by Paul Shetler and Marcelo Silva
Less well-known than their Silicon Valley counterparts, China’s digital disruptors are no less ambitious. To help businesses better understand the size of the opportunity, Which-50 is publishing the China Digital Playbook, an ongoing series authored by digital transformation experts Marcelo Silva and Paul Shetler. Here’s part one.
Venture capitalists love nothing more than making a splash. When Andreesen Horowitz, one of the world’s largest tech VC firms, invested big in bitcoin, it told the Wall Street Journal that bitcoin’s computer engineering community constituted 10,000 of the world’s smartest people.
Big, brash predictions are the hallmark of venture capitalists looking to usher in a wave of investment for their new favoured product.
Venture communists — as The New York Times has dubbed China’s growing tech investment community — have been much more shy about how their investments are changing the world. But their expectations about the future of digital technology — and the disruption it will wreak on established industries — are no less ambitious.
Over the last decade, China has transformed itself into a global tech leader. The world’s second-largest economy is pivoting from low-cost manufacturing to high-powered technological development. Global expansion is next on the agenda, as its twin giants, Alibaba and Tencent, are starting to prove themselves offshore.
The Chinese government, a key contributor to China’s digital success, has made clear that it’s aiming high, including becoming the world’s AI hub by 2030. In some cases, the government has invited foreign companies back into China to collaborate — with strict caveats attached.
Meanwhile, US tech companies are feeling the heat of mounting Wall Street pressure, and a perception that they’ve saturated the American market, and so are looking to further expand overseas. Timing is everything when approaching a new market, and the increasing Internet penetration, mobile access and willingness to transact online is making Asia and LATAM fertile target markets for expansion.
These firms know that the first player to establish an advantage has the opportunity to take advantage of network effects and dominate the global market for years to come.
The battle for digital dominance will bring wealth creation, jobs and global expansion opportunities. It will also bring much responsibility, with an increasing awareness of the political and environmental ramifications of tech.
Given the size and importance of these developments, we assess how Chinese and American tech companies compare — in strategies, structure and relationship with government — highlighting the barriers to, and opportunities from, global expansion.
Between us, we have decades’ worth of experience in start-ups, digital transformation, government and transnational companies, across the United States, Europe, Australia and Asia.
Over the coming weeks we’ll expand on four drivers, and how they’ll impact the winners and losers:
- China’s rush to digitise — the drivers behind digital transformation;
- The key players — BATXs vs. FANGs;
- Best practices across industries — across America and China;
- Government innovation — in the East and West;
- The intellectual property conundrum — will American companies re-enter China?
- And finally, we’ll ask: what can we expect in the years to come?
Part One: Countries are rushing to digitise
Why population growth and widespread disruption are driving governments and private enterprises to digitise
When we think digital, too many of us are still picturing Palo Alto, not Hangzhou’s Dream Town, or Shanghai, with its 500 incubators, accelerators and co-working spaces. That picture is no longer accurate.
Chinese start-ups now comprise almost 40 per cent of the world’s “Unicorns” — start-ups with valuations of above $US1 billion. Even more are on their way. Some $US77 billion of venture capital investment poured into Chinese firms between 2014 and 2016, making China the world’s largest destination for fintech venture capital investment, and second behind only the United States in AI, virtual reality, robotics, education technology and autonomous driving.
It’s big, and it’s moving incredibly quickly. Just a decade ago, China accounted for less than one per cent of the value of the world’s e-commerce transactions; today, McKinsey Global Institute reports that the value of China’s e-commerce transactions exceeds that of France, Germany, Japan, the United Kingdom and the United States combined.
In some areas, the pace of change seems to have kicked into exponential acceleration. In 2015, the volume of Chinese mobile payments was already almost twenty times as large as the United States’ market; then, in 2016, the Chinese market more than tripled again, spurred by an increasing number of stores accepting WeChat Pay and the growth of mobile payments competitors like Alipay.
The Internet is enabling business disruption at unprecedented speed. New business models and industries are taking shape, ushering in new category leaders like Didi, Tencent and Alibaba.
Digital China’s rise has been enormous, and rapid — but it’s far from inexplicable. Three factors explain the sudden growth in China’s digital presence.
The first is population. The global population hit 7.6 billion in October 2017, of which China made up 1.38 billion.
Technology development in China is an inevitable consequence of a growing population of increasingly digitally-sophisticated individuals. It’s also a potential salve to the consequences of population growth. The world’s population is expected to increase to 11 billion by 2100, placing considerable stress on the environment, government services, and fragile infrastructure. Data and technology might have a role in assisting.
The second factor is penetration. China has over 730 million people connected to the Internet, of which 695 million people are on mobile. To put that in perspective, China has more people connected to the Internet than the United States and Europe combined.
The majority of the Chinese population has bypassed the desktop era, ensuring the ease, familiarity and fast uptake of mobile applications. In fact, mobile-first has become the global standard, affording the Chinese a first mover advantage, especially in size and scale.
The third factor is willingness to adapt. The Chinese under-25 Internet segment outnumbers that of the US by 400 per cent. This segment exhibits an insatiable appetite for new mobile services, as early adopters try out new products and services in large numbers. Chinese unders-25s have been synonymous with small-ticket discretionary spending across music, gaming, video and micro-payments. These services are readily available in a single location: WeChat, a platform on which users can socialise, buy items, play games, book restaurants and organise their lives.
Consider that Facebook’s much-vaunted P2P payments through Messenger attracted $US24 billion in payments in the third quarter of 2017. By the Better Than Cash Alliance’s estimate that WeChat users sent around RMB 8.5 trillion through the platform in 2016, that means Facebook’s payments amount to around two per cent of those of WeChat. Facebook can only dream of having that share of consumers’ wallets and revenue on its platform.
Chinese consumers’ willingness to buy, sell and communicate online has enabled Chinese tech firms to scale new products and services, reaching ubiquity and speed and proving the worth of new business models. In turn, that’s created a substantial amount of cash flow, enabling further investment in new ventures, R&D, and fund expansion plans.
Interestingly, data shows Chinese Millennials possess the highest global propensity for home loan purchasing. (See BBC/HSBC chart below). These purchase behaviours, facilitated by low-friction mobile solutions, are returning category leaders large profits and accumulating large amounts of customer data in the process.
Given the spending profile of Chinese Millennials, micropayments and high margin goods, this places China at a competitive advantage. The segment represents 40 per cent of the total Chinese Internet population, perpetuating as they age and continue to earn more.
The Chinese market represents a perfect combination of high population, available Internet access, willingness to experiment and a growing middle class with rising disposable income.
Karim Temsamani, VP Google Asia, highlighted the opportunity for businesses in Asia in a recent Financial Times article:
“Half the world’s population is here and household wealth is set to grow faster than anywhere else over the next 15 years. This is the centre of the world again, and companies that understand the people here and the way they use technology will win in this region.”
That’s an opportunity any company — Chinese or otherwise — would be foolish to pass up.
Now that we’ve established the global and regional contexts, we’ll shift our lens firmly onto the tech leaders in China and America. How are they progressing, and what are the opportunities and challenges ahead?
- Part One: COVER STORY: Introducing The China Digital Playbook
- Part Two: Head To Head: China’s Key Digital Leaders Compared To US Digital Leaders
- Part Three: ‘Comparing Chinese and Western Innovation’
- Part Four: Examining the government’s relationship with innovation in the East and West
- Part Five: China’s evolving treatment of American intellectual property
- Part Six: What can we expect in the years to come?
About the authors
Paul Shetler is Expert in Residence at Stone & Chalk and an adviser to governments and organisations around the world who are transforming their business. He is a speaker on digital transformation and organisational change. Paul was the CEO of the Digital Transformation Office and the Chief Digital Officer of the Australian Government’s Digital Transformation Agency.
With over 20 years of online experience, Marcelo is considered to be one of the most experienced and knowledgeable digital practitioners within the Australian digital space and has recently relocated to Singapore. He is the founder of Digital Transformation Scores, invests in innovative companies and consults to emerging digital businesses across the Asia Pacific.