China’s Technology Industry Amid the China-U.S. Trade Conflict (3/4)
A Summary of the China-U.S. Trade War and the Impact to China’s Manufacturing, Technology and Service Industry (3/4)
The first stage that almost all successful tech companies in China goes through is: Copying. All of the tech companies we have visited this time in China, had in some way took a similar product in the U.S. and adapted it to China. Sina was built after Yahoo reached a critical mass of users. Sina’s most profitable subsidiary Weibo was built after Twitter had shown signs of success. Baidu was copied after google, Alibaba built after Amazon, etc… Yet interestingly, whenever there had been a battle between a local competitor and a foreign competitor, the winner almost always been the local competitor. In a conversation hosted by the Wharton Faculty, the wife of Robin Li of Baidu posed the question to the room “Name one U.S. technology company which has succeeded in China.” to which the entire room stayed silent.
Local Chinese Tech Companies have three strategic advantages:
First an understanding of Chinese norms and values which were not fully comprehended by foreign competitors. For example, early on, companies such eBay lost to Alibaba’s C2C competitor Taobao because Taobao knew the customers better. Chinese customers were not used to bidding for product and desired instead to have direct interactions with the seller. So while eBay was spending a majority of their efforts in simulating the bidding system, Taobao was working on increasing trust between the seller and buyer through features such as online messaging and linking the user’s phone numbers. Similar examples of local competitors understanding the norms in China were rampant in this period as seen in historical rivalries between Sina vs Yahoo, Baidu vs Google etc. Local companies in China simply understood the target market better and were able to better customize their product to the customer’s needs.
Second, in the past decade, the government has strategically used policies to pave an easier path for local companies. China’s stringent control on content released on social media has confused and stumbled foreign companies entering China. Local companies who understood the regulations better, and who often received the information sooner because of local connections could more quickly react to these policies.
Thirdly, China’s population and market is large enough on its own. China has an estimate of 800 million internet users compared to 290 Million internet users in the US. Any good idea in the US, will have double or triple the impact in China. Any company who targets China has an inherent target base of 1.4 Billion potential customers.
Yet, because of these constant defeats, foreign companies have pushed back, especially against the favorable regulations provided by the Chinese government to local competitors. This view that China was hindering the free flow of market capitalism is also central as a cause for the current trade tensions and conflict.
However, for Tech companies, once the adaptation stage is completed, the next step will be the innovation stage. Unless these companies can reach this juncture, China will very unlikely transition to a superpower that can truly rival the United States.
In the newest Five Year Plan released in 2016, one of the top priorities for China was to “Ensure Innovation in Science and Technology Takes a Leading Role”. Some of the key areas noted in the plan that China would focus on were big data, robotics, healthcare, material science research etc. These leading tech giants, with the government’s backing, have already been taking steps to innovate and develop their own technologies. Baidu for example, through a series of R&D and acquisition, have developed an autonomous vehicle, completely open source, that is planning to rival that of Waymo and other competitors. When asked what their strategic advantage was, the Vice President of Investments He Junjie noted that at the end of the day, because they are located in China with 1.4 billion people, they will be able to gather more data than any other competitor. In this industry, the company that owns the most data will be able to make the best decisions, develop the safest cars and eventually become the market player with the best technology.
Other companies are doing the same, Huawei, the most notable of the Chinese tech companies has been pushing development in their 5G capabilities with great resistance from the foreign powers. According to an article by the Washington Post, more than 200 Million dollars worth of subsidies have been provided by the Chinese government to help Huawei in 2018, angering U.S. and other tech giants as China is using the budget of an entire nation’s to support one companies industry research. This fundamentally negates the rules of free-market capitalism. This is especially pertinent as many hypothesize 5G technology to be the foundation for future interconnectivity, and a head start or advantage in this field could be very impactful.
As a result, Trump blacklisted Huawei, banned any telecom equipment sales of American goods to Huawei unless accompanied with a license, and accused Huawei of seeking to undermine U.S. national security and foreign policy interest. Such a move raised huge red flags in China and U.S.’s relationship, signaling the declining trust between the two world super powers.. If Huawei wanted to continue to grow, it must cut its reliance from U.S. and foreign suppliers, in favor of building its technological capability from the ground up.
In addition to Huawei, Wechat pay/Alipay, Baidu’s voice recognition system, the Bike Sharing System of Mobike are all a part of China’s continued push to expand and grow Chinese innovation and technology, to elevate China’s economic ability. As China grows more technologically advance, the questions is if the relationship will find a peaceful ending through the trade conflict or only exacerbate, leading to individual secluded markets to the detriment of both economies.
Next, we look at how the trade tensions between China and U.S. has affected the Service Industry.
Sidenote: Above is mostly describing the past difficulties of internet companies, whereas hardware companies such as Apple is very different. Additionally, one unique software company that did succeed was Microsoft. Microsoft took a very different strategy. Unlike most who feared IP theft, Bill Gates embraced it in the beginning of the launch of Microsoft into China and quickly flooded the Chinese market with pirated copies of Microsoft Office Applications. After everybody had started to use it religiously, he then gradually started to pull in the reins and charge people for those products. Bill Gates explained that he knew if people started to use it, and were acquainted with it, they wouldn’t be able to stop. Even to this day, Chinese companies still use a majority of Microsoft products.
