A Gateway To China Market Or “World Factory”? What Hong Kong Has In Store For Indian Startups

Riding on technology, going global has become a new trend for Indian tech startups. Over the years, Indian B2B companies such as Freshworks, Zoho and InMobi have expanded their operations to capture the markets beyond India, however,  B2C companies’ footprint has remained subdued overseas.

Yet, things have somewhat changed in the past two years. The Indian startups backed by global investment giants of the likes of  Alibaba, SoftBank, Tencent and Sequoia Capital, such as Paytm, OYO and Ola, have started to expand their businesses beyond the Indian borders.

For a startup, a range of factors come into play while scaling their operations beyond the home turf. These include the cost of operations and the market opportunity to business-friendly policies, to begin with.

Though Silicon Valley offers a great ecosystem for product development and startup culture, such star-studded startup destinations have a limited appeal in some cases. For instance, Silicon Valley offers the already-evolved marked base of the United States, which may not provide the necessary training ground for every startup.  While it can prove to be a promising opportunity for some startups, others may find such a market to be challenging to compete in.

Similarly, London, which has for long served as an ideal destination for Indian entrepreneurs, has lost some of its appeal for startups looking to cater to the European markets. Many such startups have, in fact, started shifting their bases to cities such as Amsterdam, the Netherlands.

China, despite lacking an overseas-friendly policy, is currently the world’s largest economy in terms of purchasing power parity (PPP). The country with a per capita income of $8,643, more than four times of India’s, offers a market which is home to not only the largest population in the world but also the equally strong capacity to consume.

The collaboration between the two startup ecosystems has picked up momentum over the years thanks to the Chinese investors’ interest in Indian startups. As of April 2018, China has pumped over $8 Bn into India so far, with the TMD – Toutiao, Meituan-Dianping and  Didi Chuxing – and the BAT trio – Baidu, Alibaba, Tencent –  having started to view India as an important opportunity.

Backed by the Chinese investors, while many Indian startups such as OYO and Paytm have set their bases in China, Hong Kong has emerged as an essential gateway for the startups and companies looking to enter the Chinese market. Reason: Hong Kong’s proximity with Mainland China, and its status as a global fintech and biotech hub having a double taxation avoidance agreement (DTAA) with China. Here’s why:

The Rise Of The Hong Kong Ecosystem

Hong Kong – ranked the most visited city in the world for eight years running by market research provider Euromonitor International  – offers a standalone market and ecosystem along with a free pass to Mainland China.

Over the past few years, Hong Kong and 10 other cities in the Guangdong-Hong Kong-Macau Greater Bay Area have emerged as a strong standalone ecosystem for startups, thanks to China’s $900-Bn Silk Road grand plan.

Tom Gaffney, regional managing director, CBRE Greater Bay Area & Hong Kong, says that the Greater Bay Area represents the growth of a connected economic powerhouse, and offers vast business opportunities. As the region seeks to enhance its high value-added industries, the demand for quality office space is set to grow, making it the most promising sector for investors. The launch of new infrastructure is seen energising the logistics sector going forward, triggering a stronger demand for warehouses, with population growth and the formation of new travel zones expected to drive the retail property market, he elaborates.

According to Euromonitor International, Hong Kong is one of the most digitally-equipped cities, with a staggering 232% smartphone penetration and 176% growth in internet subscriptions in 2017. This makes Hong Kong a strong market for Indian tech startups.

To understand the Hong Kong startup ecosystem better, and what’s there for Indian startups, Inc42 spoke to Charles Ng, Associate Director-General of Investment Promotion, Invest Hong Kong (InvestHK).

“If you’re in Hong Kong, you get the best of both worlds. And, we would like Indian startups to have their second home in Hong Kong,” tells Ng.

For Indian startups, the parameters for expanding their base to a city are:

• Technology, market opportunity and infrastructure
• Policies and laws
• People to hire
• Investors to fund
• Incubators, accelerators and co-working spaces for support

Here are some of the key facts about the India-Hong Kong startup ecosystem:

India and Hong Kong

• Hong Kong is the third most active foreign investor in Indian startups
• The number of staff employed by startups in Hong Kong has grown 70% since 2015
• India is the world’s third largest, fastest growing startup hub and unicorn base, with 39,000 startups, according to Inc42 DataLabs research
• 83% of the Indian workforce aspires to be entrepreneurs, compared to 53% globally
• India has the highest mobile internet penetration in the world (2017: 420 Mn, expected to grow to 800 Mn by 2025, from 420 Mn in 2017); the highest in the world for Facebook and Whatsapp
• India and Hong Kong have signed the double tax avoidance agreement (DTAA)

Technology Infrastructure, Connectivity And Market

The supply chain and logistics infrastructure that the Bay Area provides is conducive, due to China’s One Belt, One Road initiative.

Startups playing in the digitally-driven logistics and supply chain space in India attracted investments worth $1.89 Bn in 2018.

According to the Economic Survey 2017-18, the $160-Bn Indian logistics industry has grown at a compound annual growth rate (CAGR) of 7.8% in the past five years. The logistics sector provides employment to more than 22 Mn people. Improving the logistics sector has huge implications on exports. It is estimated that a 10% decrease in indirect logistics cost can increase 5-8% of exports. With the implementation of Goods and Services Tax (GST), the Indian logistics market is expected to clock a CAGR of 10.5% to reach about $215 Bn in 2020.

There are a number of areas where Hong Kong has an edge over other the leading cities of the world, says Ng. For instance, the city is so well connected that it guarantees delivery across the world within 48 hours at the cheapest cost, he adds.

It is home to more than 330,000 SMEs, 3,000 startups and 8,200 multinational companies. Out of which, 45% have regional headquarters in Hong Kong.

In terms of customers or the target market, though Hong Kong itself is a small market with a population of 7.3 Mn people, the Guangdong-Hong Kong-Macau Greater Bay Area has a population of 70 Mn, offering a huge market and great connectivity.

Its geographical location gives companies access to Japan, Korea and Tanzania – be it from a B2B perspective or a B2B2C perspective.

“The Bay Area (Guangdong-Hong Kong-Macau Greater Bay Area) being the ‘world’s factory’ not only meets the basic demands of tech startups but provides these startups unparalleled access to the production line to help them scale,” he further says.

The Guangdong-Hong Kong-Macau Greater Bay Area  is the key part of China’s grand plan pertaining to its $900-Bn Silk Road project, Ng stresses

Guangdong-Hong Kong-Macau Bay Area: The Factory of the World

Also known as the “factory of the world”, the Guangdong-Hong Kong-Macau Greater Bay Area is the centre of the world’s manufacturing with a cluster of 11 cities including Hong Kong, Macau, Guangzhou, Guangdong and Shenzhen. It acts as an important logistics hub and boasts the largest manufacturing plants supported by a world-class supply chain infrastructure. Guangzhou, Shenzhen and Hong Kong handle the largest flow of goods in the region.

In terms of connectivity, the entire area is connected via high-speed trains or a sea-bridge (Zhuhai and Macau are linked with Hong Kong) making the distance between two hubs within an hour’s reach.

With Hong Kong and Macau being administered independently of Mainland China and other provinces of the Guangdong-Hong Kong-Macau Greater Bay Area under the direct Chinese administration, the region offers a unique mix of different policies as well as infrastructural advantages.

Meeting Talent Requirements

Hong Kong also a growing talent pool with an addition of nearly 6,000 engineers every year courtesy Hong Kong universities, which are keen to join startups, says Ng.

In addition to logistics, it is the unique combination of different clusters such as manufacturing and services, a collaboration of corporates and universities with startups that boosts the advantage of Hong Kong.

“Large corporations are deeply associated with startups,” says Ng of InvestHK, an investment promotion agency under the Government of the Hong Kong Special Administrative Region. The regulators, large corporates, startups – and other organisations such as Hong Kong Cyberport and Science Technology Council – are working together with research institutes to provide startups with the effective support on incubation, acceleration and funding.

Just like in India, the universities run innovation labs in collaboration with the corporates. Giving an example of the infrastructure provided for fintech startups, Ng tells: “Cyberport offers 40K square feet space for fintech startups. We work with universities. We have 8-9 universities; six of them are research universities. Some of them like HKU are among the top universities in the world.”

Meeting The Funding And Incubation Requirements Of Startups

In terms of high net-worth individuals (HNIs), Hong Kong is ahead of New York, according to a report by news agency Bloomberg. There is a lot of access and possibilities for raising funds from seed investors, angel investors, venture capitalists, private equities and limited liability partnerships.

“The whole supply chain of capital is there (Hong Kong). The government is also making huge investments in Hong Kong. The government earmarked $6.25 Bn for the development of entrepreneurship and innovation ecosystem,” he tells.

In Ng’s opinion, Hong Kong is the best fit for Indian startups in Series A funding, as well as late-stage startups looking to scale up and expand their base. With a proven track record, they can easily get funding there, he adds.

He also recommends the early-stage startups to take the incubation route to foray into the Hong Kong market. This, he believes, will not only help them in getting access to infrastructure and funding but, most importantly, also ensure the networking and traction they could bring on their table.

Understanding the need for connectivity for entrepreneurs, startup expert Karena Belin chose Hong Kong to found Whub in 2013. “At Whub, our tagline is startup passion. We’re really passionate about helping startups grow and scale, and fostering the ecosystem. So being involved in different associations and to support each other – that’s one of the most amazing things,” she says over a podcast.

“In the last few years, we have produced six unicorns (including) GoGoVan, Klook, WeLab, SenseTime and Lalamove. Many of them are either from China or overseas.”  – Ng

SenseTime, credited as the world’s most valuable Artificial Intelligence startup, has applied for more than 500 patents, 90% of which are original inventions.

With a presence of over 8,200 MNCs, many of which do have their startup funding arms, and the largest pool of HNIs, Hong Kong does offer funding facilities at every stage, says Ng.

For instance, Alibaba has set up Alibaba Entrepreneurship Fund and also runs the Jump Startup acceleration initiative in Hong Kong. Hitachi and Siemens have set up Innovation Labs, which helps startups co-create products and solutions. Accenture is also running a fintech acceleration programme in Hong Kong.

“If you’re innovative enough, you should be able to get funding in Hong Kong.” – Ng

Grand Plans Aside, Isn’t Hong Kong The Most Expensive City In The World?

“Undoubtedly.” According to Ng,Hong Kong is one of the most expensive cities in terms of real estate, but the diversity in the city allows “cheap stay and cheap setup for startups” in various parts of Hong Kong, he affirms.

Growing demand for office space by entrepreneurs has led to the establishment of a number of coworking spaces in Hong Kong.

From just three coworking spaces in 2013, the number has now grown to more than 80. Many of them also offer a free-of-cost arrangement for startups. And among those that are not available free of cost, “charges are not very significant… They  are approximately $340 a month.”

Giving an estimate of accommodation-related expenses, he says: “You can rent a comfortable flat or room at $1,000 a month. Food is also not that expensive. You can have it at $11 a meal or $400 a month. It is not that expensive for startups,” said Ng.

According to commercial realty service provider CBRE, Dongguan and Foshan offer around two Mn square metres of quality office space. Office rents in neighbouring Guangzhou and Shenzhen are $20-$30  and $30-37 per square metre respectively, but the rents currently stand at $7-$11 per square metre.

It depends upon one’s knowledge, says Ng. “Some places are highly expensive, some are inexpensive as well. Once you start living, you know it.”

Policy Matters! Why Hong Kong, When Shanghai, Beijing Are Better Ecosystems?

“It’s not rocket science. Hong Kong has 95% tax compliance, because it’s code is only four pages long with a 15% flat tax.” ― Ziad K Abdelnour, author, ‘Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics’

Unlike China, Hong Kong allows you to access various websites. For instance, social networks Twitter and Facebook are easily accessible in Hong Kong.

“Corporate tax is 16.5%. However, what we have done is that for startups starting in Hong Kong, for the first $2 Mn profit that they make, we have reduced the corporate tax to 8.25%,” explains InvestHK’s Ng.

The idea is to give newcomers a break so that they can maximise their profits. “The government also has more than 20 types of funds. For instance, if a Hong Kong-registered company looks to expand its business say, it showcases its products in the EU market, the government does have a funding structure for this,” he tells.

However, the Chinese territory is “a different ball game altogether”. China has a corporate tax of 25% and the Chinese administration has imposed a withholding tax of 10% between a business from Bengaluru to a Chinese city such as Shanghai. However, between Hong Kong and Shanghai, it’s only 5% whereas, between Hong Kong and Bengaluru, it’s free, he explains.

“The best things, we have a double taxation (avoidance) agreement with Mainland China. This gives us a special privilege.”

This makes a huge difference for startups. “We want to produce a conducive ecosystem that is safe, attractive and business-friendly,” he says.

China is a very large economy and so is India. And Hong Kong could be a perfect bridge between the two countries. Unlike China, English is the official language along with Mandarin in Hong Kong.

In terms of lifestyle, a vast number of Indian restaurants could be seen in Hong Kong which caters to thousands of Indians staying in the city. The Indian community in Hong Kong has also maintained strong relations with China. Big Indian business group such as the Tatas have a good presence in Hong Kong.

The Chinese market and largest manufacturing infrastructure at the cheapest rate, Hong Kong has clearly opened its doors for the Indian startups. It remains to be seen how Indian startups take advantage of the opportunity in Hong Kong.

“A journey of a thousand miles begins with a single step.”  – Lao Tzu, philosopher and author, Tao Te Ching

The Indian ecosystem is already deeply connected with China, with investors from China taking an interest in the Indian startup ecosystem.

In 2017, Chinese internet companies such as Alibaba, Fosun, Baidu and Tencent invested $5.2 Bn in 30 Indian companies. The number marks a five-fold jump from $1 Bn worth investment in 41 Indian firms back in 2016. This makes China rank among the fastest-growing sources of FDI into India.

As of April 2018, China has pumped more than $8-Bn investments into India as – its highest so far. Nearly half a dozen such firms – including Qiming Ventures, Morningside Ventures, CDH Investments, 01VC, and Orchid Asia Group –  are looking to buy stakes in Indian startups across the fields of financial and education technology, e-commerce, content and online classifieds. The TMD trio  – widely considered the new BAT –  is also looking to expand aggressively in India.

However, even though internet giants such as Amazon and Twitter have their offices in Hong Kong, they have not succeeded to penetrate the Chinese market.

There are other issues that are yet to be resolved. Hong Kong once ruled by Britishers have their traces in today’s rules. For instance, in Hong Kong, one has to walk or ride along the Left, in China, it’s the right. In case you don’t understand how it makes a difference, try taking your car out to the 55 km-long sea bridge. You won’t be allowed if you don’t have a special license, as part of the road falls in China too.

As the Indian startup story continues to cement its position among the prized destinations for Chinese investments, Hong Kong may well hold the key to success for many Indian entrepreneurs.