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Technology in China: China’s tech trailblazers

Posted by hkarner - 5. August 2016

Date: 04-08-2016
Source: The Economist

GOOGLE left. Facebook is blocked. Amazon is struggling to make headway. And if further proof were needed that China’s tech market is a world apart, this week seemed to provide conclusive evidence. Uber, a ride-hailing service that is the world’s most valuable startup, decided to sell its local unit to Didi Chuxing, a Chinese rival. Its China dream, like those of so many before, is dead.

For many, the lessons of this latest capitulation are clear. China is a sort of technological Galapagos island, a distinct and isolated environment in which local firms flourish. Chinese firms are protected from external competition by government regulation and the Great Firewall. And that protection means that they need not innovate but can thrive by copying business models developed in the West. In short, China is closed, its firms are cosseted and their talent is for mimicry.At first sight, Uber’s retreat appears to fit this damning profile. The startup has ceded China to Didi: it will concentrate on its home market and elsewhere. Uber’s surrender was caused partly by regulations, issued at the end of July by the Chinese authorities, that in effect outlawed subsidies—Uber spent $1 billion a year in incentives to Chinese drivers and riders. Now Didi, whose forerunner firms were founded in 2012, three years after Uber introduced ride-hailing, can make hay. But look more closely and a more positive picture emerges—not just of Didi, but of China’s technology firms as a whole.

Getting the message
The usual story about the isolated nature of the Chinese market is that foreign firms are either blocked altogether or hobbled by regulators. The government has indeed restricted competition in some areas—which is why China has subpar clones of Western firms, such as Baidu in search or Renren, an ailing knock-off of Facebook. But China is not as impenetrable as its critics suggest. WhatsApp, the world’s most popular messaging app, which is owned by Facebook, is freely available in China; yet it is dwarfed by WeChat, China’s leading app (which has also fought off Alibaba, a formidable local internet giant). China is the largest market for Apple’s iPhone. And Uber made a valiant effort to establish itself in China, the world’s largest ride-hailing market: a 17.7% stake in Didi is not a bad consolation prize. Nor are Chinese tech giants walling themselves off from the rest of the world. They have invested in American startups, including Snapchat and Lyft, and bought mobile-gaming firms like Supercell of Finland and Playtika of Israel.

Being present in the Chinese market is all very well, comes the retort, but not if you are stopped from winning. That gives too little credit to China’s tech leaders. Ride-hailing, like many online businesses, is a cut-throat, winner-takes-all market: Didi itself is the product of a 2015 merger of two local firms. Uber was outcompeted. Globally, Uber arranged its billionth ride at the end of 2015, after five years in business; Didi arranged 1.4 billion rides in 2015 alone, just in China. Uber struggled to raise its market share in China above 10%. Didi understood the local culture, integrated better with social-media platforms and got taxi drivers onside by incorporating them into its app from the beginning. In outlawing subsidies, the regulators called time on a fight the American firm had already lost.

Similarly, whatever the settings of the Great Firewall, there is nothing outside China that offers WeChat’s combination of features. It has over 700m monthly users, and combines messaging, voice calls, browsing, gaming and payments. It can be used for everything from paying parking tickets to booking a hospital appointment, ordering food or paying for a cup of coffee. WeChat is not so much an app as an entire mobile operating system, and accounts for more than one-third of all time spent online by Chinese mobile users; HSBC, a bank, values the app at over $80 billion. To Chinese users, Western apps look hopelessly backward.

WeChat is the best riposte to the condescending, widely held belief that Chinese internet firms are merely imitators of Western ones, and cannot innovate themselves. But it is not the only example. Alibaba kick-started Chinese e-commerce with the clever trick of holding payments in escrow, helping buyers and sellers establish trust. It now offers services that exploit its vast customer database, including credit-scoring, digital marketing, and vetting visa applicants and users of dating sites. Didi’s ride-hailing app includes novel features such as on-demand bus services and the option to request a test-drive of a new car. Sina Weibo, the Chinese equivalent of Twitter, has a built-in payments system and supports premium content, both features that Twitter lacks. With revenue from payments, virtual goods and gaming, Chinese internet firms are also much less dependent on online ads than Western rivals.

As a result, the flow of ideas between China and the West is now two-way. Facebook’s efforts to incorporate payments and commerce into its Messenger app are inspired by WeChat, as is Snapchat’s expansion from a messaging app into a media portal, and the sudden enthusiasm of Google, Facebook and Microsoft for bots (smart software that chats with customers). Western consumers are having their experience of the mobile internet shaped by a Chinese success story. Companies that want a glimpse of the future of mobile commerce should look not just to Silicon Valley but also to the other side of the Pacific.

Digital dragons
Policymakers should study China, too. No other place will reveal more about the advantages and drawbacks of winner-takes-all digital markets. As WeChat shows, a single dominant app, particularly with a payments system included, is amazingly convenient for users. But monopolies can also spell danger. Now that Didi has a 90% market share and no serious rivals to speak of, riders can expect to pay more and drivers to be paid less. How to strike the balance between convenience and dominance is the great question for regulators in the digital age. One lesson is already clear: compared with Renren and Baidu, Didi and WeChat were strengthened by fierce rivalries. If China’s tech trailblazers aim to become truly global champions, then competition is their friend. Watch closely, world.

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