security

Chinese tech companies write off India – Financial Times


Five months after his business was banned in India, Aaron Li has resigned himself to being locked out of the country forever.

Sitting in his office in the eastern Chinese city of Hangzhou, Mr Li said he had no idea when Club Factory, which sold cheap fashion and homewares to hundreds of millions of Indians through their smartphone, would be allowed to trade again after New Delhi blacklisted scores of Chinese apps.

India this week banned 43 more Chinese apps, continuing a campaign against Chinese tech companies that began in June after a border clash between the two countries left 21 Indian soldiers dead. The so-called “digital strike” has hit large Chinese tech companies including Alibaba, Tencent and ByteDance.

Last year, Mr Li raised $100m from investors to expand in India, as Club Factory hit the top of India’s download charts and was looking at profitability. He said he saw more opportunity in India than in China’s crowded market, describing it as a “blue sea” for ecommerce.

But now he expects to lose most of the investment. The months in limbo have destroyed his business, he said. “If the consumers cannot see you for a long time, they will not come back,” he said.

Mr Li said he was at home one evening when the news broke that India would ban 59 Chinese-owned apps for security reasons, including Club Factory. In a stroke, almost all of China’s top apps were wiped from Indian phones, including the short-video app TikTok, Alibaba’s popular UC Browser and Tencent’s messaging platform WeChat.

“I was at home playing video games when suddenly I received a message saying the Indian government was going to block our app,” Mr Li said, initially refusing to believe that the edict was real.

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Aaron Li, founder of Club Factory, does not know when the ecommerce app will be allowed to trade again in India
Aaron Li, founder of Club Factory, does not know when the ecommerce app will be allowed to trade again in India

Soon Mr Li was embroiled in an all-out battle to save his business. The following day, he talked with Club Factory’s board members. “All the investors were shocked too. No internet people have experienced things like this,” he said.

A note from India’s Ministry of Electronics and Information Technology simply said Club Factory would be removed from Google and Apple’s app stores.

Indian telecoms companies soon blocked Club Factory’s domain name as well, which stopped customers from being able to track their orders. Even communicating to his staff in India became a problem, since they had mostly used WeChat to send messages and make calls.

Mr Li drafted a letter to the Indian ministry with his lawyer. “Club Factory has invested approx. INR 650 crores ($87.5m) in India to set up critical infrastructure for ecommerce,” he wrote. “We are in no manner engaged in any activity which is prejudicial to [the] sovereignty and integrity of India.”

But he never heard back. Attempts by his legal team to contact the ministry also floundered. “The order came from [Prime Minister Narendra] Modi,” he claimed, adding that the other affected Chinese companies were similarly in the dark about the situation. “We immediately found it was useless to talk to others. Nobody knows,” he said. 

In Hangzhou, his employees began asking what his plan was. India was their only market and Club Factory’s $100m of monthly orders dropped to zero in July. Within two weeks, Mr Li had laid off half his staff, more than 300 workers, to buy some time.

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“We had no better way. You have to make a tough choice. We have to look at the runway,” he said, adding that the redundancies meant the company had enough money to keep going for five or six months without revenue.

Chart showing that the surge in Chinese investment into Indian tech has fallen away. Venture capital investment in India (per quarter, $bn)

More than 200 Chinese apps have now been blocked from the Indian market, with New Delhi adding another 43 apps to its blacklist on Tuesday.

China’s tech companies, once keen to invest in the vast untapped potential of the Indian market, remain in the dark about how long the bans will continue.

Alibaba has laid off employees in the country and curtailed its “innovation initiatives”. Tencent returned the publishing rights for its hit game PUBG Mobile to its South Korean developer in an effort to get it unblocked. 

TikTok has not yet started lay-offs for its staff of roughly 2,000, but a person close to the company said morale was low. “They are doing busy work, team building, planning for how to win back India when TikTok is allowed back in. But we are worried [employees] will start to leave,” the person said.

Another person close to TikTok said Indian officials are stalling while the border stand-off between the two countries continues.

Chinese investment in India

“Until China tensions ease up there is no reason for the Indian government to relax their stance,” said Ganesh Rengaswamy, co-founder of venture firm Quona Capital. “It is not just about business right now, it is social and political.”

Mr Li said there was little the Chinese government could do to help.

A Chinese government spokesperson said on Wednesday: “Since June, India has in four batches blocked Chinese apps on the pretext of protecting national security, the action obviously violates market rules and [World Trade Organization] rules.”

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At the end of July, Club Factory received a list of questions from the ministry, including: what services does your app provide, what is your privacy policy, who are the owners, where are your servers located?

“After seeing those, we realised this is not a good sign for us — we realised they didn’t block us for a specific reason,” said Mr Li, who dutifully submitted answers to each question. “Since then, we haven’t heard anything from the government,” he said.

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A spokesperson for the ministry said it was still reviewing the banned apps. “It is ongoing, it is a quasi-judicial process, as per the act, the cyber law division, has issued some notices to them, and submitted their responses,” said the spokesperson. “The judicial process is ongoing.”

Meanwhile, Mr Li and his team at Club Factory have pivoted to building a new app for Europe and the US. Even if India relaxes the ban, he said he wanted an apology before he re-entered the market.

“Why should I invest in a country if it has a risk to fall to zero?” asked Mr Li. “Today, it is Chinese applications, the next day it could be American applications. It is an unknown.”



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