Singapore has what China tech giants need

CHINA'S tech sector has taken a beating. The combined market capitalisation of the top 10 tech companies (including Alibaba, Tencent and Meituan) has slid almost 30 per cent since February. And it's not for a lack of growth. Tencent's revenue has been growing at a double-digit pace. Alibaba's e-commerce business experienced a 72 per cent year-on-year rise. And Meituan, operator of China's largest on-demand food delivery service, reported a more than doubled revenue compared to the pandemic-hit 2020. They are riding a strong post-Covid recovery.

What's looming is regulation. Alibaba posted its first operating loss because of its US$2.8 billion antitrust fine. Tencent will likely be fined US$1.54 billion. And Meituan is under a similar probe. In China, no one is too big to rein in.

CEOs got the message. They either quieted down or stepped down. But their companies still need to grow. So they must grow abroad. Singapore is becoming a stepping stone.

Two kinds of national champions

Chinese authorities have a reputation for supporting national champions. Think Huawei, Lenovo, and Haier. These companies have all won big domestically and gone on to unseat global players. That's how Japan and South Korea got rich. You nurture an advanced industrial base, impose an export requirement on it, then support the winners who bring cash home.

So to understand the latest crackdown on tech giants, we must look at the growth trajectories of companies. Not all growth is the same for Beijing. Among the leading Chinese tech companies, the percentage of revenue derived from outside China ranges at the lower end from zero (JD.com) and under 10 per cent (Alibaba and Tencent) to 34 per cent (Huawei). At the other end, 79 per cent of Lenovo's revenue is international, while both Xiaomi and Haier have a roughly 50:50 split in revenue source.

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Another picture looks at user volume among the three major platforms - and here the share of domestic users ranges from 56 per cent for ByteDance's TikTok to Alibaba's 80 per cent and WeChat's 92 per cent. Tencent's WeChat has more than a billion monthly users in China, but "merely" 70 million user accounts registered overseas.

What's emerging here is that the companies receiving government support are those that have already gone international. The reason why China's big tech companies are falling out of favour is simple - China's tech giants are disrupting domestic industries. They threaten the profit margins of state-owned banks, domestic retailers, and government-sponsored technology providers. Yet at the same time, they do all that without generating many wins abroad.

That's why internationalisation is what China's tech giants all need.

Chinese tech giants' required learning

The current situation is not for lack of effort. Tencent has tried going global. I (Howard Yu) have visited their Palo Alto office in Silicon Valley. The sunny vibe of Tencent's US offshoot is more similar to other California startups than the hustle and bustle of its Guangdong headquarters. Then you have the time zone difference, which leaves Tencent's America employees with just a few hours of overlap with China's workdays. How Tencent America can scale its user base in the US is anyone's guess, especially as much of the product development effort is centralised at the headquarters in China.

Then you need to overcome a country bias. Chinese tech giants are obsessed with serving Chinese consumers. They have to, or they would be replaced by other local competitors. And when these tech companies expand abroad, they usually make a financial investment. Alibaba has a controlling stake in Lazada and Trendyol. Tencent has invested in videogame maker Activision Blizzard and social

media company Snap. But these tech giants rarely go into their own market development outside of China. They rarely put their own brand directly in the local market.

Except you can't buy revenue growth this way, of course. Truly global companies like Toyota or Lenovo, Google or P&G all had to learn to operate locally outside their headquarters country. Decades of experience are needed to build up such capabilities. A deep pocket like Alibaba's or Tencent's would certainly help. But there's no shortcut.

Learning is a precarious thing. You need role models. Ideally, you want to learn from someone fairly similar but not so different that you would dismiss their behaviours outright.

This would not be the first time Chinese firms have learned through the country's neighbours. Decades ago, it was Taiwanese business people who helped jumpstart China's manufacturing cluster during its infancy.

Not too close and not too far

There was a time when China had no IT brands. Before Huawei and Xiaomi became significant, China's IT sector was mostly contract manufacturing. It's all iPod city that assembles stuff in China that was designed in California. Companies like Foxconn, Quanta Computer and Pegatron are all major manufacturers serving Western brands. They built sprawling campuses around Shanghai, Suzhou and Shenzhen to export gadgets around the world. And these are all Taiwanese companies.

Then you have foreign joint ventures like KFC and General Motors that relied on Taiwanese expatriates as the first generation of local management in China.

Those early years of collaboration helped diffuse management know-how. That's how management techniques and modern-day manufacturing spread across China. Cultural translation played a key role, laying the foundation for indigenous innovation that later took the world by storm.

In that regard, Japan, South Korea, Singapore, and Taiwan would be ideal candidates for Chinese tech companies. What they are looking for in a host country are three things: 1) situated in an advance industry cluster; 2) access to international markets; and 3) ease of cultural assimilation.

Given today's political tensions, making big investments in Taiwan is no longer feasible, although the presence of TSMC alone would have justified a major outbound investment. What South Korea and Japan represent are the most advanced industry clusters - clusters that are highly complementary to Chinese tech companies. There are semiconductor machinery, advanced material science, and specialty chemicals. South Korea, especially, harbours a near-total agreement that "R&D is essential to have a future", according to a Bloomberg report.

What Singapore has behind it is its cultural similarity with mainland China. Language matters. Decades ago, Taiwanese executives were spearheading China's industrial development. Fast forward to today, we see a Singaporean Chew Shou Zi, the former Xiaomi CFO, is heading TikTok. Ping An Group's co-CEO, Jessica Tan, is a Singaporean hired away from McKinsey. It's also the Singapore context that allows Chinese firms to learn how to navigate a different set of standards related to data protection and consumer privacy. When Alibaba Cloud operates in Singapore, for instance, it needs to adopt very different operating procedures from those in China.

Singapore's neutrality has no doubt contributed to the outpouring of Chinese investment money into the island nation. But for Chinese tech companies, it's the outward orientation of the business executives that are of most significance and interest. Whether it's Alibaba or Tencent or ByteDance, they all need managers who can traverse seamlessly between US and China and other international markets. They need leaders who instinctively know how to play "neutral". They need managers who know how to "localise" offerings, be it in India or Malaysia. They can't find these talents in mainland China. And so they are looking for a second home outside.

Singapore can seize the opportunity. But it's also up to Singaporeans who will ultimately decide whether to play this role.

• The writers are from the IMD Business School in Switzerland. Howard Yu is LEGO professor of management and innovation at IMD, and director of its signature Advanced Management Programme (AMP). Jialu Shan is a research fellow at IMD's Global Centre for Digital Business Transformation.