Impact of FDI policy on Chinese Investments in India

In our last post, we had put together a detailed summary of the regulatory changes in FDI from bordering nations. Now we would analyse and provide our 2 cents on the policy’s impact of Chinese Investments in the Indian startup ecosystem.

In last few years Chinese investments have played a major role in the Indian startup ecosystem, with 18 out of 30 Indian unicorns having Chinese investors.

                                       

For Indian startups, traditionally US has been the major source of capital. In recent years China has emerged a viable source of funding. Chinese investments in Indian startups doubled last year, from 2 Billion USD in 2018 to 3.9 Billion USD in 2019.

India is not a preferred destination for Chinese FDI in general. India languishes on 31st spot as a home for Chinese FDI. Singapore, Mauritius, US and EU are still the major contributors to the total FDI inwards in India. These four regions/nations accounted for about 50%+ FDI inwards in India. Total Chinese FDI last year was roughly about 3.4 Billion USD, about 7% of the total FDI in the country.

Chinese investors and corporations have themselves slowed down FDI due to various reasons, major being a slowing economy and international trade frictions with the United States.

                                        

Chinese FDI peaked globally in 2016, with about 200 Billion USD and then have gone down successively, 143 billion in 2018. Beneficiaries of Chinese FDI have been SE Asia, Central Asia, Latin America and EU. Chinese FDI have been focused on either creating newer markets for Chinese products due to a maturing domestic market or for consolidation of raw material supply chain.

Chinese investors have taken liking to Indian tech startups with Alibaba and Tenecent being the flag bearers of Chinese investments in Indian startups. With Big Basket, OYO, Paytm & Paytm Mall, OLA, Snapdeal, Udaan and Swiggy all having 100+ Million USD of Chinese investments.

Indian startups in last couple of years are not just looking to consolidate their position in the domestic markets but are looking to expand globally in to varied markets. Their need for cash has never been as high as it has been in last 3 years. This has allowed Chinese investors with plenty of opportunity to invest into Indian tech startups.

With the current change in the FDI policy norms from automatic route to government route, it would be near to impossible for Indian startups to raise fresh funding from Chinese investors and also due to the beneficiary factor applying on the sale of the existing investments by the Chinese investors, it would be very difficult for them to liquidate their holdings.

Compounded with an already kicked in recession, the picture becomes bleak for Indian Startups as they would now have to look for funding from regions which are still covered under automatic route.

We can look 3 important questions racing over everybody’s mind:

1) What will happen to Indian startups with Chinese investments?

Alibaba invested 50 Million USD into online grocer Big Basket during the lockdown, when the firm was suffering from a lack of operational requirements, further capital inducement by Alibaba into Big Basket looks impossible. Same for Paytm, who has raised close to 1 Billion USD from Softbank and Alibaba’s ANT Financials.

These startups with major Chinese investments are huge and have a considerable amount of runway in front of them, but the it is hard to predict how the society would change and will they be able to sell once the lockdown is completely lifted.

One more problem which we foresee that these startups will have to face is increased competition by startups funded from countries apart from China. We believe that this has the potential to become Phone Pe (backed by Walmart and Google) vs Paytm or OLA vs Uber, as these businesses can raise more capital soon and can consolidate their position. Though unrealistic but If the pandemic does not get under control in the near future, this can be a possibility.

Just like every other country in the world, China is also facing a recession, and this can lead to low investments by Chinese investors outside their own country. This scenario again does not fit well for Indian startups with Chinese investments.

2) What does it mean for Indian businesses operating in China?

Just like any other country on the globe right now, China is also growing through a recession. Indian businesses operating in China had already started to brace themselves in late January and early February for a looming summer of pain. With a reduction in domestic economic activity and a growing global mistrust of products manufactured In China, we expect that it would be harsh for Indian businesses operating in China.

For e.g. OYO has in last 2 years have expanded quite aggressively in China. A complete lockdown, slowing local movement and a highly reduced international movement of people will have a very adverse effect on OYO. OYO has reported a decrease of 50% in revenue and have furloughed or laid off scores of employees to keep cost in check. Indian manufactures and IT companies are mostly based in southern and eastern China and have understood that the recession will be long and have prepared accordingly. For Indian startup operating in China through Chinese entities, cashflow troubles could lead to much more complex problems.

3) What does this mean for India Co. in general?

Indian economy has never been over reliant on China in terms of Investment and Chinese markets are not a huge market for Indian products. India have done a good if not perfect job in controlling the pandemic and with relaxations in lockdown norms and a highly anticipated fiscal stimulus in line to bring the economy back on track, India Co can take care of its own.

High scrutiny of China and Chinese manufactured products in the global market along with increasing labour costs, many international manufacturing units have or are looking to leave China for good. India can extend them an olive branch and provide them with incentives which fit well in line with the economic stimulus to make a move towards India. This is one opportunity that the regulators should not miss as this would help the Indian economy to come out of the recession stronger than ever.

In conclusion, we would like to suggest that Indian startups irrespective of sector or stage, should focus on strategy for the future as future will be unpredictable and unforgiving. Startups who will prepare for that will reap the benefits.

Stay Safe

Written by: Ayush Dadhich & Manas Vashistha.

You can also check out our Blog on https://medium.com/@ayush_63583/chinese-investments-in-india-going-forward-3826e3631bbb.

We would love to hear your thoughts, please reach out to us on [email protected]