Over the past decade, technological advancements have shifted from the powerhouses of the US and Europe to China and India, where investments in startups have grown in tandem with investment in research and development (R&D).
For many Chinese companies that expanded westward to South and South East Asia, the natural next step is the Middle East and North Africa (Mena). Efforts to bridge the two regions began to take hold before the pandemic but slowed down as China shut itself off from the rest of the world. Now however, the country’s ongoing zero-Covid policy has provided an impetus for Chinese startups to begin exploring markets beyond their own.
In 2018, a group of prominent Chinese investors and businessmen, spearheaded by Alibaba founder Jack Ma, came together to launch the Electronic World Trading Platform (eWTP), an investment platform with a $600 million fund to facilitate the development of global trade and the digital economy through the development of global digital economy infrastructure and the adoption of policies to promote best practices, such as cross-border free trade zones and SME e-commerce pilot projects.
A year later, the eWTP Arabia Capital (eWTPA) was set up in Saudi Arabia, backed by the Public Investment Fund (PIF) with a $400 million fund to build a local digital ecosystem in Mena by partnering with leading Chinese businesses and providing a gateway to establish their presence in the region.
“Mena used to be a region that was overlooked for decades, that’s why at that time we were curious,” says Jessica Wong, founder and managing partner at eWTPA Capital. “We started to evaluate and study other innovations and what are the chances of it happening in other emerging markets. Several of our portfolios did extremely well [in Mena] and we understood why.”
Before it focused on investing in startups, eWTPA made a conscious decision to invest in the technology infrastructure and ecosystem in Saudi Arabia first. To date, it has invested in 16 companies across digital infrastructure, core technology and platform, consumer and enterprise services which span cloud services, cyber security, fintech, e-commerce, logistics and digital entertainment, which Wong argues work together and build a unique digital ecosystem. The biggest project backed by the fund was a joint-venture between Ali Cloud and STC group to build the Saudi Cloud Computing Company (SCCC) and J&T Express.
“In the last three years we built our HQ in Saudi, we built a local team and we looked at the needs: logistics and a cloud service is what is needed,” says Wong. “If you don’t invest in a cloud service and logistics, then you won’t change a fundamental thing. If you invest in that most important layer, you can have hundreds of thousands of startups later on. Those kind of investment opportunities no longer exist in mature markets.”
While many investors complain that the region’s startup ecosystem comprises primarily of consumer-focused and e-commerce startups, for Wong, this is crucial.
E-commerce embodies the fundamentals of a tech ecosystem, from logistics to payments. Solving for the problems along the entire value chain creates a base from which other startups can emerge and key to this is bringing down the cost of logistics. Currently in Saudi Arabia, the logistics costs are 20x more expensive than in China according to Wong.
“To have the real e-commerce is a huge task, it’s a big mission that you cannot solve by investing in one or two companies. You need to invest in the whole ecosystem and then the user can really live the life that is shaped by technology,” she says. “If we are not investing in the fundamental layer, whatever money you throw here, you cannot change the cost structure.
“A lot of investors here locally tell me we have the ecosystems, the good e-commerce and then I open app my Chinese apps and give them a peak, for every vertical you have 20 options and for reach item you can have hundreds of thousands of options - that is e-commerce,” she adds.
In the last year alone, China spent 2.44 per cent of its gross domestic product (GDP), roughly $441 billion on research and development (R&D), with great focus on the fields of telecoms and cloud technologies. But simply bringing these Chinese tech firms and their know-how to the region will not be enough according to Wong, who hopes to avoid the “resale model” adopted by the majority of US and European tech firms that set up sales offices in Mena.
“In our eyes, if you want to build a local ecosystem, you can provide the standard technology that has been proven by billions in investment in R&D, you can bring those mature technologies and solutions to this market as a start, but you have to customise it to local demand. You have to make sure the future R&D will really be in the [Mena] market,” she says.
Wong describes the Saudi client as mature in this regard, “they’re used to purchasing the best services, it is how you take it to the next level that is the next opportunity”.
“The pressures from authorities in each country [in Mena] to embrace digitisation and diversify their economic structure makes it very interesting for us, she says. “This region is a goldmine in our eyes, there are a lot of sovereign funds, the world’s deepest pockets are here. We have confidence in the market because of our portfolio, they have been here for years. From their performance and data, we know what will be the big chance.”
Chinese startups that are thriving in the Mena region according to Wong are in fintech and gaming with both sectors attracting handfuls of Chinese players keen to escape the competitive landscape of their home market. Among eWTPA’s portfolio is Valuable Capital Financial Company, a Hong Kong-based online brokerage platform established in 2016 and backed by Sina Group, which owns the popular Chinese blogging site, Weibo. It recently received the initial licences from the Capital Market Authority (CMA) to conduct Dealing, Advising and Custody services in Saudi Arabia, making it the very first and only licensed corporation in the kingdom from Asia.
“Over these past six years, a lot has changed, there are at least 20 brokerages doing the same thing with a population of only eight million people. In 2020 we decided to look at other markets, we looked at the US, Singapore, New Zealand and we were invited by eWTP to visit Saudi Arabia,” says co-founder Jess Cheung.
Initially sceptical and reluctant, Cheung went to meet Wong and her team over the course of four days, a period he describes as life-changing.
“We had at least six or seven meetings a day, with the Exchange, regulators, entrepreneurs, pretty much all the typical people from the industry and it was eye opening, it was really stunning. I came back and urged my partner to sign a contract with eWTP, I was so determined,” says Cheung. “I see the opportunity, but more importantly, I see the sparks in people’s eyes, I saw that before in 2000 in China, now I’m seeing it in Saudi Arabia. I don’t see it anymore in China, it’s overly competitive, it became too extreme and they don’t see the light ahead anymore.”
More than 200 Chinese and Asian companies visited eWTP’s Riyadh offices in the last quarter to establish a foothold in the region or gain some sort of understanding of the region’s markets. eWTP is currently raising another fund, which will focus more heavily on investing in startups.
“The young population [in Mena] is really exciting us, everyone has an international mindset, they cherish the Arabic culture, but they want to do something different, to modernise it. This kind of motivation and ambition is really something that gets us excited as investors,” says Wong.