China is different

Over the last 2 weeks, along with 30 classmates and 2 professors I explored China, visiting Beijing, Shanghai, Hangzhou, Hong Kong and Macao. Our trip was centered around technology so in addition to hiking the Great Wall and eating Chinese delicacies like chicken feet we visited 10 of the biggest Internet companies and Venture Capital investors in China. On average, the Internet companies are only about 10 years old but have an astronomical number of users and huge valuations.

The biggest lesson that I took from our company visits is that business in China is different:

1) Chinese companies do not need to go global-

With a middle class of over 250 million people, more than 300 cities with a population of at least 1 million people, and over 800 million Internet users, China is like nowhere else. The local internet population is still under-served so there is a lot of opportunity to grow and no need for Chinese Internet companies to look outside China! Their focus is on making their products more “sticky” (a term we heard multiple times) and bringing more solutions to their existing Chinese consumers.

2) The big internet companies are so large that they do everything at once-

We observed that as Chinese internet companies grow, their growth does not follow that of internet companies elsewhere and it is difficult to pinpoint what their main business is.  For instance, the food delivery company that we visited called Meituan started off as a coupon website similar to Groupon, but it now also does coupons and restaurant ratings similar to Yelp, food delivery like Grub Hub and it is also a search engine like Google. The stories of Alibaba and Baidu are strikingly similar to this.  Baidu went from a search engine to food delivery. Alibaba has recently gone from e-commerce into the gaming industry.

These companies were able to do this because they typically did not face much competition in their early years and they were able to raise so much capital that when faced with the question of how to expand they looked at different business verticals instead of looking outside China. I also noted that although none of them is profitable and that even though their margins are a fraction of similar US businesses (food delivery margins in China are a tenth of US food delivery companies) they are focused solely on volumes, which I guess is what counts with that population.

China’s market is so big that it stifles its companies looking outside of China.

3) Chinese companies do not have counterparts outside of China-

Contrary to what I had heard before my visit, Alibaba is not the eBay of ChinaJD.com is not the Amazon of China and Didi is not the Uber of China. While the tech may be similar, the details of their operations are completely different to the US and I was impressed to see how much they are innovating and devoting to R&D. They are not just copying from the west.  One company we visited, a subsidiary of Alibaba called Ant Financial has spent close to $250 million developing technology for anti-fraud transactions and is the first company to successfully develop facial recognition and retinal recognition technology that can be used for everyday transactions. They showed us a demonstration and it was effortless!

3.1) This was one example of China becoming a leader in tech advancements especially in Artificial Intelligence. We were informed that close to 50% of all research papers on Artificial Intelligence in 2016 came from Chinese researchers. I am not surprised because in every city that we visited, our tour guide was quick to point out the universities and to mention how many of the top 10 universities in China were in that city. With such a strong talent pool and money at their disposal, Chinese companies are investing heavily in R&D. I left China convinced that Chinese companies will definitely be responsible for a bigger proportion of the technological advancements of the next 10 years.

3.2) China is the real home of BIG DATA.

Before visiting China, I constantly heard of the term ‘Big data’ but until now I did not have a real appreciation for what it is.  The companies that we visited, especially Tencent and JD.com have the real “BIG DATA”.  They are able to collect so much data on their hundreds of millions of unique users from where they eat and shop, how they bank and how they spend on electricity.  To put big data in perspective, Ant Financial the digital finance company that I mentioned earlier, has more than 500 million users, which is almost 10 times the level of the biggest banks in the world. This gives them access to a huge volume of information on default rates, which in turn will allow them to make more informed credit decisions than traditional banks.  Interestingly, my group was curious to know if the government had access to this data but when we asked this question it was intentionally not answered.  Either way, with the size of data available to Chinese Internet companies, it will be fascinating to see if they utilize it to become the leaders in the BIG DATA age.

4) I observed no signs of a slowdown in the Chinese economy.

I had read that the Chinese economy slowed from nearly 8% to 6% growth but I did not see anything like this. That could be because people have become wealthy in such a short space of time. In the last 10 years, GDP per capita has increased from ~$2k to ~$9k. You can see it everywhere with luxury retail brands, the dining out culture, the smartphones and the hundreds of Porsche’s and Audi’s that I have seen people driving. The Chinese middle class is not slowing down and the bottom line of all of the companies that we visited also does not seem to be affected. They continue to invest and are chasing phenomenal growth rates.

5) “There is an entrepreneurial hunger in China like nowhere else.” These were the wise words of the founder of China’s biggest VC, Qining Ventures. He said to us that in the US, there is a lot of innovation but in China there is entrepreneurial hunger, which the Chinese government is fueling by funding and backing early stage startups. It was self-evident everywhere we visited and is a practice that I have read the Nigerian government, is trying to replicate.

Bankole Cardoso ’18

Chazen China Tech/Innovation Study Tour

 

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