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. Read the first and second installments here.
When Uber first came to China, it tried to replicate the same things that had made it a breakaway success in America, right down to using Google Maps — despite it being inaccurate in China — and insisting on credit card payment — even though credit cards aren’t popular in China.
It took Uber a while to realise that that the Chinese tech market isn’t what we see in the West, just transplanted into a different country. It’s a sector with a fundamentally different complexion, with different strategies and plays suited to consumers’ differing needs.
We’ll review the differences in best digital practice between China and the West, comparing strategies in five areas: payments; mobile, including mobile gaming; asset-backed securities; cloud and AI; and electric vehicles.
Across this broad range of products, the lesson is clear and consistent: the best practices expected of Chinese innovators differ substantially from those of their Western counterparts.
Like savings products, mobile payments provide financial services players with revenue, large customer bases, and a growth engine to up-sell and cross-sell future products.
Twitter and Facebook have been late to the party in integrating payments products into their services; Apple is rushing quickly towards catching up, unveiling a peer to peer payments system just last month. By contrast, the Chinese approach has out-foxed its adversaries, and achieved the scale and acceptance necessary to winning the payments space.
Tencent and Alibaba took the opportunity to become, by early accounts, global leaders, as the graph below indicates.
Given its access to millions of customers, Alibaba has cunningly invested in its financial services arm, Ant Financial, carving out a fantastic opportunity across financial services, namely payments and the high-margin loans sectors – personal and home.
According to some Chinese reports, AliPay was able to achieve ubiquity by deploying a low-cost labour force to physically sign up merchants.
That was a masterstroke — it allowed AliPay to quickly acquire scale by offering a frictionless system with on-boarding on the spot.
Not to be outdone, Tencent is also riding the payments wave, introducing payments to its social media platform, WeChat. The results have been phenomenal, to say the least: on some measures, WeChat payments are growing even faster than the WeChat messaging service itself.
Led by Alibaba and Tencent, the Chinese mobile payments system has established itself as world best practice. For users, it offers a true omni-channel infrastructure, integrating seamless online and offline customer experience, underpinned by the standard use of QR codes and offering 2-3 factor mobile device security.
From the perspectives of the companies rolling out these platforms, there’s the possibility of an immense long-run payoff. Once those companies’ dominance in the market has been established, it’ll be difficult to dislodge, because of the strong network effects attached to payments systems.
As the first movers, they set up rapidly scalable platforms that allowed them to grab huge market share. Since making a payment to someone relies on a ‘double coincidence of platforms’ — the buyer’s preferred method of payment needs to coincide with the seller’s — it will be challenging for new entrants to disrupt the strong grip the BATXs have on this market.
US companies, on the other hand, rely on merchants to self-select payment systems at their own pace and discretion. North America continues to operate a fragmented payments system, as start-ups, established credit schemes and issuing banks all wrestle for consumers’ hearts and minds (wallets). Differing solutions across website and mobile risk adding further complexity, and creating inconsistency in users’ experiences.
The achievements of Chinese innovators in the mobile payments space highlights their forward-thinking and smart tactics. Strategically, it again demonstrates Chinese companies’ ability to own multiple layers of the value chain.
And there’s still plenty further to come. By one estimate, mobile payments make up only 12 per cent of total payments in China, with online, cash and credit card payments making up the balance.
Financial services and lending
More generally, the financial sector has proven a tough playing field for Western start-ups. The sector is highly-regulated, and consumers base their decisions strongly on trust — both difficult barriers for new entrants to overcome. Just in April, ACCC Chairman Rod Sims of the impact of fintech that “There has been a lot of talk, but not much really happening”.
The contrast in China could not be more stark. Alibaba is now firmly entrenched in the asset-based lending sector, funded by investors and offering loans back to consumers at around 14 per cent per annum. A company related to Alibaba, Mybank, offers loans of up to 5 million yuan (around $805,000), without any need for collateral at all. Another e-commerce competitor, JD.com, has also entered the market, and is offering similar loans.
Many Western investors would baulk at the possibility of offering loans with such little backing. Very real questions remain about the risk profiling that Alibaba and JD.com are able to carry out. But the companies say that they, with the wealth of e-commerce data they’ve captured, they’re well-positioned to understand their customers intimately.
In the US this high-margin market is valued at $2 trillion and makes for an interesting battle as Alibaba scales up its efforts in China and other foreign markets.
Cloud, data AI — knowledge is power
As The Economist has said, data is the new oil. The volume of data has exploded, and will continue to do so as long as humans congregate on the Internet, the world’s biggest data-generating machine — ever.
That means that digital players — both in private enterprise, and in government — are relying on new computing grunt to capture the opportunity with which the new era of data collection has presented them.
Think of cloud computing as the fine-tuned car engine, and AI as the wily Formula One driver, who’s spent many years perfecting their craft through countless laps and circuits.
It’s a technical combination that has already hugely impacted society in the last five years, and is likely to continue to do so.
The cloud computing market is projected to increase from $67B in 2015 to $162B in 2020, and Gartner predicts that the worldwide public cloud services market will grow 18 per cent this year alone.
Google and Amazon have realised that the future is data-driven — that’s why their point of difference is increasingly becoming bundling AI and analytics with cloud computing solutions for large enterprises.
Cloud computing continues to be dominated by a small number of large US firms, with Amazon the clear leader at this stage. Given the company’s clear dominance, and its wealth of investment in research into the future of cloud technology,
Alibaba’s promises of a catch-up by 2020 seem overstated. In this area, it seems that American innovation continues to lead the world.
At the same time, the margin between American and China in the counterpart technology to cloud — AI — has narrowed considerably.
According to a recent Goldman Sachs report, the US leads in AI, with China not far behind. Just as Google’s Alphabet is working on driverless cars, there’s an equivalent being produced by Baidu, which, as part of its “Project Apollo” — an open source platform for driverless cars — has announced its aim to release fully autonomous vehicles by 2020.
Just last month, a group of Chinese researchers tested the IQs of various AI solutions. The results indicate in clear terms the future path of AI development. Though Google’s product came in first place, the next three most impressive performances were the results of Chinese firms, and Alibaba has announced a $15B research and development investment in AI across the Middle East, Asia, Austria, Israel and the US.
The Chinese Government has also announced its intention to become the global AI leader by 2030. Traditionally, the government has discouraged foreign tech companies from setting up in China, but it’s been willing to ‘Open up the Hanfu’ to allow Amazon and Google back into China to collaborate on AI development. In fact, as of last month, Amazon had over 900 rules advertised on LinkedIn for AI roles in China.
The Chinese Government knows as well as anyone else are how high the stakes are, and has proven itself willing to act accordingly.
At the same time, China, is upending the automotive industry. Over the last 10 years, China has firmly established itself as the world’s largest car market. The chart below highlights the scale and growth of the Chinese market, compared to the flattening US trend line.
China recently announced its intention to eradicate fossil-fueled cars, standing side by side with the Dutch Government, which aims to end the sales of fossil fuel cars by 2025.
That coincides with China’s ambition to be the world’s electric car leader. Electric vehicles currently make up 1.4 per cent of total car sales, but the Chinese Government plans to increase this to 30 per cent by 2030, by investing over $15B in electric power stations while offering consumers up to $9,000 to switch to electric cars. Tesla, along with GM, Volkswagen, Volvo and Nissan, are rushing towards the lucrative opportunity.
The cumulative effect of these policies is that China now represents half of the world’s electric car production.
Despite its history as one of the world’s most polluting countries, China is taking decisive action towards environmental protection, and its tech community is reaping the rewards.
By early reports, these reforms are taken seriously by the Chinese government. The New York Times recently reported that, by 2020, China would have invested over $15B in electric power stations, enabling the infrastructure to make the consumer transition between petrol and electric power somewhat seamless.
“It’s the world leader in total renewable energy… and looking to spend $360B by 2020 on renewable energy, and have half of its commercial buildings certified as green.” (Source: Morgan Stanley)
The US, by contrast, has pulled out of the Paris Climate Accord, and continues to view coal as a sustainable power source into the future. As part of its current agenda of tax reform, the American government is considering removing the $7,500 electric car tax credit, further deprioritizing the electric car opportunity and issue of climate change.
Is the US cutting off its nose to spite its face? Will they inevitably miss out on a burgeoning electric car market? The country’s early response towards foreign companies transferring technology IP to the Chinese seems lazy and not well-considered. The majority of the auto companies are already trading with China and are well aware of the potential risks.
To that end, China seems confident it can dominate the electric market whilst committing to environmental reform.
The gaming sector provides strong recurring revenue streams to Chinese start-ups, while also establishing another asset: the collection of rich, transactional datasets. This combination makes for a fascinating battlefield, putting traditional console players against the fasting growing segment, mobile gaming. The mobile gaming segment is undergoing rapid expansion, growing 19 per cent year-on-year.
Tencent has been able to gain the ascendancy over Chinese and American competitors because of its strong access to users, through the social media platform WeChat. The image below highlights the pronounced lead WeChat has achieved.
If its lead maintains itself, Tencent stands to make over $16B in 2017 from the global gaming market. To put it into perspective, that’s the size of the entire Australian advertising market.
As Business Insider has said, “With such a massive lead, it’s unlikely American companies or others will be able to catch up to the powerhouse anytime soon.”
WeChat has even made itself the gatekeeper of app competition for many Chinese mobile users. The app acts as the go-to location for app discovery, over and above its own ecosystem, making it the ‘App Store’ of China. Tencent’s owner, WeChat, carefully monitors which apps are made available, and invests in the third party apps they greenlight onto their platform.
About the authors
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.
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.