Alibaba went public it was all about GMV. Now it is not. Right now it’s about monetization. In fact they are not even focused on guiding for GMV.

3. Geographic and product expansion - Obviously the central premise was always the village; not from a charity perspective, but from a opportunity perspective in tier 3 and 4 cities in China. Since mobile devices are ubiquitous, it’s really tying together the country. People are looking at models that will really take advantage of those more rural areas of the country.

Then beyond that, substantial investments obviously includes cloud and payments etc. [product expansion in different categories]. Now when you look at the disclosure of the Chinese companies, we notice that they have changed how they present themselves to investors. Companies are isolating their core business and then will talk about company investments in each project/product separately. Otherwise it was all just getting comingled. And it was getting hard for investors to figure out how much a company was worth. For instance Alibaba would say, every investment we make takes 7 years to make money. So if you don’t separate that out, it doesn’t really give a valid indication of company value.

4. Fintech will be the next big thing - Right now I’m working on 6 fintech IPOs out of China, with business models ranging from credit models to wealth management. Some are associated with BAT, some are not. The reason for this is that investors recognize that the opportunity for fintech in China to leapfrog traditional financial services is even higher than Alibaba’s is to leapfrog retail. Because basically in China, especially in banking models, the banks do not serve consumers at all. And frankly having done most of their IPOs, I know that these are big clunky SOEs with not even a shred of technology capability.”

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