Opportunities and risks when entering Asia’s tech hubs
BDO’s International Tech Hubs publications illustrate what companies and investors stand to gain by entering some of Asia’s bustling tech hubs. However, good results depend on successfully navigating risks and grasping opportunities.
On March 25th, 2019, a Financial Times headline exclaimed that “The Asian century is set to begin.” The august FT is far from alone in lauding the power and – to some degree - untapped potential that Asia holds.
Economically, the region’s tech companies accounted for 43% of revenue generated by the world’s top 100 tech firms in 2018. Demographics also lends weighty arguments. By the middle of the century, around three billion people across the Asian continent might enjoy living standards comparable to those of current-day Europe. For reference, all of Europe is currently home to approximately 750 million people.
High educational levels, low labour costs, increasing innovation, more technology unicorns, and massive investments in infrastructure, led by China’s Belt and Road Project, also add to Asia’s attractiveness for technology companies and investors.
Technological advancements are on the rise, and several start-up scenes in Asia are continuing to emulate the success of Silicon Valley.
Two BDO publications on Tech Hub around the world show how the continent’s tech hubs, such as Vietnam, Malaysia and India, present strong investment arguments. Available talent, market size and untapped potential for growth are among the strong reasons to build up – or out – a presence in the region. However, getting the best results requires planning and careful attention to the opportunities and challenges that will likely influence your success.
Opportunity: High-skilled, Low-cost Workforce
Asia’s fast-growing tech hubs provide access to well-educated, often STEM-focused, and young employees. Add relatively low labour costs, and it is little wonder that many countries are seeing strong international interest, with many foreign companies interested in creating offices and divisions in the country.
Vietnam provides an excellent illustration. On top of a strong workforce, its burgeoning market offers good opportunities for sales to a young, dynamic population of 96 million inhabitants, which have embraced new technologies, foreign investments, and expatriate workers. The country’s lower costs of labour and supportive government policies have attracted both multinationals and start-ups to its shores.
Risk: Legislative Alignment and Cultural Understanding
Building a presence in any foreign country requires a keen understanding of the on-the-ground situation. What works one place might not work in others. Legislative differences and stumbling blocks still exist across Asian tech hubs. Often, governments will be playing a game of catch-up bringing legislation up to date with the workstyles and contracts often employed in the tech space.
It is advisable to work closely with advisors who have a keen understanding of both your situation and that in the market or markets you are looking to enter.
Opportunity: Explosive Market Growth
Much has been said about the huge economic potential of Asia's rising middle class. Projections show that the trends are set to continue, as a large and aspirational consumer base is enjoying ever-increasing purchasing power.
Middle class defined as households with income between $11 and $110 per person per day (2011). Source: Brookings Institute. Graph: BDO Global.
Perhaps the most significant potential is found in India’s 1.3 billion inhabitants that are expected to constitute one of the world’s largest consumer markets by 2025. Similar dynamics apply to Vietnam and Malaysia.
The growing middle class also creates synergies, as each technology hub finds itself near some of the world’s most prosperous consumers and booming e-commerce markets.
Risk: Differing Market Conditions
A primary obstacle for many products and services is a relatively weak infrastructure. The region is comprised of many countries with vastly different socio-political frameworks, values, and varying consumer behaviours. The kinds of goods produced need to be tailored for India, need to be tailored for Indonesia, and so forth.
Building a presence in Asian tech hubs and adjoining markets requires being attuned to ongoing development in relevant legislation and regulation. One such area is updating privacy laws to match the speed of disruptive new technologies and ensure the protection of consumers’ data.
Opportunity: Strong Growth Prospects
Until the arrival of Covid-19, GDP figures across the Asian region had generally been on the rise. For example, Vietnam posted a 6.1% GDP growth per annum for the last decade. The increase in GDP signals stronger consumers and could also be linked to more investment and start-up activity.
For example, this is the case in India, whose approximately 9000 technology start-ups make it the third-largest ecosystem in the world. Furthermore, Asia-Pacific is home to 8.4 million Science, Technology, Engineering and Mathematics (STEM) graduates, out of which 30 per cent are in India. In other words, local start-ups and scaleups have good access to highly qualified workers that have help further develop their solutions and services.
Governments have also been incentivising investment through various initiatives. For example, in the Malaysian capital Kuala Lumpur, where a tech hub called Cyber City offers special tax incentives.
Risks: Limiting Market Conditions
While there are many start-ups in countries such as India and a stronger trading environment, local investment is still dominated by blue-chip companies. One reason that may be holding back some companies from investments is differing, at times labyrinthine laws and regulations for investment and taxation, which can be extremely difficult to navigate without local assistance. Investors in Vietnam should be aware that it has its own accounting standards (Vietnamese Accounting Standards, or VAS).
Capital costs may also restrict the raising of funds and business listings. Indian debt capital averages over 9%, whereas in the UK or US loans are available at rates as low as 2%. With equity capital this steep, businesses often try and raise capital from AIM, LSC, NYSC or Singapore instead. It should be mentioned that the central government and bank is working hard to expand opportunities in this area.
Opportunities: Strong Incentives for Innovation
Regional front-runners show how strong innovation can be the foundation of growth. Now they are often among the entities providing capital and knowledge to power innovation in other Asian economies. Start-up ecosystems in regional tech hubs like Vietnam, India and Malaysia are spearheading rapid change and increased innovation.
Data: World Intellectual Property Organisation. Graph: BDO Global
The growth is partially attributed to good conditions for businesses. For example, Malaysia ranked 12th globally in terms of ease of doing business. In addition, foreign companies can own 100% of their business and do not, as is the case in China and elsewhere, need to have local owners. This helps make it an attractive place for technology companies to base themselves and create innovative, new solutions.
Risks: A Follower Rather Than a Leader?
In tech, one often talks about either developing the Uber for X (new solution based on existing business structures) or Airbnb for in Y location (in broad terms localising an existing solution and business model). Asian technology companies, as is seen elsewhere, sometimes wait and see if a solution works elsewhere and then create a solution for the home market. This can be extremely successful for the home markets but leaves companies playing catch-up once they reach their international expansion stage.
The internal cohesion between official agencies that regulate technology, academia, and industry is strengthening but remains fragmented. However, strong innovation pockets often exist within the more fragmented overall technology landscape. Creating the basis for long-term success and disruptive innovation requires a firm grip on how to interact with and engage such pockets.