Since 2020, US tech giants have invested more than $20 billion in Indian tech companies in an effort to enter the world’s fastest developing tech market.
By Michael Megarit
Why are American Corporations Buying Indian Tech Companies?
2020 was a landmark year for the Indian tech industry:
January 2020: Amazon pledged to invest $1 billion into small businesses in India over the next 5 years.
April 2020: Facebook invested $5.7 billion for a 9.99% stake in Jio Platforms, India’s telecom giant.
July 2020: Google revealed its India Digitization Fund, which will invest $10 billion in India’s tech sector by 2028.
In total, India’s government claims that the US invested $43 billion between April 2000 and March 2021, with nearly half of that sum being invested since 2020 alone.
Why are American firms rushing to invest in Indian technology companies?
Just over a year ago, these same companies were butting heads with Indian regulators over how to collect and store data, sell products online and protect their users’ privacy.
However, these tensions now appear to be a distant memory and business is booming again.
Here is why American companies are investing massively in Indian technology companies.
China’s Loss is India’s Gain
In recent years, Big Tech focused on trying to enter the booming Chinese market.
With a population of more than 1 billion people and a thriving economy, China was the market every American company wanted to conquer.
However, the situation is changing.
China’s crackdown on its big technology companies caught foreign investors by surprise. In total, it cost them more than $1 trillion of losses this year. In late July, China decided to reform its private education sector and banned the $100 billion industry from making profits. This sudden decision wiped out shareholders and the US SEC responded by freezing all IPOs of Chinese companies.
This is not the only chilling example of the Chinese government flexing its regulatory muscle.
Earlier this year, Beijing forced Jack Ma’s Ant Group to revamp its business model. Regulators accused Ant of failing to respect the country’s financial regulations. The central government blocked Ant’s IPO and showed that even the nation’s richest businessman can’t escape their regulatory oversight.
In addition, the Chinese government is becoming increasingly sensitive to Big Tech’s ability to provide a platform for political dissent.
For example, following the Hong Kong protests, a new national security law was imposed granting the island’s authorities the power to regulate and punish tech platforms. The law enables authorities to remove any posts that are considered a threat to China’s national security. If the platforms fail to censor the sensitive content, the authorities can remove it themselves and even restrict user access.
In response, Facebook, Google and Twitter threatened to leave Hong Kong. Indeed, the new legislation puts locally-based staff at risk of criminal charges. Others, such as Tik Tok, simply left the island.
As the Chinese government tightens its grip over national and foreign tech companies alike, US firms are looking for alternative growth opportunities.
Naturally, doing business in neighboring India is an increasingly attractive proposition.
In fact, the Indian government’s interests seem to align perfectly with the US’. Indeed, India has its own historical conflicts with China. Last year, 20 Indian soldiers died during a border clash. The Indian government retaliated by banning Tik Tok, WeChat and a dozens of other Chinese apps.
Of course, Chinese tech remains well established in India.
Chinese smartphones dominate the Indian market and Chinese firms have interests in dozens of Indian start-ups.
However, the Indian government is keen to redirect initially Chinese-bound US investments to its own tech industry.
From a strategic point of view, India has every reason to play both sides: it has forged solid economic ties with China while clinging on to the security provided by the USA, and now it is attracting billions in investments from US companies.
For Indian politicians and business owners, this is a win-win proposition.
In effect, China’s domestic crackdowns are encouraging US firms to invest in the seemingly business-friendly Indian tech market. While the Indian government enacted its own privacy laws that may thwart American tech’s short term plans, the consensus is that legislation will eventually become fair and transparent.
Another key factor behind American tech’s entry into India is the longstanding economic relationship between the two countries. For decades, Silicon Valley has hired talented Indian engineers and both Microsoft and Google currently have Indian-born CEOs. Furthermore, the fact that Indians are well educated and speak English further reinforces natural cooperation between the two nations.
Clearly, there is a natural synergy between the two countries that US tech giants are eager to capitalize on.
India is the Last Great Untapped Tech Market
India is a land of opportunity that promises exponential growth prospects.
With 1.3 billion inhabitants, the majority of which are destined to become middle class by 2030, India has tremendous potential.
From 2010-2020, India’s internet market exploded: with over 560 million internet users, India is the world’s second largest online market, second only to China. By 2023, it is estimated that there will be more than 650 million internet users, and internet penetration rate, which stands at just 45% in 2020, is expected to continue growing rapidly in coming years.
For US tech firms, this means millions of potential new customers.
Online shopping is one example of an attractive market with promising growth prospects: for now, e-commerce represents less than 3% of retail transactions but the market is expected to grow to $200 billion by 2026 from $38.5 billion in 2017.
The first companies to reach these new consumers stand to gain billions of dollars of fresh revenue.
The CEOS of American Big Tech companies know this and are scrambling to tap into this pool of fresh and enthusiastic internet users.
Over the past few years, Facebook CEO Mark Zuckerberg, Twitter CEO Jack Dorsey, Microsoft CEO Satya Nadela and Google CEO Sundar Pichai all visited India and met with Prime Minister Narendra Modi. Amazon CEO Jeff Bezos also made several trips to India – albeit with significantly less success – in an effort to facilitate his company’s entry into the local market.
These companies, along with other tech giants such as Uber and Netflix, are collectively investing billions of dollars in the Indian market, either by introducing “India-first” features and local language versions of their services, or investing directly in Indian businesses.
Here are some notable investments made by US companies in recent years:
July 2021: Dana invests $18 million to acquire 1% stake in Switch Mobility, an electrified commercial vehicles company.
Jan. 2021: Salesforce led a $15 million financing round for Darwinbox, a company specialized in HR software.
Jan. 2021: Tesla registered its Indian entity in Bengaluru.
Nov. 2020: Global tech company Honeywell announced a strategic investment in Trinity Mobility, an India-based software company.
Oct. 2019: Cargill, the global food and agriculture conglomerate, revealed plans to invest $160 million for acquisitions and growth.
May 2019: Mastercard announced plans to invest $1 billion in India over the next five years in order to establish the country as a global technology node.
Analysts expect more US investments in Indian tech companies over the next few years.
Thus, for now, the general atmosphere is bullish.
However, cautious observers remind investors that the Indian government has shown a willingness to enact protectionist policies in the past – especially when it comes to privacy and data collection.
Which of the protectionist or laissez-faire attitudes will prevail in the long run?
Only time will tell…
About the Author
Michael Megarit is the founder and managing partner of Cebron Group. With over 25 years of domestic and international corporate finance experience, he has provided M&A and capital advisory to high-growth technology companies seeking investments and buyers.