China’s tech giants take on the FAANGs
Facebook, Apple, Amazon, Netflix and Google – the so-called FAANGs which dominate the global tech landscape – are facing strong competition from China’s major tech companies, as the country pushes to become an ‘innovation nation’.
The success of Facebook, Apple, Amazon, Netflix and Google – given the acronym FAANG by Wall Street due to their collective grip on global markets – has fuelled a stock market rally in the United States over the last few years.
The five tech giants have a total value of $3.25tn. This is more than the United Kingdom’s 100 largest companies combined, more than the companies that comprise Hong Kong’s Hang Seng index, and more than the blue chips listed on Germany’s DAX and France’s CAC 40 put together.
Four of the five FAANGs are mainstays in any list of the world’s ten largest companies by market capitalisation. At top spot, Apple became the first public company in the world to be valued at $1tn in August. Its stock market value is now larger than national economies such as Switzerland and Turkey.
The one omission is Netflix, which is still viewed predominantly as a disruptor rather than a fully established business. Its market value has more than doubled since the start of 2018 – from $83bn to $172bn – making it larger than Disney and the standout success story of the past 12 months.
But anything the US can do, China will try to do better. Its tech giants include Baidu, Alibaba, Tencent and Xiaomi – collectively known as BATX – and they’ve also enticed bullish investors. Tencent and Alibaba are now the world’s sixth and seventh-largest companies, respectively – both nearing $480bn – and their founders, Pony Ma and Jack Ma, among the world’s wealthiest entrepreneurs.
They’re at the top of a burgeoning tech sector in China that’s making major strides in artificial intelligence (AI), games, payment systems, livestreaming, social media, search engines, cloud services and more, as the country looks to transform into an ‘innovation nation’ by 2020.
China’s innovation imperative
Along with e-commerce group JD.com and livestreaming platform Weibo, the BATX companies have consistently outperformed earnings estimates by focusing on subscription fees and merchant commission, rather than relying – like their Western counterparts – on advertising revenues.
More importantly, the BATX also focus on continually refreshing their offerings through innovation. Some of the FAANGs and other tech players in the US, on the other hand, have been criticised for simply building on past successes, rather than being true innovators.
For example, Weibo launched in August 2009, three years after Twitter. Both platforms initially shared similar features, such as the 140-character limit on messages. But while Twitter barely altered its business model, Weibo evolved into a multimedia platform with features that combine those of Twitter with those of Pinterest and Tumblr.
As a result, Weibo has overtaken Twitter – which remains banned in China since it was partly blamed for helping organise a protest in 2009 – both in terms of market influence and user numbers. Last year, Weibo reported that its monthly active users had hit 340 million and market capitalisation had increased to $16.4bn, exceeding Twitter on both counts.
Weibo’s focus on retaining users has also been a draw for advertisers. The company, in which Alibaba holds a 31 per cent stake, saw a 67 per cent rise in total income during 2017, reaching $199m – with 80 per cent of this coming from online advertising. Its net income rose by a staggering 561 per cent to $47m, at a time when Twitter reported a $62m loss.
And its reach has gone beyond China, with two of the most popular sports leagues in the US, the National Football League and National Basketball Association, opening Weibo accounts to capitalise on interest from Chinese sports fans.
Jeanette Chan, regional head of the Communications and Technology Practice at Paul Weiss in Hong Kong, has advised the likes of Microsoft and Tencent on a number of key investments in China. ‘The country’s tech industry has shown the world its capabilities in making innovation better and more global,’ she says. ‘Chinese corporates previously held a negative stigma for their lack of innovation, but new offerings by various Chinese tech giants have [helped] overcome this misconception.’
Tencent’s instant-messaging app WeChat competes with Weibo in China, with increasing numbers of customers spending more time reading news and watching videos on its platform. ‘WeChat is a good example of providing more innovation within the communications space by blending a messenger application with multi features such as payment solutions, social gaming and social media,’ adds Chan.
WeChat blends its social media feature by integrating a user’s profile with status updates and photos to share. Its integrated gaming platform has an app store that allows users to download and launch games within the app and also connects its users socially. Its payment feature allows users to send monetary gifts on special occasions, transfer money and pay bills. ‘This multifaceted messenger system has created an innovative and globalised model for other messaging apps to follow,’ says Chan.
High-tech industries get a boost
With the BATX companies and Weibo outmanoeuvring their US counterparts in China, some industry insiders believe it’s only a matter of time before they replicate their growth story overseas.
Alibaba, for instance, has a web of strategic partnerships and investments in Southeast Asia, and has continued to eye global expansion. In September, for example, Jack Ma visited Russia to formalise a venture with internet company Mail.ru before travelling on to Cape Town to help South African President Cyril Ramaphosa establish a digital training centre to nurture entrepreneurship.
China’s tech giants take on the FAANGs
|Search engine; AI||Baidu – an internet services company that has been ramping up R&D spending on AI. It’s eyeing the autonomous driving market in particular.||Google – officially left the Chinese market in 2010 after refusing to cooperate with government requests to filter results. Recently began opening offices in China and certain services, such as Google Maps, are accessible.|
|E-commerce; payments; cloud||Alibaba – the world’s largest and most valuable retailer also owns financial services company Ant Financial, which is expected to launch an initial public offering.||Amazon – has had trouble competing against Alibaba since entering the Chinese market. Strong competition extends beyond retail, with Alibaba Cloud competing directly with Amazon Web Services.|
|Social; payments; gaming||Tencent – one of the largest tech companies in the world with a wide array of internet and payment services. WeChat has more than 1 billion users worldwide, and WeChat Pay has more than 200 million linked payment accounts.||Facebook – remains blocked in China, but even if it does gain access in the future, it will be competing with very popular domestic platforms such as WeChat, Renren and Weibo.|
|Consumer electronics||Xiaomi – one of China’s top smartphone brands and a major player in smart homes, Internet of Things (IoT) and smart wearables. It sold 92 million smartphones in 2017 – a 75 per cent increase over the previous year. In addition to brisk domestic sales, it makes three of the top-five-selling phones in India.||Apple – once hailed as a major success story in China, Apple has seen its smartphone market share drop to single digits. The Apple Pay mobile payment service is also up against stiff competition from Alibaba’s Alipay and WeChat’s e-wallet.|
Chung Nian Lam, an officer on the Internet Business Subcommittee of the IBA’s Technology Law Committee and partner at WongPartnership in Singapore, says Chinese tech companies have been expanding aggressively into the rest of Asia over the last few years. ‘Alibaba, for example, has made some high-profile acquisitions, such as the South China Morning Post and [e-commerce company] Lazada, and it’s expanding into services such as cloud offerings to compete head on with Western counterparts,’ he says.
‘Other companies such as Xiaomi have expanded aggressively into Southeast Asian markets and India, with an initial wave of budget smartphones, and they’re now moving into other areas such as domestic appliances and other complementary areas,’ adds Lam. ‘Consumer acceptance of Chinese products outside of China is also increasing.’
“Policies have all worked together to effectively enhance China’s development into a technology powerhouse
Regional head of the Communications and Technology Practice, Paul Weiss, Hong Kong
Graham Wladimiroff is Vice President and Assistant General Counsel, Retail Branding and Information Solutions at Avery Dennison in Hong Kong and former Corporate Counsel Forum Liaison Officer for the IBA Asia Pacific Regional Forum. ‘There are undoubtedly entrepreneurs in China that would love to branch out on the global stage,’ he says. ‘But, given China is so large, I suspect that is often seen as a next step to add to the standing of a company, but not as essential for its future development and survival. Success in China will often be the main goal.’
The government in Beijing remains cautious about the global prospects of the country’s tech leaders. In April 2018, China’s continued vulnerability to US tech dominance was highlighted when America banned its own firms from selling to Chinese telco equipment provider ZTE for seven years over a violation of US sanctions on trading with Iran.
The ban, later dropped, threatened thousands of jobs and could have put ZTE out of business. Peter Bullock, an IT partner with King & Wood Mallesons in Hong Kong, says the episode increased calls within China to accelerate its development of core technologies. ‘ZTE was a salutary lesson for China, which wishes to obtain its own core technology but is starting from a long way behind.’
In fact, China’s push to become a tech innovation leader began a few years earlier, in 2015, when the government unveiled Internet Plus, an action plan to integrate the internet with traditional industries. This was subsequently incorporated into Made in China 2025 – an innovative manufacturing strategy that aims to upgrade domestic high-tech industries such as robotics, aerospace and pharmaceuticals.
Momentum for both initiatives has continued under China’s 13th Five-Year Plan, which has set objectives for the country to become an ‘innovation nation’ by 2020 and a ‘world powerhouse of scientific and technological innovation’ by 2050. Municipal governments are playing their part by developing tech hubs in the hope of luring entrepreneurs, researchers and corporations. For example, construction began last year on General Electric’s new $800m biopharmaceutical campus in Guangzhou.
‘The Chinese government has pursued a raft of policies and regulations to create an environment to implement the Internet Plus initiative,’ says Chan. ‘It provides funding through loans and subsidies to support companies focusing on high-tech research, innovation and acquisition of overseas technology. It’s formulated industrial standards for the integration of the internet and traditional industries.
‘Procedures for business registration have been streamlined to reduce market entry barriers to encourage more startups to be formed. And more preferential social security and taxation policies have been rolled out to attract and retain domestic and overseas entrepreneurial professionals.’
The government has also recognised the importance of protecting intellectual property (IP) rights for local innovation. In March 2018, the State Intellectual Property Office was restructured and strengthened in an effort to bolster law enforcement concerning IP rights. ‘Such policies have all worked together to effectively enhance China’s development into a technology powerhouse,’ says Chan.
An economy in transition
Driving government policy is the realisation that China is transitioning to a slower-growing, more consumer-driven economy. The country’s labour force is no longer growing, with ageing expected to reduce the working-age population by 23 per cent by 2050. In addition, returns on heavy capital investment in fixed assets such as housing, infrastructure and industrial capacity is declining.
China tipped to become a world leader
|Biotech||The market for biologics and biosimilars is still in its infancy in China, but it has grown quickly in recent years due to a large domestic market, a favourable regulatory environment and strong government support.|
|Big Data and artificial intelligence||China’s Big Data sector grew by 65 per cent in a single year, reaching a volume of $2.32bn in 2015. This represents 10.7 per cent of the global Big Data market.|
|Internet of Things (IoT)||The IoT is the new mega-trend in China that’s expected to drive demand for technology across the hardware, software, services and infrastructure sectors. The country is already the world’s largest hardware manufacturer and it has a broad internet user base.|
|New energy vehicles (NEVs)||China is now the largest NEV market in the world. In 2015, sales of alternative-powered vehicles in the country rose by 343 per cent over the previous year to 331,000 vehicles.|
|Nuclear power||Based on installed nuclear capacity, China is not the world’s largest nuclear power producer, but its planned nuclear projects will make it the world leader in this area. Its ambitious nuclear energy generation plan calls for a doubling of capacity by 2020.|
China’s debt situation, which exceeds debt-to-GDP ratios in both the US and Germany, is also constraining investment. According to consulting firm McKinsey & Company, innovation needs to contribute up to half of GDP growth by 2025, or $3tn to $5tn in value per year.
This explains why Beijing has invested so much in the nascent technology known as 5G. According to a recent report by Deloitte, China is leading the race to be ready for ‘fifth generation’ mobile internet ahead of Japan, South Korea and the US. A combination of proactive government policies and industry momentum has seen China outspend the US by $24bn since 2015 on early 5G trials. This includes building 350,000 new cell phone tower sites, compared to 30,000 in the US.
According to telecom research firm Recon Analytics, when the US won the race to 4G earlier this decade, it boosted the country’s GDP by nearly $100bn, as well as spurring an 84 per cent increase in wireless-related jobs, whereas Europe and Japan lost out.
The unique attributes of China’s market help its companies accelerate experimentation and learning, enabling the rapid commercialisation of new ideas. For example, while Apple prides itself on its patience to wait until a product is great before going to market, and not using customers as a ‘laboratory’, Chinese consumers facilitate innovation by accepting 1.0 versions of products before providing feedback that helps companies refine their offerings.
‘Chinese consumers have seen so much change over the past 30 years that past conservative traits, if they existed, have probably been banished,’ says Bullock. ‘They are very forward looking. Because access to international offerings is often restricted, they may give greater credence to what is available locally, not realising that Western consumers will generally receive more mature offerings.’
What matters is execution, product quality, speed and data. This is where China comes in
Former President, Google China
According to the Harvard Business Review, the ability of Chinese companies to conduct rapid prototyping and shorten the time for new product introductions sets them apart from the more time-consuming process to do the same in the West.
In addition, China is one of the world’s top digital retail markets, with consumers who are extremely willing to buy products online. ‘This allows for more convenient and efficient feedback, which helps companies refine their offerings effectively,’ says Chan. ‘China’s rising middle class also results in a larger domestic market that distinguishes the country’s innovation strategy from that of the US.’
Creativity or constraint?
Prominent venture capitalist, tech innovator and former President of Google China, Kai-Fu Lee, said in a recent Ted Talk: ‘Now is the era of implementation, and what matters is execution, product quality, speed and data. This is where China comes in.’
But other commentators point to the potential problems that China could face in its drive to become a global innovation powerhouse. In particular, the overflow of money into the country’s tech scene from both the government and the private sector, where Alibaba and Tencent compete ferociously for acquisitions, has the potential to hurt innovation in the country – as startups bypass the research and development (R&D) phase in favour of a quick sale.
Chan says that even if tech startups are not always successful, they’ll still enjoy the advantages that come with China’s unique market and state relationship. ‘The vast amount of data produced by Chinese digital companies can be used to advance machine learning and AI research. Economists also predict that the government will loosen its policies on banks, making loans easier to obtain. This could help innovation grow in China, even though some startups do not succeed.’
It remains hard to predict how markets and innovation will develop in China due to its unique mix of culture, state-led developments and sheer size. As with everything else in the country, the role of government should not be underestimated.
‘We’ve seen in other parts of the world that government can facilitate innovation, but ultimately innovation needs space, creativity and many other ingredients to thrive,’ says Wladimiroff. ‘While Beijing will understand this, ultimately “control” is hardwired in the system. Will private companies in China be given enough freedom to innovate?’
Stephen Mulrenan is a freelance journalist. He can be contacted at firstname.lastname@example.org