These days, China is growing faster than ever and shattering any perception of it as a follower in the process. Although the country grew into a technology powerhouse initially by following the example of the U.S. tech industry, it is now home to four of the world’s ten largest internet and technology companies – Alibaba, Baidu, Tencent, and Xiaomi. What’s even more impressive is that three of those four broke into the global top ten just since 2013. China’s growing economy is increasingly focused on mobile, and the conviction and passion of its leaders are something to be taken seriously. The opportunity is certainly there — the market cap for China’s biggest Internet companies sits at more than $400 billion — the only thing that needs to change is foreign perception of Chinese innovation.
Whatever the stereotypes that have followed around the Chinese economy (fake iPhones, bootleg DVDs, rapidly produced imitations of every popular game on the App Store, etc), these are all background noise to the country’s actual world impact. Perceptions of China as a country that “follows the leader” have been blown out of proportion for a while, and now it is clear that the nation is an innovator that has in many ways defined markets like search, commerce, social, entertainment, and advertising. With surging growth and a huge untapped market both internally and in neighboring Asian countries, China is well positioned to continue innovating within technology and outside of it. The following are a few examples of how China is blazing new trails that the US hasn’t yet approached.
It’s a Really Big Market
To begin with the obvious, China’s consumer market is simply massive, and it’s primed for surging growth. Its urban areas are booming, and despite government worries about unchecked population growth in large cities, some Chinese scholars argue that all but the very largest cities (those with populations under 10 million) have room for growth. If urbanization continues at its current speed, by 2040, one billion Chinese citizens will be living in cities, a rate of urbanization that is unprecedented in history.
Growth in cities drives other growth as well: according to the World Bank, the Chinese economy was 87 percent as large as the US economy in 2011. Since then, China’s economy has grown at a much faster rate than that of the US, averaging about 9 percent growth each year, compared to a US average of 3 percent. Yes, the Chinese economy has slowed from its formerly astronomic pace of over 13 percent a year in the early 90s, and as the economy continues to expand, growth will become more difficult and slow down. But China is still on track to become the world’s largest economy by the end of 2014, and by some estimates, it has already claimed that title. And it won’t be content to maintain current growth levels — it’s increasing investment in research and development activities at a rate of 20 percent a year, reflecting a national commitment to innovation.
With a population of 1.35 billion, there is an enormous opportunity on the horizon as China’s rapid technology growth continues. According to Alibaba’s S-1, there are currently 618 million Internet users in China. A staggering figure, but not even half of the potential the country holds. Digging deeper, there are 500 million Chinese internet users on mobile and 301 million internet shoppers — online shopping makes up 7.9 percent of China’s total consumption. The market is simply huge, and companies like Alibaba are moving fast to capitalize on it with great success — the commerce giant stated on its S-1 that the total gross merchandise volume on its China retail marketplaces currently sits at $248 billion.
China Has the World’s Biggest and Fastest-Growing Mobile Companies
While Xiaomi CEO Lei Jun got his start at Kingsoft, a very similar company to Microsoft, his new smartphone company is now succeeding in its own right. The world’s fastest-growing mobile phone company, Xiaomi, is seeking to put pressure on Apple — not by copying, but by innovating. Already the third-largest phone manufacturer in China and sixth-biggest in the world (according to Canalys), Xiaomi is looking to get bigger. Weekly software updates to its Android-based MIUI platform, often based on user feedback, put bi-annual releases from Apple and Google to shame. And Xiaomi has found success largely through word of mouth and social messaging, selling online only and avoiding traditional marketing and advertising expenditures. Alibaba is next in line for innovation in this field, demonstrating real promise with its YunOS devices. Interestingly enough, Microsoft is trying to play catch-up now by opening stores in China. Is it too late?
China has had the world’s largest smartphone market since 2012, and smartphone sales have grown enormously each year since. China’s 500 million mobile Internet users add up to almost 50 percent more than the entire US population. State-owned China Mobile is the world’s biggest mobile phone company in terms of subscribers and profits, and the company has been displaying a great deal of interest in expanding its brand globally. It recently purchased an 18 percent stake in one of Thailand’s biggest telcos, True Corporation, for $880 million.
China Has More Social Messaging Users Than the US Has People
It’s hard to overstate how important mobile messaging is in China, as most of its top companies have their own messaging services. Tencent created WeChat (called Weixin in China), which has 396 million monthly active users, and also QQ, a social media platform and messaging service popular among young people. Alibaba recently invested $215 million in TangoMe Inc, the Silicon Valley-based startup behind Tango, a popular free video call app. These giants understand the value of messaging and have paid close attention to how their users communicate through mobile.
Tencent’s founder and CEO, Pony Ma, is often portrayed as a follower instead of a leader, even in China. He prefers to let other companies take the initial innovation steps, then quickly moves in to one-up them — or ten-up them, if you will. And you can’t deny he is a smart man: under his leadership, WeChat is flourishing, and its scope has expanded to become far more than a messaging service: it’s also a global social network, a la Facebook, with 100 million registered accounts outside of China. Users report spending up to six hours per day on Weixin, as it’s the nexus of their social and work lives as well as their commerce hub.
China’s social messaging platforms, although less constricting than Sina Weibo, have recently been subject to harsher scrutiny. Tencent recently closed 20 million WeChat accounts and has closed tens of thousands of false accounts associated with promoting slander and spreading rumors.
China Is Ahead on Mobile and Commerce
Mobile commerce users can manage their money, order taxis, and even invest in money market funds, all from their phones. In the US, these kinds of activities aren’t even close to as widespread on mobile.
Alibaba is the ecommerce giant of China, accounting for about 80 percent of China’s retail traffic. Just this month, soon before its potentially huge US IPO, it launched 11 Main, an invitation-only US retail website featuring a huge range of specialty items, from clothing to antiques to flashy bicycles, and one of the first China-led ecommerce plays in the US. And since adding mobile money market fund investment capabilities, Alipay, Alibaba’s third-party payment service, has brought in $89 billion in assets under management in 10 months, making it already a top three global money market fund and proving that it is more than “the PayPal of the East,” instead, it’s a force to be reckoned with in its own right.
This type of success is pushing some analysts to believe that Alibaba’s market cap could soar to multiple of $100 billion by its IPO — this would place it in the top 5 on the US top 10 list, behind only Apple, Google, and Microsoft and ahead of IBM and Facebook. Clearly, they are the key example that innovation is streaming out of China.
Innovation in China Can Be Tough, But It’s Worth It
While it’s generally cheaper for companies to operate in China, both in terms of production and human capital, the actual software engineering and development is much harder. This is because China’s market has evolved much differently than the US did, moving more aggressively into mobile. As a result, China’s ecosystem and its users’ behavior are much more complex than that of the US. On top of the sheer volume of users, their maturity cycle makes for a much more difficult landscape. As a result, it’s generally the case that if you can build a successful product in China, expertly navigating challenges such as extreme localization, you can really build a product anywhere, although go-to-market strategies will differ geographically. That’s why innovating in China is doubly important — it strengthens a company’s ability to operate all over the world.
This gives China a leg up on the US when it comes to technology flow. Now that the country has reached a certain point in its own tech evolution, look for more China-led initiatives to pop up in the US. At this point, it’s really a matter of delivering quality products that continue to push the boundaries of consumer and market expectations. And although the prospect of Chinese government censorship may turn off Westerners interested in China’s expanding social networks and tech services, the siren song of seemingly boundless Chinese innovation, driven largely by the global ambitions of its CEOs, will probably prove difficult to resist. So it may be time for the US to look to China for inspiration — not the other way around.