What China Flexing Tech Muscle Means For India
The digital relationship between the Asian neighbors has rapidly evolved over the past decade, and India must now think strategically about China's ambitions in the way Western countries have been forced to do.
MUMBAI — For years, India's relationship with its biggest trading partner, China, has been defined by a one-sided kind of "buy-buy" — Indian hunger for Chinese machinery and equipment. In return, India exported low-grade ores to China. A trade surplus in China's favor has now crossed $50 billion out of two-way trade of around $85 billion.
While the focus of India's current trade strategy with China is to bridge the gap, chiefly by increasing exports of agricultural commodities hit by the China-US trade war, Beijing's priorities have shifted elsewhere. Since 2015, around $7 billion in Chinese funding has poured into the Indian tech sector. A dizzying range of acquisitions has now left Chinese companies as major shareholders of some of India's biggest tech companies.
Chinese tech companies have over the past two years also launched ambitious tailor-made products for the Indian market. As of last year, of the 100 most popular Android apps used in India, 44 were Chinese, including five in the top ten, such as the now popular video-sharing platform TikTok and UC Browser, said one recent report, describing it as "a Chinese takeover of the Indian app ecosystem".
India is by no means unique in this wave of Chinese tech plays and acquisitions. But what is rather curious about the Indian context is the absence of any robust debate on the implications, particularly of Chinese financing, which has now taken center stage in the West.
Just two of China's three big BAT (Baidu, Alibaba and Tencent) tech firms — Alibaba and Tencent — have invested close to $3 billion in various Indian start-ups. (The third of the group, Baidu, has been slower off the mark.)
Where is the money going? It's a pretty diverse spread. From 2015 till 2017, the biggest sectors have been e-commerce ($3 billion), transportation ($1.7 billion), fin tech ($750 million) and travel ($450 million), according to a KPMG study.
In 2015, Alibaba pumped in close to $700 million in Paytm's parent company, giving it a 40% stake. Alibaba also has investments in Snapdeal and Zomato, while Tencent has invested in Ola, Flipkart and Practo.
There's been little attention at the official level when it comes to investments in tech.
Chinese companies like ByteDance, which is behind TikTok (and the widely popular Chinese original, Douyin), is among many that see India as the next big frontier. Unlike acquisitions and investments in the West, the objectives here are slightly different — it is not about acquiring new technology (India is widely seen as lagging behind China on this front), but sharing the successes of the Chinese e-commerce experience and helping Indian companies to scale up in a similar way.
There are also concerns in China about the slowing domestic market. Just last week, Baidu CEO Robin Li warned that "winter was coming" for China's tech sector. India might also appear to be an increasingly favorable market going forward considering the increasing hostility that Chinese companies are facing in the West.
India's trade and investment strategy with China has been slow to grasp this trend. India has primarily had two areas of focus — opening up China's market, particularly for IT and pharmaceuticals and bringing in Chinese investments in greenfield infrastructure projects in India and to manufacture in India.
A lot of energy has been — and is being — expended in both areas. Both have largely failed to bear fruit for various reasons, one of which is neither suits the objectives or interests of China. Consider IT and pharmaceuticals. What China is seeking here is to develop and acquire the capacities on its own in both areas, including through acquisitions — hence, for example, Fosun's $2 billion acquisition of Indian company Gland Pharma.
Or, for instance, if we consider the fact that the only Indian IT company to be successful in China is NIIT, which isn't selling Indian IT services or products, but training tens of thousands of young Chinese in IT skills every year, so they can bolster Chinese IT companies rather than rely on Indian ones.
In contrast, there's been little attention at the official level when it comes to investments in tech. That's because understandably, India's focus was on greenfield investments. In the past two years, the Indian government has started trying to cash in on this trend and brought Indian start-ups to China on essentially fund-raising missions. But because it been behind the curve, there's also been very little regulation of what's been happening in this space.
Is this flood of Chinese money an unalloyed good? To be sure, it has benefits. The infusion of capital has allowed hundreds of Indian start-ups to scale up, thanks to their financing. So it should certainly be welcomed, in some sectors.
But are there wider, longer term concerns of Chinese companies acquiring controlling stakes in certain start-ups in certain sectors, and if so, how do we regulate the process?
This isn't — and shouldn't become — a China-specific problem.
"We need a transparent, predictable and fair regulatory framework, something along the lines of what other countries have and which does not differentiate between foreign investors based purely on nationality," said Santosh Pai, partner at Link Legal India Law Services which has advised many major Chinese companies on investing in India. He was speaking last month at the second India Forum on China, organized by the Institute of Chinese Studies, which addressed the question of dealing with this new phase of Chinese external economic engagement.
Pai argued that a regulatory framework suits the interests of both countries. "This would be beneficial not only to India's interests but something that I think Chinese companies and investors would find agreeable as well," he said.
Indeed, this isn't — and shouldn't become — a China-specific problem and the question of security applies to all companies, and not just overseas ones. It is an Indian problem of how to ensure transparent regulation. But in the rush for financing, the question of regulation has been all but ignored.
Regulation — and deciding what sectors are sensitive — isn't easy in an industry that's changing rapidly. If we consider banks to be strategically sensitive assets, is it only a matter of time before online wallets that are increasingly offering all of the services that banks do, fall in a similar category?
If so, are we okay with Alibaba, a Chinese company with close ties to the state, essentially being the biggest shareholder in India's biggest online wallet? What guarantees do users have that their data isn't finding its way to Hangzhou? Or to take that argument one step farther, considering the often blurry private-state boundaries in China: would we be okay with the Chinese state being the biggest shareholder in Paytm?
Particularly when it comes to data security, there are few safeguards. Consider the case of the Alibaba-owned UC Browser, which has a 50% market share in India and is reportedly used by more than 300 million people. The company was recently forced to issue a clarification after government reports suggested that Indian users' data was not entirely being stored in Indian servers.
Indeed, Chinese companies — and Western ones — haven't been shy about describing data as "the new oil." And for them, the Indian market is only second to China's in terms of its offerings. India also happens to be a market with among the poorest regulations and protections when it comes to data security. A fortunate combination for them. Less so for us.