🔬Parsing India's app ban

At least 20 Indian soldiers were killed as they clashed with Chinese soldiers in a disputed border area along the Himalayas in June 2020. This is the first time in 45 years that the two sides have lost the lives of soldiers to conflict. The conflict triggered latent anti-China sentiment in Covid stricken India, especially on social media, and hashtags such as #BoycottChina started trending. 

In the days following the conflict, videos showing angry Indians destroying Chinese products surfaced. Then there were rumors that many Chinese products had security loopholes and people started deleting Chinese apps from their phones. Many apps were also proven to be insecure and then the Indian government stepped in to officially ban 59 Chinese apps including popular apps like Tik Tok and Helo.

India’s ministry of information technology said in a press release on 29 June 2020 that these app are “prejudicial to sovereignty and integrity of India, defence of India, security of state and public order.” 

The move was praised by many Indian entrepreneurs, who hope this becomes the great Indian firewall that will create a favorable environment for homegrown companies to grow without having to compete with Chinese rivals. Uninstall their apps, stop buying Chinese goods, and instead, choose Indian products, they extolled their followers. 

Ironically, close to 100 Indian startups have raised money from Chinese investors. At about $4.6 billion in 2019, Chinese investment in Indian startups has grown nearly 12-fold from $381 mn in 2016. Of the 30 Indian Unicorns (startups in India valued at over $1 bn), 18 have taken Chinese investment.  

Naveen Tewari, the founder of Inmobi, a company backed to the tune of over $200 million by Japanese investor Softbank and a few other investors, said in an interview with ET Now: “This is historic because digital companies don't necessarily have boundaries and in India given the population and how digitally savvy the population is, it was important for India to control its own data and take care of its own security. Therefore, it's a great phenomenal move by the PM.” InMobi owns Roposo, a short video app that competes with bigger rival TikTok. 

Winner winner chicken dinner: Replacement apps from India

For a few years now, the Google Play Store in India has been dominated by Chinese companies like TikTok and several others. Back in 2019, my former colleague Shadma had written in FactorDaily that five out of the top 10 mobile apps in India are Chinese — compared to two at the end of 2017. 

A quick look at the Indian Play Store after the ban shows that it is littered with pale alternatives to TikTok and a few credible competitors. Back in 2017, when I’d written about the growing trend of BMKJ apps, I had not anticipated it to be this big. The Indian play store has two clear trends now: BMKJ apps are all over the top charts. TikTok clones are everywhere (Recommended read: How to build an Indian TikTok - A product perspective).

What would have taken these new companies millions of dollars in user acquisition cost doesn’t cost anything now. User growth has solved itself for now.  However, many of them are likely to run into user retention problems. And also, when TikTok comes back (I believe it will), most people are likely to go back to using it. 

Several investors, including Balaji Srinivasan and Naval Ravikant, have offered to back entrepreneurs making replacement apps. That’s a great thing. I recently argued that if you’re only launching your replacement app now, you’re probably too late. 

Funnily, Nasdaq listed Zoom, an American company, has also been caught in the crossfire. After the lockdown in India, Zoom was starting to become a household name. But since the border issue, many people called Zoom a Chinese company and its CEO Eric Yuan — an American citizen since 2007 —  has been making public appearances trying to correct the misperception. In a totally unrelated development, India’s richest man’s company Jio, which recently raised $15.2 billion (not a typo) from investors including Facebook, is building a Zoom replacement and it’s doing pretty well on the Play Store. The design of JioMeet, as our friend here has pointed out, is a total rip off. 

I’m not a big fan of clones. However, I realize that sophisticated ecosystems we see today have primitive beginnings. Take China’s famed mobile phone manufacturing ecosystem for instance. It has roots in Shanzhai goods: the Nokai’s and the BlueBerries that Chinese entrepreneurs happily cloned from their western counterparts thanks to cheap chips supplied by Taiwanese MediaTek.  

Winner winner chicken dinner: Big tech from the West

While BMKJ apps are doing well, apps owned by American companies are also doing well. Facebook-owned Instagram and WhatsApp are not under scrutiny anymore. They also stand to gain if creators move to them from TikTok. It also means more revenues for these companies because the absence of TikTok means lesser inventory for ad buyers to spend on. Mind you, at about $2 billion, India’s digital ad market is tiny with way too many competitors.  

Huawei’s woes

India is likely to auction 5G spectrum this year. But China’s largest private company, Huawei and rival ZTE will likely have to sit this one out. The US, Australia, New Zealand, and several other countries have already banned Huawei. More are likely to follow suit.

Xiaomi & smartphone companies

While Xiaomi and other Chinese smartphone companies that together sell three out of four smartphones in the country haven’t been directly affected yet, there is growing concern that if India- China relations deteriorate any further, things could go south for these companies.  To preempt concerns in India, Manu Jain made public appearances presenting Xiaomi as “more Indian in spirit than any other smartphone company.” Jain told The Economic Times in an interview that the company has generated nearly 50,000 jobs in India;  makes all its devices in India; sources 65% of the components from India; stores all the data locally on servers in India; and that it has less than 10 Chinese nationals working at Xiaomi India. “Other brands have been here for 15-10 years. We've been here for six years out of which our Make in India journey has been like four-and-a-half-year-old. And still, we are ahead of anybody else in localization. In spirit are we more Indian than anybody else,” Jain said. 

In hindsight, Xiaomi’s efforts to build relationships with New Delhi after the 2014 fiasco, seems to be paying off now, when the relationship between India and China is at its worst. Xiaomi continues to sell products through 10,000 retail outlets — plastered with Make in India posters — and online without too much trouble.

With bilateral trade of $65 bn (April - December 2019), China is India’s second-largest trading partner after the United States. India imports nearly $20 bn worth of electrical machines including smartphones and other devices from China every year. However, in the absence of local manufacturing capacity, banning Chinese hardware may yet prove difficult, if not impossible. 

Are the winners really winning?

All this brings me to a bigger question: are the winners really winning? India’s economic growth has slowed down partly because of the pandemic and partly because of the government’s inability to see some of the big reforms through without sending the system into shock. At this rate, as Ira Dugal reasons in this excellent column, to move from a lower middle-income country (with a per capita income of $2000) to an upper-middle-income country (with a per capita income of $4000), it will take us another 7-8 years. Given the paralyzed state of the economy, it could take longer. I’ve argued before that India’s digital ad market has too many players with an infinite supply of inventory but millions of people without enough purchasing power for it to make sense. So until the time we have a larger upper-middle-income population, app companies (with the exception of categories like dating and education tech) can have all the users they like but they’re not going to make enough money per user.