China’s phenomenal growth over the last decades was underpinned by the cementing of its place as the world’s factory in the late 1990s and 2000s, but recently it has also become one of the world’s leaders on the technology front. This digital charge has been most visibly led by three conglomerates, Baidu, Ali Baba and Tencent, commonly referred to as BAT. BAT’s market capitalization is now comparable with the American tech giants.
China’s thriving digital landscape is underpinned by:
A high proportion (53%) of the population already online, resulting in over 500 million potential customers.
Extensive 4G networks across the country providing consumers with better online mobile experiences which in turn has led to the proliferation of mobile internet usage across video, music, shopping and social media. Chinese consumers spend 3 hours per day online on average, making digital platforms an ideal place to capture their attention.
Chinese consumers are building the habit of paying for physical and digital goods by mobile payment, driving the ecommerce market to become the largest in the world by revenue.
However, China is a notoriously hard market to crack and the flourishing digital space comes with its own sets of challenges. These include:
An ambiguous and fluid regulatory environment in which laws are purposefully left open to interpretation in order to leave the government room to take action if and when it sees fit. The common responses are for established players to err on the side of caution to avoid potentially large fines while emerging players with little to lose push the envelope in hopes of making it big.
Beyond the uncertain regulatory frameworks, geopolitics must also be seriously considered given China’s emerging dominance on the global scene, often putting it on a collision course with other world powers and their allies. South Korean companies, for example, were practically stopped in their tracks after South Korea agreed to the deployment of US missile systems in its sovereign territory.
When a new sector picks up traction and signs point to a nation-wide market opportunity, the dizzying revenue potential often leads to a mad dash of entrants with seemingly endless flows of funding behind them. However, “here today gone tomorrow” fads are common place in this rapidly evolving market which can result in wasted time and investment by those looking to partner, invest in or enter the space. The live streaming video market is a prime example which saw massive growth in new entrants and funding in 2015 and 2016 but then abruptly experienced a contraction in the face of new regulations which immediately dried up funding impacting new entrants and causing many existing players to fold. The image below shows the extensive number of existing players across online video verticals at the end of 2017. Who will still be around at the end of 2018 is difficult to say outside the top 5-10 major players.
The high consolidation of market power between BAT means that these companies are essentially the gateways to Chinese digital consumers and therefore need to be part of any digital plan. While they leverage significant power, the fierce competition between them also means they will be open to negotiating fair terms with the right partners to one up their rivals. The complication is that through complex and extensive shareholdings, these players have related entities across key digital sectors (as highlighted in the graphic below), so a major partnership with a player in one area may lead to closed doors in other areas where the competitors are the better partners. Therefore, any deal making with BAT needs to take a wide and long-term view to partner selection and deal terms.
Often cited risk of piracy in China is present but receding. This is due to several factors: major Chinese players have been publicly listed and are as such under increased public scrutiny; and increased competition is driving the major players to innovate and create their own IP which, understandably, they are keen to protect.
In summary, the opportunities in China are well publicised but international players need to identify and address significant challenges to achieve business success in the digital space.