Why are Chinese Internet companies placing bets on smaller cities in India?

Chinese Internet companies and strategic investors have gradually been turning aggressive in the Indian market for the past three years. While large corporations such as Alibaba and Tencent collectively pumped in about $6 billion across 14 companies in India (between 2015-18), over the past 18 months many new ventures have come up in content and e-commerce segments.

Interestingly, most of the new ventures by Chinese entrepreneurs in India are focusing on ‘Bharat’, not India. Right from NewsDog to SHAREit, Bigo Live, Kwai, TikTok, and Club Factory have been focusing on Bharat (tier II and III cities) not India (top 10 cities or English speaking).

But, why are these companies betting on smaller cities? “For the sake of achieving greater scale,” answers K Vaitheeswaran, author of ‘Failing to Succeed – the story of India’s first e-commerce company’. And, he’s right to a large extent as in Chinese startups inherently believe that scale can heal everything.

In China, many startups (now corporations) such as Jd, Taobao, Pinduoduo (PDD), Meituan, Kwai, Babytree amongst several others have achieved scale by focusing on tier II and III cities. For instance, Kwai has over 400 million users out of which 80 per cent hail from tier II and III cities. It’s believed to be the fourth largest social app in the local market after WeChat, Weibo, and QQ.

Similarly, PDD did more than $10 billion in GMV in 2017 from mere $200 million in the preceding year (i.e; 2016). About 60 per cent of its customer base comes from smaller cities such as Shijiazhuang, Qingdao, Wuwei, and others.

PDD’s GMV numbers are the fourth largest in China after Alibaba, JD, and Vipshop.

Talking about marketing strategy in India, Jason Wang, VP, Emerging Markets, SHAREit, says, “Since English speaking population is mere 250 million in India, we chose not to focus on it.” The company caters to an audience that consumes content in vernacular such as Tamil, Telugu, Bengali, Gujarati, and Hindi.

With over 400-million downloads in four years, India is the largest market for SHAREit.

“We have a long-term plan to gain major market share in content distribution for a billion Internet users. Till 2022, SHAREit aspires to achieve greater scale rather than bothering about the revenue,” explains Wang. He also believes in a philosophy that once a company cuts through the competition and attain envious scale, monetisation becomes easier and hefty.

In early 2016, NewsDog had started operations in India with a primary focus on English. However, soon it pivoted to concentrate on vernacular languages such as Hindi, Tamil, and Telugu.

“Before pivoting we did some ground research on Indian content consumption pattern and found out that the audience in tier II and III cities are more open to spending time on genres like entertainment, politics (non-serious), and cricket,” explains Chen Yukun.

Since then, the Gurugram cum Beijing-based company has come a long way. Currently, it claims to have about 60 million registered user base with 20 million Monthly Active Users (MAUs).

Besides content, pure-play transaction based e-commerce companies like Club Factory are also betting on smaller cities. According to Entrackr’s sources, it generates over half of its orders from smaller cities (excluding top 10 Indian cities).

“Catalogue of Club Factory essentially appeals to the young audience in tier II and III cities where buyers look for fresh and unique fashion apparels at low cost (starting from Rs 60 to Rs 1,000). The company’s strategy is to deeply penetrate smaller cities,” says Satish Meena, Forecast Analyst, Forrester India.

Despite the inferior consumer experience, Club Factory has gained significant ground in India. It does about 1.5 million orders a month. Recently, it also brought actors Ranveer Singh and Manushi Chhillar (Miss World 2017) to bolster the branding aspects.

As the online urban customer base has been stagnant for the past couple of years, the real growth would be driven by tier II and III cities. “Since Chinese entrepreneurs have seen the uprise of local companies in their country, they want to repeat the play in India,” points out Sujayath Ali, co-founder, and CEO, Voonik.

He outlines that Indian tier II and III cities are more like China. “People in smaller cities usually have more time to spend on smartphones and Chinese companies want them to engage through content and gamification,” adds Ali.

Top tier companies such as Jd, Taobao, TMall, PDD are busy competing in the local market (China). Second tier companies and many serial entrepreneurs see potential in repeating the same models in India. Vaitheeswaran explains that low customer acquisition and lack of alternatives (in content and commerce) for consumers are enticing Chinese startups towards Bharat and not India.

Chinese companies are betting big on the vernacular audience, and anticipate Indian tier II and III cities to pan out like China. However, many experts believe that India would carve its own path. “Indian story would be of India and wouldn’t be akin to either US or China,” adds Vaitheeswaran.