China’s Digital Silk Road: Progress & Influence in Southeast Asia
China’s Digital Belt and Road Initiative (BRI) seeks to promote strategic digital connectivity across the Asia-Pacific in a time where great powers are vying for regional and global influence. To assert its technological supremacy, the Chinese government is working in conjunction with private Internet companies (Alibaba and Tencent) to create their own digital BRI in Southeast Asia — a key battleground in this geopolitical competition. Yet, an important but perhaps often overlooked pillar of China’s plan is its embrace of the digital payments revolution, which carries both immense potential for regional trade connectivity as well as risks to the region’s financial regulatory landscape.
The electronic payments market (e-payments, for short) is predicted to become the future of transactions, playing an important role in the region’s e-commerce trade and economic interdependence. Southeast Asia provides the perfect market for digitalization with high smartphone penetration and a large, financially underserved population. In 2019, the region boasts 360 million Internet users but only 104 million of whom are fully “Banked”, meaning that they have full access to financial services. As a result, the rise in e-payments adoption can connect people to new online products and services, promote greater financial inclusion, and provide small- and medium-sized enterprises (SMEs) greater access to domestic and global markets.
At the forefront of this digital revolution are Alibaba and Tencent, two Chinese technological giants that are estimated to have invested over $12 billion to the region since 2015. However, the rapid pace of their investments suggests that at least for the near future, China will continue to hold substantial market share and influence over the digital economy in Southeast Asia. To better assess the impacts of Alibaba and Tencent’s growing presence in the region, we must first turn to look at their strategies and successes in driving the digital payments revolution — starting from their explosive growth in China.
ALIBABA & TENCENT’S BUSINESS MODELS
Electronic payments adoption took off in China after Alibaba and Tencent’s mobile phone app introductions in 2011. The Internet companies began building their own online payment systems, then introduced easy-to-use, low cost, real time, mobile payment applications to approximately 550 million retail and corporate customers. The apps use Quick Response (QR), or two-dimensional barcodes, that could be printed and scanned (with smartphone cameras) to complete payments, alleviating the need for merchants to buy or rent expensive point of sale (POS) devices. The e-payments revolution became widely successful, growing to a $40 trillion market by 2018.
Alibaba and Tencent’s success can be attributed to a function of the app’s ease-of-use and low-cost tactics, since their goal is to drive goods and service sales rather than to make money on payments. To attract an initial customer base, the Internet companies intentionally charged much lower transaction fees relative to the banks and international credit card companies. For example, PayPal charges merchants 7 times more than Alibaba or Tencent but transacts only 1/20 of the payments volume. To drive customer usage of the apps over time, Alibaba and Tencent then use payments data to expand and tailor services on their platform. The companies have now diversified their product offerings to include financial services, e-commerce services, and even convenient bill payment services. One research found that more than 1 million restaurants, 40,000 supermarkets and convenience stores, 1 million taxis, and 300 hospitals are connected to the Alipay app.
LAUNCHING SOUTHEAST ASIA’S DIGITAL ECONOMY?
The degree to which Alibaba and Tencent have been overwhelmingly successful in Southeast Asia, however, cannot be simply be attributed to their low-cost strategies — or even to regional characteristics alone. Indeed, these Internet companies also employ a variety of tactics to gain a foothold in the region. In Malaysia, for instance, Alibaba partnered with the national government to launch the Malaysia Digital Economy, an initiative promoting a digital free trade zone that will give the country’s SMEs access to big, new markets in China and abroad. In 2018, Alibaba also announced the implementation of its City Brain Project in Kuala Lumpur, set to replicate China’s smart city infrastructures as well as a China-based set of digital information standards.
In Thailand, Alibaba committed 11 billion baht (roughly $320 million USD) to building a “digital hub” as part of the country’s Eastern Economic Corridor (EEC), which will include a new facility for processing logistics data as well as efforts to support Thai agricultural exporters and provide them access to Chinese markets. The agreement also seemed to go far beyond just trade, with Alibaba promising to develop training programs for the Thai labor force through a “Digital Talent” project.
In Indonesia, Alibaba and Tencent gained access by heavily investing in many local companies that offer or use electronic payments, such as many e-commerce and ride-hailing services. For example, Chinese investments helped to jump-start Go-Jek, one of Indonesia’s five unicorn fin-tech startups that closely resembles Alibaba and Tencent’s business models. Originally a ride-hailing platform, Go-Jek has evolved into “super-app” that connects over 30 million users to more than 400,000 businesses, providing services such as buying groceries and medicine, food deliveries, and even back massages. The tech company has been described as helping to spark an Indonesian banking revolution, and boasts that 93% of its SMEs partners experienced an increase in transaction volume and earnings after joining.
AN UPHILL FIGHT FOR U.S. DOMINANCE
In the span of a decade, Alibaba’s and Tencent’s rise both within China and the broader Southeast Asian region is truly remarkable. As a result of their strategies, Chinese tech companies have made tremendous stride and taken minority stakes in over hundreds of Southeast Asian startups. The experience of Alibaba and Tencent should serve as a wake-up call to the United States, reminding us that Chinese private investments will continue to pose a major threat to our regional position for three reasons.
First, as Alibaba and Tencent are being drawn closer than ever to the Chinese party-state, the synergy of private-sector innovation and government directives provides China with an overwhelming advantage over U.S. businesses. The Chinese state has become an active partner, providing financing, opportunities, test beds, and even shortcuts to these digital players as needed. For instance, although Alipay introduced online money transfers in 2005, regulators took 11 years to set a cap on the value of such transfers. Mobile payments were also not required to be routed through a central clearinghouse for security verification until 2018. As a result, Alibaba and Tencent were able to quickly penetrate Southeast Asian markets, bypassing stringent foreign ownership restrictions typically faced by U.S. businesses.
Second, the unregulated fintech landscape these firms are operating in should alarm U.S. policymakers, especially given the close connection between the state and private sector. The IMF, for instance, signaled money-laundering concerns over 70 percent of the approximate $19 trillion in electronic payments that Alibaba and Tencent conduct on its own IT systems. Reports also implied national surveillance risks from Chinese government exploiting private Internet payment data to further regime objectives. As Southeast Asian countries continue to adopt Chinese technologies and consequently Chinese-based technological standards, the U.S. will face serious security threats unless it can take active steps to promote a safe, free and open digital economy.
Finally, it cannot be presumed that our Southeast Asian partners will readily stand by the United States against Chinese investments. To be sure, nations have expressed concerns about Chinese influence and corruption in their domestic economy, particularly the impact of Chinese monopoly in crowding out SMEs competitiveness. However, for many countries like Thailand and Malaysia whose economies are struggling to find new drivers of growth, the appeal of a digital free trade zone cannot be neglected. Moreover, what is clear from Alibaba and Tencent’s strategies is that they are not offering just a cut-rate deal, but rather a host of substantive investments such as technical assistance, know-hows, and workforce training to boost countries’ global competitiveness. For all these reasons, it is likely that Alibaba and Tencent will continue to find willing partners in the region.
Just as the United States is fighting for dominance in the global 5G race, a similar fight is to be had in the battle for a more open and global digital economy. Thanks to government-led initiatives and rapid private sector investments into Southeast Asia, China has emerged as a front runner in shaping the region’s digital standards. What happens next will depend on U.S. policymakers. To counter Chinese influence, the United States needs to provide our own concrete, substantive investment alternatives to our allies and partners in Southeast Asia. While the most important step will be to rejoin regional trade agreements such as TPP, the U.S. can begin by providing development assistance directed towards digital infrastructures. Otherwise, we will not only open the region to a host of money laundering, surveillance, and financial stability concerns, but will also risk stifling U.S. business interests and dominance in the region.
