How China's tech titans could conquer Silicon Valley

Alibaba, Tencent and Huawei have gone from copycats to innovators worthy of Google, Facebook and Amazon.

by Adam Gale
Last Updated: 15 Nov 2016

Here’s a test of your global business knowledge. Without cheating, list as many American companies as you can in one minute.

Being Management Today readers, you’ll no doubt reach at least forty, and probably only stop because you get bored. Now try it for Chinese companies.

Not so easy, is it?

Despite there being 103 Chinese businesses in the world’s top 500 (compared to 134 American and 22 British), precious few of them have much of a name in the west, either because they don’t do much business here or because they haven’t quite got the knack of branding yet.

The chances are that the Chinese companies you did name were tech firms. Alibaba, Tencent, Huawei, Lenovo, JD, Xiaomi, Baidu and Didi Chuxing have all made waves, first as copycats of the great American tech giants and more lately as potential rivals.

So how much do Google, Amazon, Facebook and Apple have to fear from the East? Could their epoch-defining brilliance really be under threat after a mere decade at the top?

The Chinese are coming

In terms of pure numbers, the writing’s on the wall – and it’s in Mandarin. The Chinese are getting into tech in a big way. Take the rapidly expanding, $194bn global digital advertising market, on which Google and Facebook have built their fortunes. The trio of Baidu, Alibaba and Tencent (BAT) accounted for 12.1% of the global market between them in 2015, according to eMarketer. By 2020 their total is expected to be 18.1%.

Chinese firms are also gaining ground in the smartphone wars. The combined global market share of Apple and Samsung dropped from 42% in 2015 Q2 to 33% only one year later, according to Counterpoint Research, while the Chinese big 5 (Huawei, Oppo, Vivo, Xiaomi and ZTE) grew from 17.7% to 28.5%.

In ecommerce, China is already the world’s biggest market, with $899bn sold online every year compared to America’s $397bn. By 2020 eMarketer predicts it will be worth $2.4tn – four times what it will be in the US and comfortably more than the next twenty countries combined.

Silicon Valley’s finest have had scant luck penetrating this exploding behemoth. If you’re being diplomatic, you’d say this was because the American firms just didn’t put in the effort to understand the Chinese market, not realising until it was too late that crushing local competition wouldn’t be as easy as it was elsewhere.

If you come from the Donald Trump school of diplomacy, you’d say it was because the Chinese state deliberately protected or at least favoured its fledgling firms – while simultaneously nourishing them with industrial espionage to help them catch up in technology.

Either way, the all-conquering West Coast giants have all met their match on China’s Pacific shores. eBay and Amazon.cn failed to thrive, the latter reportedly because Jeff Bezos refused to invest in advertising in its early stages, believing erroneously that word of mouth would do the trick as it had done everywhere else.

Google and Facebook were both banned by a Chinese state suspicious of foreign interference with its population’s political views. Only Apple has made real headway, though even it is now suffering a sales decline there as local rivals catch up technologically.

The battle for international markets

Big deal, you may say. So the western tech companies have failed to crack China, but we’re not exactly seeing people in Manhattan, Rio de Janeiro, Berlin or Bangkok using Baidu instead of Google, are we? So what if Chinese firms capture China, if California’s finest conquer the world?

In tech, though, nothing stands forever. Eventually the vast Chinese market will slow down and its companies will need to look for expansion elsewhere. A global war between Amazon and Alibaba, Google and Baidu, Apple and Huawei and Facebook and Tencent seems inevitable.

Indeed, there are already signs it has begun. Huawei is leading China’s mobile makers to great success in emerging markets like India, while you’ll already see Xiaomi models on sale in American malls. Alibaba recently bought  southeast-Asian ecommerce businesse Lazada as it attempts to ramp up cross-border trade, while Tencent has acquired an impressive portfolio among western online game developers, including full ownership of Riot Games and a majority stake in Supercell.

The Chinese are coming. But do they have what it takes to topple Silicon Valley’s finest?

The East is Innovative

It’s obvious that China’s tech firms are technologically innovative. Alibaba, for instance, is able to process and dispatch over four times the number of packages that Amazon does, while Tencent’s WeChat app had payment features well before Facebook’s Messenger.

What’s more worrying for the Silicon Valley giants is not China’s technological innovation, which is to be expected from such a highly educated, rapidly developing economy, but rather how they function as organisations.

In the west, we hear a lot of business buzzwords. Agility. Employee engagement. Inspirational leadership. The entrepreneurial mindset. A diverse and inclusive workforce. It is taken as a given that the organisations that display these characteristics will generally perform better than those that do not – and nobody does them better than Google and the gang.

Because of these things they’re amazing places to work – they get the best out of the best people, informing their strategies with the best ideas, rigorously and rapidly supported by data. It’s a winning combination, and we tend to assume therefore that the west coast giants are not only our most innovative but also among our best run firms.

Surely here is an area in which the Chinese upstarts will struggle to catch up? This is a country, after all, where private firms only became legal 30 years ago, and where most business people over the age of 50 got their management training in the monolithic communist bureaucracy or in the Red Army.

However, many of the rising Chinese tech firms are characterised by a distinctly 21st century, unbureaucratic way of doing things. Look at JD.com. It’s the closest thing China has to Amazon – an electronics-turned-everything online retailer that owns its warehouses and inventory (unlike Alibaba which is famously asset-light).

JD’s founder Richard Liu is just as customer obsessed as his counterpart Bezos (whose business he has explicitly stated he wants to overtake as the number one global ecommerce firm) going so far as to spend a full day every year as one of JD’s red-uniformed delivery drivers to get close to them.

 He’s also got a very liberal view when it comes to employees, announcing in 2011 his intention to send all director level executives on an MBA the following year, all expenses paid, no strings attached.

‘Some might say: isn’t it silly? Are you paying to cultivate the talents of others? This is not silly! Aren’t we always talking about being grateful? Being grateful is not only about good pay,’ Liu said, as quoted in the JD.com story. ‘We also hope our colleagues can raise their personal careers... and competence to a higher level after several years’ work with JD. What’s the big deal if they leave?’

Those words would be more at home in Cupertino or the Googleplex than Beijing’s Great Hall of the People.

It would be a mistake to think such attitudes and cultures are ubiquitous, says David de Cremer, professor at the Judge Business School in Cambridge. He’s the co-author of a book about another surprisingly innovative Chinese giant, called Huawei: Leadership, Culture and Connectivity.

‘Most Chinese companies have always had the mindset of a manufacturing economy: produce more and you’ll earn more, and quality isn’t that important. Huawei has had customer centricity from the beginning onwards,’ de Cremer says.

Aside from its customer focus, Huawei is in many respects most notable because of its partnership model (employees own 98.6% of the company, sharing profits much as John Lewis does) and unusual practice of rotating CEOs every six months.

De Cremer believes that founder Ren Zhengfei wanted to keep the company private precisely so it could experiment with its business model and with organisational quirks like the rotating CEO. ‘I call him an intellectual architect... he hates the idea that the company will become complacent or arrogant.’

Too good to be true?

Substantial resources? Check. Technological prowess? Check. Drive? Check. Enlightened management? Check. China’s tech giants – if not its legion of monolithic state owned entities – have all the ingredients to take on their western rivals.  

Or, at least, they seem to.

The trouble with China is that it remains very difficult in the west to separate the hyperbole from the truth. Most books on the subject are slavishly positive to the point of being hagiographies. (The JD.com story, for instance, is littered with sentences like ‘his plain spoken message, enlightening and inspiring, once again boosted employee morale’. While there's a lot of interesting anecdotes in there, after 50 pages I'd given up trying to find anything remotely critical.)

Without that degree of public scrutiny, it remains hard to know. Every business talks about how it’s becoming agile or disruptive or ‘promoting an ownership mentality’ among employees. The proof will be in the pudding.

All we do know is that they’ve been very successful so far, but that so too have the Silicon Valley giants they seek to emulate. It would seem foolish to underestimate firms like Facebook and Google that have conquered (most of) the world in a decade.

Besides, ultimately it may not even be market competition that determines the victor in the global tech wars. The Chinese companies’ alliance with the Communist Party is utterly necessary for their survival (even in the case of Huawei, which obtains most of its revenues abroad), and it’s an uneasy one. And with Trump in the White House, the political climate abroad may not be much better. Time will tell. 

Image credit: UNClimateChange

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