The Chinese Internet Story

Chinese firms were seldom thought of being anything apart from copies of their western counterparts. The snobbish inhabitants of Silicon Valley never thought that these companies would amount to much. However, the reality has become very different.

China today has about 25% of the world’s unicorns i.e. tech startups with a valuation greater than $1 billion! This is remarkable given that China is a closed economy and the internet users face censorship and high regulation.

China is only second to the United States in terms of the number of unicorns, and some of these unicorns are galloping ahead threatening the supremacy of their western counterparts. In this article, we will understand the Chinese internet story in more detail.

Some of China’s Top Internet Firms

Few people outside China know and use the services of these firms. It is therefore surprising to know the scale at which these companies have grown in a relatively short period.

• Alibaba is the number one e-commerce player in China. The number of users that Alibaba has is larger than the users of both Amazon and eBay combined. Alibaba wanted to reach 2 billion users in the next decade!

• Hong Kong listed Tencent Holdings is not a small player either! It owns WeChat i.e. one of the most widely used messaging apps in China. The valuation of this giant firm is over $100 billion! Tenpay is another product created by Tencent Holdings which is gaining a lot of traction. It is said to be amongst the best digital payment platforms available in China.

• Baidu is the Chinese equivalent of Google. This firm quickly expanded into the Chinese market after Google left over regulatory and censorship concerns.

  The firm has been losing ground in the mobile internet business. However, it is effectively using mergers and acquisitions to grow inorganically. The $1.9 billion acquisition of 91 wireless is the most expensive acquisition China’s internet market has ever seen.

• Didi i.e. the Chinese equivalent of Uber has recently been valued at $50 billion. This is astounding because Uber’s valuation is derived from its global business whereas Didi only operates in China!

  Why are Chinese Firms so Successful in China ?

  One peculiar thing about Chinese internet firms is that their business is limited to China. Unlike other global internet firms, their business does not cross international borders. Some of the major reasons for this are as follows:

  • Huge Market: The Chinese market itself if huge. China has 731 million Internet users. That is the largest number for anywhere in the world.

    Last year itself, the Chinese market grew by 6.2% and added 43 million users. That number is bigger than the entire population of Ukraine. These firms have a long way to tap the untapped potential of the Chinese market itself. There is no reason that they must change their business models to cater a more global audience.

  • Negligible Competition: Chinese market is extremely regulated. There is a copious amount of censorship and government intervention. For this reason, foreign firms do not enter China in full force.

    Chinese companies, therefore, face negligible competition from any outside firm. A large market along with negligible competition translates into good business within China.

  • Unlimited Capital: Contrary to popular belief, the Chinese internet companies are not funded by Chinese investors.

    Instead, they are funded by the same investors who fund companies in Silicon Valley viz. venture capital and private equity firms. Therefore there is no lack of capital for these firms. This is the reason why these firms can scale up really quickly.

  Challenges Faced Outside China

  The big Chinese firms like Tencent and Alibaba have not been able to make much of a splash outside China. The reasons for that are as follows:

  • Negative Branding: The Internet has a huge connection with privacy. If people are not comfortable about how their privacy details will be used, they will not use the internet. This is where Chinese companies get a bad name.

    Western consumers believe that Chinese companies are mostly state owned. Hence, they believe that their personal data is at risk with such corporations. This gives Chinese firms a negative branding. Instead of leveraging their own brand name, Chinese firms have to partner up with local firms when they enter other markets.

  • Difficult Competition: Chinese internet firms have excelled in an era of no competition. However, the global market has cut throat competition.

    Chinese firms do not have the wherewithal to beat global competitors like Google, Apple, and Uber. Hence, to avoid loss of money and reputation, Chinese companies stay in China.

  • Political Intolerance: China has a communist regime. This regime is intolerant towards the viewpoint of any other nation.

    China has disputed borders with other nations. However, a map company in China was forced to label all disputed territories as being Chinese. This is the reason Chinese companies do not want to expand to other markets. They will not be able to appease all political parties involved. Hence, the smarter thing to do is to stay in China and pledge loyalty only to one nation.

  To sum it up, Chinese companies have a long way to go before they reach market saturation and then have to look to other countries to ensure that the growth story continues unabated!