Editor’s note: the article first appeared on technode.com.

In this episode of the “Going-abroad” live program hosted by TechNode Group Founder and CEO Dr. Lu Gang (also the co-founder of BEYOND Expo), ATM Capital Founder Tony Qu discussed the various changes currently happening in the Southeast Asian technology investment sector. Based on his experiences in the venture capital industry and the years he spent in the Southeast Asian region, Qu also shared his insights on investing in the region, his experience investing in unicorn J&T Express and how to capture opportunities that are emerging in the region, among others.

Established in 2017, ATM Capital is the first Chinese-led venture capital firm focused on the Southeast Asian market, headquartered in Jakarta, Indonesia. ATM Capital currently manages four funds with over $1 billion under management, information from its website showed.

ATM Capital’s investment portfolio includes J&T Express, J&T Cargo, Y.O.U (Southeast Asia’s leading emerging cosmetic brand), Jet Commerce (Southeast Asia integrated e-commerce service provider), MAKUKU (Southeast Asia’s leading mother and baby brand), TOMORO COFFEE, Tuya Smart (NYSE: TUYA), and Waterdrop Inc. (NYSE: WDH), amongst others. They include one super unicorn ($10 billion market cap), two US-listed companies, two unicorns ($1 billion market cap), and several quasi-unicorns.

From left: TechNode Group Founder and CEO Dr. Lu Gang and ATM Capital Founder Tony Qu.

Below are the edited excerpts of the interview: ​​

Why did you invest in J&T Express? Did you foresee that J&T Express would be able to expand to China from the Southeast Asian market and become successful in the Chinese market?

To talk about how we got to know J&T Express and why we invested in J&T Express, I need to start with why I came to Indonesia to establish ATM Capital in 2017.
I started doing investments in 2007 when I joined Alibaba Group’s strategic investment department. After accumulating years of experience in investment, in 2017, I began doing angel investments on my own. I was doing quite well. At that time, I was considering setting up an early-stage US dollar-venture capital fund. However, by 2017, the competition in the domestic fund industry [in China] had become very stiff, with the top 10 percent of the funds earning away 90 percent of the money. So, if I wanted to establish a fund, it had to be a top-tier/leading fund.

I then started researching how a fund can become a top-tier fund, and I believed there were two factors. The most crucial factor is that the fund needs to enter the market early enough, such as IDG [Capital], which entered the Chinese market in the 1990s; Sequoia Capital entered around 2005. Second, the fund needs to make early-stage investments in companies that would become extremely successful in the future, also known as super unicorns. For example, IDG made early-stage investments in Tencent and Baidu, while Sequoia Capital made early investments in Meituan and ByteDance.

Therefore, at that time, I was thinking whether I could find a market where I could enter early and also invest in super successful companies. Then, I turned my attention to overseas markets. During a market research trip to Indonesia, I felt that the market there was not bad, and considering the size of the entire Southeast Asian market is substantial too, I decided to set up the fund’s headquarters in Indonesia and focus on the Southeast Asian market.

Once the direction was set, I started to study the market more thoroughly to identify which areas had the potential to produce super unicorns. Having worked at Alibaba for years and around that time in 2017, e-commerce was still the best business model globally, I decided to look into the e-commerce sector in Southeast Asia. But during that time, several large companies had already emerged in the e-commerce space in Southeast Asia, such as Shopee, Lazada, and Indonesia’s Tokopedia. Moreover, they had already received significant investments from large funds, and even Shopee’s parent company had gone public. So, there were no early-stage investment opportunities in the e-commerce platforms in Southeast Asia. Since e-commerce in Southeast Asia has become a rising trend, I started to think about what new opportunities it would bring alongside the growth of e-commerce.

This led me to examine the upstream and downstream aspects of e-commerce, including payments, logistics, supply chains, and new consumer brands. In this regard, e-commerce platforms would handle their own payment systems, while the supply chain and branding segments would be more fragmented, making it difficult for a monopolistic company to emerge. Upon analysis, it became apparent that there would be significant opportunities in the logistics sector. I witnessed the growth of companies like SF Express and ZTO Express during my time at Alibaba. Therefore, I was convinced that Southeast Asia would undoubtedly produce a company similar to SF Express or ZTO Express, and it would have a substantial market presence. With this, I began scouting for who would be the future “SF Express” or “ZTO Express” of Southeast Asia.

First, I ruled out traditional courier or logistics companies and focused on startups that are innovative and served the e-commerce sector. This was because the largest incremental growth in the future logistics market would come from e-commerce.

At that time, there were not many early-stage courier startups in the market. J&T Express was one, and there was also one called NinjaVan in Singapore. Since J&T Express was relatively low-key, I first contacted NinjaVan. During our conversation, the founder of NinjaVan told me that there was a powerful logistics company called J&T Express in Indonesia. Generally, the evaluation from competitors is always more reliable. Your enemies or allies often understand you the best.

Secondly, there is a theory/saying in the logistics industry which says “commercial flow determines logistics.” So, when studying logistics, it is essential to start with e-commerce platforms. We studied several major e-commerce platforms in Southeast Asia and concluded that Shopee had the greatest potential. Later, we discovered that Shopee primarily used J&T Express for logistics services in Indonesia. Based on these two reasons, J&T Express became our target.

Why did J&T Express choose to expand from Indonesia to the Chinese market?

J&T Express was founded in 2015, coinciding with the boom of the Southeast Asian e-commerce market. By 2017, it primarily operated in the Indonesian market and had not expanded to other countries yet. However, it was experiencing rapid growth and had become the second-largest courier company in Indonesia, closely following the market leader.

Based on our research, we believed that it was only a matter of time before J&T Express became the market leader. Moreover, its founder came from the “BBK Electronics-OPPO” related group, which had performed exceptionally well in various countries in Southeast Asia. Therefore, we predicted that after J&T Express captures the Indonesian market, it would quickly become the number one leader in Southeast Asia.
The decision for J&T Express to enter the Chinese market was made in the second half of 2019. At that time, it was a highly-controversial decision. Many believed it was extremely risky, with a very slim chance of success. However, after detailed discussions and analysis, I supported J&T Express’ decision to enter China based on several reasons:

Firstly, Chinese courier companies had always been considering expanding overseas, including into the Southeast Asian market. Some had conducted numerous market assessments. However, they were primarily focused on the highly-competitive domestic Chinese market, including the rapid consolidation of companies like STO, YTO Express, SF Express, Best Express, Yunda Express and ZTO Express. At that time we were of the opinion that these kinds of express courier firms in China will consolidate from five to three. They were busy with the domestic market and lacked the resources to focus on overseas expansion.

Secondly, the Southeast Asian courier market was relatively small at that time. However, in 2019, we expect that in the next three to five years, after further consolidation in the Chinese courier market, the strongest one or two companies would expand overseas and expand to Southeast Asia. Therefore, J&T Express decided to enter the most competitive and advanced market, China. If they could survive and thrive in the Chinese market, their operational capabilities, technological prowess, and team would be among the best in the world.

Also, we saw significant changes taking place in the Chinese e-commerce market. Previously, platforms like Taobao and Tmall held about 80 to 90 percent of the entire Chinese e-commerce market share. However, starting from 2019, due to the rise of platforms like Pinduoduo, Douyin, and Kuaishou, the market share of Taobao and Tmall gradually declined. At that time, major courier companies in China, (STO, YTO Express, SF Express, Best Express, Yunda Express and ZTO Express) were all members of Cainiao Network and had received investments from Alibaba. Platforms like Pinduoduo, Kuaishou, and Douyin would want an independent third-party logistics platform to maintain the balance within the logistics sector. We saw this as an opportunity for J&T Express. Of course, entering the Chinese market required substantial funding, and as an investor, I could provide support in terms of capital. Therefore, we supported J&T Express’ entry into China.

Why would you think e-commerce is an important sector in the Southeast Asian market?

When it comes to investments, we need to observe what is the most significant “variable” in the market. The most important variable to observe in the Southeast Asian market is e-commerce. We identified three major “dividends” in the Southeast Asian market: the “e-commerce dividend”, the “TikTok dividend” (which includes media and social dividends), and the “offline channel dividend”. Unlike the fully developed offline channels in the Chinese market, Southeast Asia still has insufficient infrastructure in offline channels. There is a lack of strong management teams for offline channels as well.

In the next five to ten years, is e-commerce still a major sector that you focus on in Southeast Asia? If not, which other sectors interest you the most?

As mentioned earlier, we see significant opportunities in areas related to e-commerce, such as logistics, consumer retail. The scope of consumer retail is quite broad. It includes retail, offline services, and also those related to the food and beverage industry. It can even be defined as a broader concept of e-commerce, involving food delivery. However, its relationship with platforms like Shopee and Lazada may not be as significant.
Currently, we noticed that the COVID-19 pandemic has greatly accelerated the digitization process in Southeast Asia. Prior to the pandemic, the adoption of online payments in Southeast Asia was very low, with most e-commerce transactions being cash-on-delivery. The proportion of online payments was only around 10 to 20 percent. However, after the pandemic, the proportion of online payments increased to around 50 percent.
We have recently noticed that some vertical social platforms, which used to operate at a loss, have started to break even. Although the profitability is not substantial, this trend is similar to the early days of the Internet in China. We believe that sectors such as gaming, culture, entertainment, and advertising will gradually gain momentum. Therefore, we see potential opportunities in certain online models, but we are still observing the market.
Furthermore, we believe that new energy is another area with tremendous potential in Southeast Asia. However, the new energy sector in Southeast Asia is still at a very early stage. I believe that real opportunities may emerge three to five years from now.

However, we believe the battle in the logistics sector has already concluded. Therefore, the opportunity for Chinese companies to expand into Southeast Asia in the logistics field is not substantial. In consumer retail, we see numerous opportunities, including brand development, offline and chain terminals, and chain services. China has many excellent consumer retail companies, and if they are willing to adapt to the local market, and deploy strong teams, there are significant opportunities. As for the new energy sector, we believe there is no need to rush, as the market will take some time to develop.

What aspects should be considered when investing in Southeast Asia?

When investing in Southeast Asia, there are certain aspects to be mindful of. Firstly, it’s important not to replicate the experiences and strategies used in China. China has numerous successful projects, abundant exit opportunities, and a large market. In comparison, although Southeast Asia has a sizable market within the emerging markets worldwide, it still falls significantly behind the super-sized markets of China and the United States. This means that many Chinese business models, such as some vertically segmented market models, may encounter limitations in Southeast Asia. Furthermore, Southeast Asia has a lower GDP per capita as compared to China. There is still inadequate infrastructure such as e-commerce payment systems. Consequently, certain models that are suitable in China may be premature in Southeast Asia. Therefore, it is crucial to select high-potential industries with significant market opportunities and favorable local market conditions when investing in Southeast Asia.

After experiencing a phase of rapid growth and later some contraction, where does the Southeast Asian market currently stand?

I believe that both growth and contraction are occurring simultaneously but in different sectors. For example, in Southeast Asia, we observe strong growth in areas such as e-commerce, logistics, consumer retail, and some of the offline industries we have invested in, such as coffee chains and offline restaurant chains. These consumer segments are growing tremendously. The trend of “consumer upgrading” is also evident. However, the concept of “consumer upgrading” in this context is different from our usual understanding. People from lower-tier regions are starting to purchase goods they previously did not buy.

From a venture capital perspective, I think Southeast Asia has gone through several stages. When we entered the Southeast Asian market in 2017, there were not many substantial funds, and most of the startup companies were relatively small in scale. The number of unicorn companies could be counted. However, by 2021, the COVID-19 pandemic had accelerated the digitization process, and companies related to online and mobile internet showed promising data.
We have seen some large international funds which previously obtained significant returns through relatively aggressive investment strategies in the Chinese market, due to its size. These funds also applied a similar strategy to Southeast Asia, resulting in the emergence of 20 to 30 unicorn companies in a year’s time. However, these funds did not truly delve deep into the Southeast Asian market, and the timing was too early. With global liquidity tightening, these large funds later became hesitant to invest further.
And now, even those previously active growth funds and early-stage funds in the region have become more cautious. From an outsider’s point of view, it seems that investment and financing activities in this market have decreased in terms of volume and frequency. But from my point of view, I think it is a process of returning to the mean, with the market reverting to its “original state”.

Many Chinese companies are optimistic about the Southeast Asian market. Which specific industries are suitable for Chinese companies?

ATM Capital focuses on e-commerce and its supporting infrastructure (including logistics), consumer retail, FinTech, and the new energy sector, all of which are quite suitable for Chinese companies. However, I believe the battle in the logistics sector has concluded. So, there may not be significant opportunities for Chinese companies to enter the Southeast Asian market in the logistics sector. On the other hand, we believe there will be many opportunities in the consumer retail sector, whether it’s in branding, offline retail, chain terminals, or franchising services. China has many outstanding consumer retail companies, and if they are willing to align with the domestic market and deploy strong teams, there are significant opportunities to be tapped. As for the new energy sector, I believe it is not something to be rushed; its market development takes time.

Will there be another J&T Express in the future?

There is a saying, “Win Indonesia, win Southeast Asia.” (If you win in Indonesia, you’ll win in Southeast Asia) J&T Express is a very special case. First of all, their team is strong, and they achieved excellent profits in Southeast Asia at an early stage. In addition, their fundraising was successful, and there happened to be a window of opportunity in the Chinese express delivery market at that time.
If a Chinese team can succeed in Southeast Asia and then expand to emerging markets such as Latin America, the Middle East, and Africa, the opportunities would be tremendous. These markets cover a population of two to three billion people, and with limited competition, there would be good profits. Once a significant market share is captured and these markets are more established, it could potentially reach a scale three to four times that of the Chinese market. Furthermore, expansion into European and American markets could also be considered in the future. After conquering these markets, one can even consider returning to China since, in my opinion, the Chinese market is the most challenging of all.

Apart from the Southeast Asian market, which other markets are worth paying attention to?

I believe there is still significant potential in emerging markets, including Latin American countries. Southeast Asia is our most advantageous market, and we also believe that if Chinese entrepreneurs venture abroad, their first destination should be Indonesia, should be Southeast Asia. Once you succeed in this market, expanding to Latin America would not be a problem. We don’t make choices, we don’t choose Southeast Asia or Latin America or the Middle East, but there is a sequential order. I would start with Indonesia, then focus on Southeast Asia, and then expand to other emerging markets worldwide, including Africa.

We have also observed that relatively successful companies often have multiple origins. Looking ahead, I believe Indonesia is also likely to be a significant birthplace. For example, we see that J&T Express and Shopee started from Indonesia, and even OPPO’s overseas success began in Indonesia before they bring their experience to other countries and regions. We believe that at least 30 percent of Chinese global companies in the future will be born in Indonesia.

What advice do you have for entrepreneurs or investors who want to start businesses or invest in Southeast Asia?

In my opinion, whether it’s investing or starting a business, the direction is crucial. As an investor, if you want to invest in Southeast Asia, it is essential to have a local team and conduct thorough research. Copying strategies from China or a global perspective without understanding the local market will likely result in failure. The same principle applies to entrepreneurship. It is crucial to choose a major track and develop a business model that closely aligns with the local market. Moreover, you must be fully committed. If you’re a startup founder, you should be based in Southeast Asia, preferably residing in Indonesia if targeting the Indonesian market. Living in Singapore or other locations won’t suffice. If entrepreneurs can choose the right direction and go all-in, we believe they have the potential to become the next J&T Express.

J&T Express plans HKEx listing, seeks funds for logistics expansion