Chinese e-commerce start-up Club Factory, once a challenger to Amazon and Flipkart in India, lives to fight another day

When Aaron Li Jialun woke on the morning of June 29, he had no inkling that his dream of building India’s No 1 e-commerce platform by year’s end was about to become a nightmare.

Listening to media reports, he was shocked to hear that the Indian government had just banned 59 Chinese apps, including his own Club Factory site – which he touted as “Taobao without borders”, a reference to the highly successful Chinese e-commerce site run by Alibaba Group.

“I was really surprised,” Li said. “The Indian government should have given us official notice. It’s just not right that we found out about the policy from media outlets. We had no clue at all.”

In ordering the ban, which included viral short video platform TikTok and China’s ubiquitous messaging app WeChat, the Indian government cited “sovereignty and security” threats. Another 118 Chinese apps were blocked early September as tensions with China continued to simmer.

The bans came amid rising anti-China sentiment in India after 20 Indian soldiers were killed in a deadly confrontation with Chinese troops in a disputed Himalayan border region in June.

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“It was less a message to Chinese tech companies. It’s really more of a message to the Chinese government,” said Pratyush Rao, head of the Indian political and regulatory risk practice at consultancy Control Risks. “There’s very little that Chinese companies can actually do. They will either have to wait it out or, as we’ve seen with some companies, suspend their [India] operations for the next six months.”

Soon after the ban, Club Factory complied with an Indian government directive to submit written answers to a list of questions. However, it has not got any feedback so far.

“Apart from downloads, all kinds of operations [in India] were suspended,” Li said. “The number of orders [in the Indian market] is now zero.”

The company employed more than 300 people worldwide, including over 100 local staff in India. After the ban, 90 per cent of the local employees were asked to take leave without pay but subsequently 80 locals quit their jobs, Li said.

Just over a week after the ban was imposed, Li had come to the conclusion that India would no longer be very friendly to Chinese companies. He made the painful decision to quit the Indian market – which accounted for 90 per cent of the company’s total revenue and had turned profitable by the end of last year – and search for opportunities in other overseas markets.

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Before starting his own business, Li worked for Chinese e-commerce giant Alibaba for about a year. (Alibaba owns the Post). He left in 2011 to attend the Stanford University business school in Palo Alto, California, where he met his partner Vincent Lou Yun, who majored in computer science.

The pair established Jiayun Data Technology Co. Ltd. in 2014, a data analytics provider for small and medium-sized businesses looking to source the most popular products at the best prices. The start-up received angel round financing from IDG Capital and Zhen Fund.

Two years later, they launched the Club Factory platform, leveraging artificial intelligence and big data to construct an e-commerce retail ecosystem. At first, Club Factory explored overseas markets including the Middle East, Southeast Asia, Europe, the Americas and India. In 2017, Li and Lou decided to focus on India.

“We were thinking whether there was a chance to create a company like Alibaba in another country. At that time, we thought India might be it because the country has a big enough market,” Li said.

With the world’s second-largest population, India has a fast-growing e-commerce market driven by an increase in internet and smartphone penetration. The ongoing digital transformation is expected to grow India’s total internet user base to 829 million by 2021 and its e-commerce revenue is expected to hit US$120 billion this year, triple what it was in 2017, according to the India Brand Equity Foundation.

From 2017 to 2019, Club Factory raised more than US$220 million from three funding rounds, collecting investments from the likes of Bertelsmann, IDG Capital and Qiming Venture Partners.

In December, Club Factory was the No. 1 downloaded shopping app worldwide, according to analytics firm Sensor Tower. Before the June 29 ban, the app had been installed around 190 million times in India. However, new downloads went to zero after July 2, according to Sensor Tower.

Although it was only in the India market for three years, Club Factory became a major player with 100 million monthly active users and about 40,000 local sellers. Before the app ban, Li still had ambitions of beating Amazon and Tencent-backed Flipkart to become India’s No 1 e-commerce platform by year’s end. Sales recovered to 80 per cent of pre-pandemic levels in June after the Indian government eased lockdowns imposed to contain the spread of Covid-19.

Even before the geopolitical tensions, it had not been a smooth journey for Club Factory in India, according to analysts.

“Club Factory continuously faced issues in India, beginning with its use of gifting to avoid goods and services taxes [as well as] related issues – and now the ban,” said Satish Meena, senior analyst at market research company Forrester. “After the ban, the company suspended operations in India. Now they are facing issues in making payments to sellers as they still have to pay them.”

Like other Chinese-based e-commerce platforms, Club Factory had reportedly taken advantage of a loophole in Indian law to declare goods under a certain price as “gifts” to avoid customs duty. However, in December 2019 the law was amended to require the payment of tax even if the goods were gifts.

“Club Factory is always compliant with the law and has never declared products as gifts,” Li said in a statement issued to the Post.

Club Factory did not charge commission fees in India. It earned revenue from value-added services for merchants, including marketing tools, logistics services and advertising.

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If there is a ray of hope for Li, it is that unlike other merchant-focused e-commerce platforms, Club Factory‘s core competitiveness was the data derived from more than 100 million goods sold on its platform, as well as the associated supply chain knowledge. While user data is specific to each country, its other capabilities can be moved to another market, Li added.

The company is now exploring opportunities in Southeast Asia, the Americas and Europe. Li said that this time the company would be much more cautious about the legal system and political issues in the target countries before making a decision.

If the ban on Chinese apps is eventually lifted, Meena believes there is still an opportunity for Club Factory in India as the demand for entry-level products in fashion and accessories will continue to grow. “If the ban is not removed this year I expect Club Factory to figure out a way to explore options of merging with existing local players or finding a Southeast Asia-based partner who might be interested in India,” he said.

Some analysts believe the ban is part of a broader effort to contain Chinese tech overseas.

“India‘s decision would not just be India’s alone. There seems to be more of a concerted attempt to go after the Chinese companies,” Rao said. “This is a technology cold war. Once you shut off Chinese competitors, it will possibly benefit a number of US companies who‘ve been looking at the Indian market with a lot of interest.”

After the ban on Club Factory, downloads of the Amazon and Flipkart apps jumped in India. In the two months since the end of June, both platforms saw around 16 million installs, representing a 100 per cent increase for Amazon compared with the two-month period before the ban, and a 45 per cent increase for Flipkart in the same period, according to Sensor Tower data.

The fallout has also impacted Alibaba, which has invested in several Indian start-ups including payments platform Paytm, restaurant aggregator and food delivery service Zomato, and e-grocer BigBasket. The Chinese e-commerce giant will not invest any new funds in the country for at least six months, according to a Reuters report in late August.

“From now on, Alibaba and other Chinese companies will adjust their overseas expansion strategy with more investments in local companies rather than direct operations with their own apps, to avoid risks,” said Wang Xiaofeng, a senior analyst from Forrester.

Club Factory’s Li remains undaunted despite the major setback in India.

“Globalisation is still an inevitable trend,” he said. “For Chinese companies, I think the business problems [of overseas expansion] are easy and can be solved. But the more important lesson is, what is their understanding of the world and how are they going to achieve their vision.”