Generation 40s – 四十世代

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Well connected: The growing reach of China’s internet sector

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South China Morning Post
Comment›Insight & Opinion
2016-01-04

Edward Tse and Matthias Hendrichs

Edward Tse and Matthias Hendrichs say 2016 will be a year of further expansion for China’s internet and tech businesses, both at home and abroad

Wuzhen, a small town in Zhejiang (浙江) province, became the centre of global attention when it hosted the second World Internet Conference last month. The theme was “An interconnected world shared and governed by all: building a cyberspace community of shared destiny”. More than 2,000 participants joined the event. Among them were President Xi Jinping (習近平) and other heads of state, prominent local internet business leaders and leaders of major foreign internet companies such as Brian Chesky (Airbnb), Jimmy Wales (Wikipedia) and Reed Hastings (Netflix). The conference included discussions on a range of topics, from global internet governance, cyber security and the internet industry as the engine of economic growth, to social development, technological innovation and philosophy of the internet.

Xi gave the keynote speech, underlining the growing importance of the internet industry for China. He set out his vision of “cyber sovereignty”, urging the international community to support a “multilateral” approach to the governance of a shared future cyberspace, while also emphasising the need for all nations to join hands in fighting internet surveillance and cyberattacks.

Alibaba’s Jack Ma pointed out that the internet has drastically changed almost every aspect of people’s lives in China and that the potential for internet entrepreneurs to incubate more innovative business models and breakthrough technologies is limitless.

Other Chinese internet leaders expressed their optimism about artificial intelligence, virtual reality and the Internet of Things. Baidu exhibited its prototype of a self-driving car. Its CEO, Robin Li, believes such cars will be commonplace in three to five years. Tencent aspires to build platforms that connect people with other people, products and services. CEO Pony Ma believes the internet can “help unlock the full potential of public services” such as health care and education by eliminating inefficiencies and lowering costs. Jia Yueting, CEO of LeTV, a fast-growing company which started as a content provider over the internet, talked about his vision of creating “lifestyle ecosystems” for consumers.

China’s internet industry saw strong growth in 2015. The number of users reached 670 million, with mobile users accounting for close to 90 per cent. Purchases from mobile phones account for around half of all Chinese e-commerce retail sales. Last year also marked a series of market consolidations, including mergers between mobility service providers Tencent’s Didi and Alibaba’s Kuaidi; classified advertising websites 58.com and Ganji.com; group-buying website Meituan and local review platform Dianping.com; as well as online travel agency platforms Ctrip and Qunar.

Leading Chinese internet companies took further steps to “go out” to the rest of the world. Alibaba hired former Goldman Sachs executive J. Michael Evans to help make it a major player in the US. Recently, it opened offices in Munich and Paris to expand its European operations.

To take on Uber in markets outside China, Didi Chuxing has invested in Lyft, Uber’s main rival in the US, India’s top car-hailing app Ola, and Singapore-based GrabTaxi. Guided by former Google executive Hugo Barra, smartphone company Xiaomi is expanding in India, Brazil and Indonesia. And LeTV is funding a US$1 billion investment in Nevada to build an electric vehicle manufacturing plant, saying it wants to take on Tesla.

On the other hand, more foreign tech companies are looking to China as an essential part of their global plans. December saw Apple and Samsung each reaching agreements with UnionPay to bring their payment systems to China. Google may follow with AndroidPay. That news came after Uber announced a US$1 billion China push, LinkedIn took its total number of China users past the 10 million mark and Airbnb secured US$1.5 billion for its China expansion plans.

This year should see the growth of China’s internet industry accelerate further. Lower-tier cities and rural markets will become the next frontier. Online retail sales in China’s rural markets are expected to reach 460 billion yuan (HK$ 549 billion) this year, nearly three times higher than in 2014, according to Ali Research. Beijing is also investing heavily in internet infrastructure, spending US$182 billion over three years to extend the country’s broadband and 4G network reach to almost every part of the country.

Issues such as the “Great Firewall”, media censorship, inadequate intellectual property and data privacy protection continue to present challenges for both foreign and domestic firms to grow their internet businesses in China. These issues will continue to be tension points between China and other countries, especially the US. Successful Chinese entrepreneurs will continue to take advantage of imperfections in Chinese society to identify new opportunities and build innovative solutions that address rapidly evolving consumer preferences and needs.

The World Internet Conference showed that Beijing sees the internet as a national priority; China can play a leading global role. Some observers have ridiculed, rightly or wrongly, China’s proclamation of a “world conference” given its censorship practises. Regardless, the government seems determined to move forward and it is trying to align with the private sector to continue building a thriving internet sector and use it to drive innovation and entrepreneurship in China.

In this context, Chinese entrepreneurs are developing a wide range of innovative ideas, and seem in general much more confident and outward-looking. In their attempts to build ecosystems, some Chinese tech companies will end up collaborating with others, while others may compete head-on. More foreign tech companies would like to enter – or re-enter – the Chinese market, given its huge size. Some will seek to collaborate with Chinese firms. At the same time, more Chinese tech companies and investors will seek partnerships or investment opportunities outside China, especially in Silicon Valley or Israel, creating a web of relationships unseen before. There will probably be more consolidation, through mergers and acquisitions, as well as the emergence of new entrepreneurial companies. This year, expect more excitement from China’s internet sector, which will increase its relevance on the world stage.

Edward Tse is founder and CEO, and Matthias Hendrichs is managing director, of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. Dr Tse is author of China’s Disruptors

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