China is the top 3 in terms of Digital and Technology investment and also represents the biggest e-commerce market in the world with nearly 40% of the total e-commerce transaction in the world. China is home to a third of unicorns around the world.
The quick adaptation of Chinese Internet users has allowed e-commerce to grow considerably in the last fifteen years. This is also due to the appearance of mobile payment (from Tencent “Wechat” and Alibaba « Alipay”).
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280 Millions Digital Natives in China
This ability to adapt is also the source of the strong competition in the Chinese digital market. The core of web users are digital native, which is close to 280 million in China, which represents almost the total number of web users in the United States. These digital native are born within the digital era and grew up with these developments but are more importantly they are passionate about the digital world and contributes to its active evolution in China.
One of the characteristics of the Chinese web user population is that 1 out of 5 netizens use the internet only via their smartphone and moreover 68% of netizens use mobile payment. A unique figure when we see the difficulties encountered by the US and European markets to implement this type of payment system.
BAT Baidu Alibaba and Tencent
In 2016, the BAT group represented a total of 42% of the venture capital investments for China; while the US group : Facebook, Amazon, Netflix and Google (FANG) is accounted for only 5% of venture capital investments in the United States.
Digital in China
So how did this digital ecosystem develop in China? Who are the main actors and how was it constituted? These are the questions we will answer in this article.
The structure of the Chinese digital ecosystem is based on three main players, Baidu, Alibaba and Tencent. These three behemoths of the Chinese economy are also known by the acronym “BAT”. These are the three companies that have managed to build an empire around digital development and technological innovation to serve their users.
The Fight for Dominate the Ecosystem
Unlike Western companies like Google, Amazon, etc; these Chinese companies are literally building an ecosystem around their core business. That means that instead of focusing on the development of a single product / service they will very soon start investing in other business governing the daily lives of their Internet users while innovating ( mobile payment / deliveries / new entertainment platform / …)
The objective of this type of development is obviously to create a form of union between the core enterprise, and the companies that have been developed around this core enterprise allowing to increase the strength and influence of the group that these companies form. Moreover, the strength of these groups is that by investing in businesses other than their core one, they provide a more effective rule out of competition.
That’s why more and more platforms are trying to connect with a large group to gain visibility and accessibility for users (e-commerce platforms will be tied to Tencent for example by accepting Wechat payment).
Conversely, as mentioned above, Western companies value the development of a single business / product. And if some companies acquire new entities (like Facebook acquired Instagram) this is in order to enhance and develop the initial business of the company rather than seeking to extend the range of services / product offered to the user.
Governement and the Chinese Ecosystem
The role of the government is also very important, unlike the western economies that does not dare to take risks for the development of digital structures, the Chinese government allows time for innovation and invests in new innovative entities. The government is also currently creating an infrastructure to develop and invest in digitization.
Chinese are Addicted to Internet
Netizens are also an important reason why the development of the Chinese ecosystem is so important and so effective. Indeed, the Chinese are much more active on social networks and digital platforms than their Western counterparts. Moreover, the Chinese are “active” users who interact with the content, while the Westerners are more « passive”. 66.8% of netizens are between 20 and 49 years old which gives them the ability to be active on the networks but also to have the means to consume on e-commerce platforms for example. It is these features that have allowed the development of many e-commerce
Chinese digital companies in order to develop their business will try to gain ground in areas that are different from their trades in order to “encompass” the needs of the users and to be active on all the fields of the daily activity of this user, being able to have a digital solution to meet all his needs. This is done in particular by the so-called “super apps” that are mainly offered by Tencent and Alibaba through Wechat and Alipay that provide access to services related to education, health (as the monitoring of the person’s sporting activity, or medical monitoring for example), entertainment (games, videos, shopping), or even for practical life (train tickets / airplanes), etc. On Wechat it is possible to find 40 feature on the super app (in 2017) and 90 on Alipay. These applications do not only meet the needs of users, one of the main advantages is that they can collect data on each of the users and thus allow to improve the performance on the outputs of new
Tech Startups in China
As China is home to a large number of startups, the innovation dynamic is very powerful because the competition is very strong, to increase in size, BAT groups often invest in promising startups, always with the aim of covering more ground. See other news about Chinese Startups
To protect this development, these Chinese companies will tend to directly cut the links between their companies and competition. Meaning that from their platform to a competing platform links will not be able to work since it will be blocked by the starting platform (as when Wechat blocked access to Taobao via links that would have been shared on Wechat for example).
Western companies have sometimes used similar protection techniques, blocking access to a platform via a link. However for the rest, companies like Facebook, Amazon tend to defend their trades, and ensure that no competition comes encroach on their field. In contrast to the Chinese who invest and seek to win the field of competition.
For the efficiency of the strategies, if it is possible to have access to the results of the acquisition of instagram by facebook in term of ROI, it is more difficult to give an idea of the results for the Chinese groups since the investments are made in several different entities, with different structures and size.
In addition, the companies previously operating only in China (BAT) is growing more and more across borders by investing in entities abroad, particularly in developed economies and digital sectors. Through these investments, China seeks to be at the forefront of technological advances and innovation in the field. Beyond that, companies are actively involved in mergers and acquisitions (video games, telecommunication, e-commerce, …) abroad for the same purpose of development.
Apart from these large groups, other Chinese digital companies are developing very effectively abroad, for example with the application TikTok (formerly musical.ly or Douyin in Chinese) allowing the creation of creative video with effects and music that has very good market in Europe and especially in the United States with nearly 150 million active users daily in 2018).
THE FUTURE OF DIGITAL INNOVATION IN CHINA
BAT groups are now well established in China and are continually expanding abroad. Each group is now involved in the funding of unicorns and companies that are actively developing to potentially be the future digital leaders of China.
These Chinese actors are gradually developing their ecosystem, like the Xiaomi brand for example, which originally only sells phones, but is now diversifying into other areas related to lifestyle, such as computers, then rice cooking machines, cameras, electric scooters, air purifiers, etc.
Or another exemple could be : NetEase (a Chinese company whose portal 163.com is particularly popular in China) which is developing to form its own digital network. To grow in the market, NetEase invests particularly in software, video games and online video platform. The brand succeeds more and more in particular in the entertainment by signing a partnership with Disney to create new « Super Heroes » characters whose adventures will be available on the NetEase platform.
With Kaola, netease is taking great market shares on the crossborder Market in China.
E-Commerce in China
Chinese groups are now leaders in terms of e-commerce and customer-oriented digital services, however they tend to have a slight delay in terms of technological and digital development oriented production that will improve efficiency in different areas. The gap between China and other nations is not large, however, and is narrowing rapidly. China (like many other nations) has vastly digitized sectors such as information and communication technologies, media, and so on. However, government sectors have also been at the heart of digitization issues as well as industries related to the production of consumer goods as well as in public services (such as smart meters installed in Chinese homes).
The government can also continue to act in the direction of digital development. This means continuing to invest heavily in this area that will allow the digital bubble to develop. The government can promote the dynamics of competition with digitalisation and innovation to push companies to develop new projects to improve contact, productivity, efficiency in all sectors. The government must monitor the fluctuation of the labor market during digital disruption. All these missions testify to the key role that the government has to play in the years to come as digitization gains ground.
Digital Services at the national level.
Further development of the digital ecosystem in China should be facilitated by the accessibility of digital products at the national level. In fact, first, the Chinese labor force is still pretty accessible, plus China has the hand on the rare earths (these are mineral materials with properties used in the manufacture of high-tech hybrids, LEDs, screens, photovoltaic panels, wind turbines, etc.) concentrated mainly in Africa and partly in Chinese territory (among others). Through its partnership and cooperation in Africa, as well as the One Belt One Road initiative linking China with a shipping route in Africa. Rare earths are easily accessible for China and promise to facilitate the development of future businesses and future digital oriented products. The creation of these low cost products has already contributed in the past to the meteoric rise of China: especially with the production of smartphone accessible with Chinese brands like Huawei, Oppo, Xiaomi who offer smartphones between 100 and 300 euros. Thus the smartphone accessible to a large part of the population, the rise of digital services could begin.
THE KINGDOM OF E-COMMERCE
Thanks to this easy access to mobiles and technology, e-commerce in China has developed rapidly. And because applications such as Wechat have developed into an “all in one” application to combine several Western applications (Facebook, Google, Uber, Booking, Paypal, Games, Tinder, and more thanks to the appearance of mini-program WeChat ) in the same platform, the phones have become the extension of the arms of Chinese people.
Applications evolve and take in hand the life of all the Chinese users and pushed them in a unique digital ecosystem, the cash has almost disappeared from the daily life due to the mobile payment (whereas in France it is still possible to pay with checks!).
QR codes now allow you to do almost anything, pay, find information, order food at restaurants, etc. And e-commerce applications like Tmall, Taobao, Alibaba have taken advantage of this technology by bringing new innovations to their platform: augmented reality on store displays, red envelopes (chinese hong bao) to win discounts, etc. The development of O2O strategy (Online to offline) has also enabled e-commerce to rise while maintaining physical retail spaces.
Influencers are powerful
Key Opinion Leaders (KOL) have also contributed to this growth, gaining visibility and sharing their life with their community, these people become influential and self-employed by creating a Wechat shop (via mini program) or working directly with brands to become ambassadors and promoting their products. These influencers help generate commitment to consumers and build loyalty. Or, they can also bring attention to a product in the shadow. They allow the development of digital strategy especially on social networks. They use Wechat but also streaming platforms (extremely popular trend in China) such as: Meipai, Momo, YY.com, etc.
E-commerce is developing within China but also internationally, and the government has set up exchange zones specializing in cross-border e-commerce (35 selected cities). The logistics and administrative system at the customs is simplified and thus allows for a faster and therefore more efficient system.
All this is built around the belief that China is the heart of e-commerce and wants to remain the leader in this field while bringing innovations and new technologies to get the best of it.
China pushes the limits and goes further in terms of innovation while seeking to gain influence on a global scale. Already well advanced in sectors such as e-commerce and customer services, the future will bring its share of challenge to push China to new areas.
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