Opinion: To thrive in Southeast Asia, Japan and Korea should look to China

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For the past five years, Southeast Asia’s tech ecosystem has been on a tear, as more investable, value-driven companies launch products, raise funding, and scale.

There are now eight tech unicorns in the region, covering everything from ecommerce to logistics and gaming. Go-Jek recently raised a staggering US$1.2 billion. And Sea, formerly Garena, recently listed on NYSE (SE).

Much of this activity can be attributed to bottom-up, homegrown innovation from local players, not global giants. While there are exceptions—like Rocket Internet’s Lazada, Uber, and, most recently, Amazon—the majority of Southeast Asia’s most successful tech companies are local, founded to service regional markets, tastes, and consumers.

Conversely, many tech giants that initially came to dominate the region are now struggling:

nnRocket Internet has shut down or sold off almost a half-dozen properties in the region.nUber is losing ground to homegrown Grab.nAmazon has only recently entered into one of the most fragmented, competitive geographies in the world.nn

China has shown more success in the region, making significant inroads across Southeast Asia. Unlike American companies that prefer competing directly with local incumbents, Chinese companies have taken a more nuanced approach, preferring joint ventures, local investments, and strategic acquisitions to scale across Asia.

They invest (or acquire) local brands with on-the-ground teams and localized tech. Even their payment methods follow local proclivities, permitting cash on delivery in multiple countries—something that Amazon Prime has yet to learn, and one that took Uber over a year.

Now, Japanese and Korean corporates can choose between two approaches:

nnFollow the US model to expand by pushing tech, brand, and talent into a new geographynFollow the Chinese model, which treats expansion as a real estate land grabnn

While Japan and Korea have already devoted a tremendous amount of time, energy, and resources to expanding across Southeast Asia, they haven’t been as successful as they could be.

There might have been some key missteps. In 2014, Rakuten launched a marketplace on existing Japanese tech infrastructure, which is run by Japanese management and did little to adapt to Southeast Asian nuances. Three years later, they shut down the service and wrote off US$340 million.

Korean conglomerate Kakao acquired a faltering US company, Path, for one key global market—Indonesia. But they missed the key point. In order for a company to thrive in these markets, they need an on-the-ground team, with tech localized for unique problems in this region.

There are huge opportunities for Japanese and Korean companies to make land grabs in Southeast Asia. They should look into a major investment into regional logistics companies (e.g. NinjaVan). Fashion and beauty brands should acquire the region’s many ecommerce startups (e.g. France-based Sephora’s acquisition of Singapore-based online cosmetics shop Luxola).

So, why aren’t more Japanese and Korean corporates doing this? There’s one reason: price.

Japanese and Korean businesses are accustomed to more conservative valuations and scrutinous public markets, while Chinese tech giants such as Alibaba and Tencent are cash-rich. Thanks to a bullish decade in China and a bubble of investment activity, companies that appear affordable to China are seen as expensive to Japan and Korea.

In short, the future of investment in Southeast Asia is for foreign companies to understand their domestic strengths and find strong partners to localize and expand in the region.

While there is still some way to go for Japanese and Korean companies, there are signs that they have started to adapt. Thanks to Softbank’s early investment in Alibaba, they have learned the localized approach to this region, demonstrated by their minority to majority investment in Grab. And while Rakuten may have written off US$340 million in the region, they have since invested significantly in the homegrown player, Carousell.