8 reasons why China is the most fascinating tech market in the world

Eric Feng
Eric Feng
Aug 8, 2018 · 11 min read

“The Fourth Industrial Revolution is unfolding at an exponential rather than a linear pace.”

China President Xi Jinping

I lived in Beijing from 2004 to 2007. It was the first time I had ever set foot in China and it turned out to be one of the most interesting experiences of my life. Personally, I biked through the Olympic village as it was being built, trekked to Mount Everest base camp, ran the Beijing marathon, competed in a nationally televised reality cooking show, and learned an entire karaoke repertoire of Chinese pop songs. Professionally, I built products under the tutelage of Microsoft Research Asia, taught a graduate class at Tsinghua University, started an online video company, and witnessed firsthand China’s greatest economic growth period of the past twenty years, the engine powering all progress in China.

The below chart shows China’s annual GDP growth percentage since the late 1990s. As you can see, the period from 2004 to 2007 was an economic rocket ship, with China’s GDP growth rate increasing consistently each year, which translates to exponential growth in overall GDP. The GDP growth peaked at an astounding 15% rate in 2007. The last time the US had annual GDP growth over 15% was 40 years ago in 1978. China’s economy was simply on fire.

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I moved back to the US at the end of 2007, feeling lucky in my timing to have been on the ground for China’s peak economic boom. But turns out, my timing was wrong. Turns out, China was just getting started.


清单体 (or Chinese for “listicle”)

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(1) China has the largest middle class in the world

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The echo of the economic boom has created the largest middle class in the world in China. And here’s why that matters to people all around the world: that growing Chinese middle class spent over $260 billion overseas last year, more than any other nation, yet only 5% of its citizens have a passport! Chinese consumers are set to reshape markets domestically and abroad.

(2) Cross border e-commerce is growing faster than domestic e-commerce

So even if they don’t plan to ever have a presence in China, businesses around the world should be thinking about the Chinese consumer.

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(3) E-commerce goes real world

So where are the new growth markets that commerce giants like Alibaba and JD.com, masters of the digital world, are looking at? They are back in the physical world. 2 years ago, Alibaba’s CEO Jack Ma coined the term “new retail” and the entire industry has been pushing online experiences into offline locations ever since. Alibaba has already opened 46 of their own grocery stores, under the brand Hema, across 13 cities. This year, they are averaging a new store opening every 6 days. Not to be outdone, JD.com recently opened its first grocery store in Beijing, called 7Fresh, with dozens more set to launch. And they’ve partnered with franchisees to open more than a thousand convenience stores, some of them fully automated with no staff required, and have set a staggering goal of launching 1,000 new stores per day by year end. Not only is physical retail not going away in China, it’s more strategically important than ever.

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(4) Big opportunities in small cities

Chinese companies have historically targeted the major metropolitans, known as Tier 1 and Tier 2 cities. But the rural areas, known as Tier 3 and Tier 4 cities, have experienced tremendous growth in population, Internet penetration, and most importantly disposable income, which is up more than 36% the past 5 years. Goldman Sachs estimates that rural cities will account for 71% of new online shoppers over the next few years. Pinduoduo has capitalized on this trend brilliantly with nearly two thirds of its customers coming from rural cities. More companies will surely follow.

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(5) There’s an entire new Internet inside WeChat

Tencent is projecting that 400 million users will be using WeChat mini programs every single day by the end of this year, across every category imaginable supported by a rich ecosystem of service providers. For example, 60% of Pinduoduo’s users already access the service through their mini program.

Through unique features of their mini programs, WeChat has totally nailed 3 of the toughest challenges of building an app:

  • Onboarding. Everyone is already logged in and uniquely identifiable which makes onboarding easy.
  • Distribution. Users have full access to their WeChat contacts to share content, including the entire mini app.
  • Payments. Users can immediately purchase through WeChat Pay with no additional setup.

The programs may by mini, but their impact will not be.

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(6) To B-AT, or not to B-AT; That is the question

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How can that be? Well from the very beginning, Alibaba has blocked Baidu from indexing its shopping content and kept that proprietary to Alibaba’s own search service and monetized that traffic itself. Contrast that with Google, who captures over 75% of all retail shopping search ad revenue. That’s a significant chunk of revenue enjoyed by the leading US search engine (Google) that the leading China search engine (Baidu) does not have access to. As e-commerce ad revenue continues to outpace general search ad revenue, Baidu’s own revenues will likely erode.

So while the A (Alibaba) and the T (Tencent) are stronger than ever in the BAT lineup, the B (Baidu) is facing an uncertain future. Does that mean we may soon see TAT (Toutiao Alibaba Tencent), DAT (Didi Alibaba Tencent), MAT (Meituan Alibaba Tencent) or some other grouping? Time will tell.

(7) China is skipping past the rest of the world in payments and AI

We’re witnessing two platform skips right now in China around payments and computing that are particularly interesting because the skip is not just to the latest solution from the US or other established market. Instead, the skip is to solutions more advanced than anything the rest of the world has. The skip is straight to the front of the pack.

For payments, China is in the midst of skipping credit cards as the dominant payment platform and jumping straight to mobile payments (namely Alipay and WeChat Pay). Mobile payments in China is already a $16 trillion dollar market, or approximately 100 times bigger than the US. To illustrate the prevalence of mobile payments, I was in Beijing last week and picked a restaurant that clearly stated they accepted credit cards. However when it was time to pay, I had to wait 15 minutes because their credit card reader had run out of batteries from lack of use. China isn’t about to skip credit cards, and therefore the US, in payment technology. It’s already happened.

For computing, mature markets still primarily rely on computer assisted tasks where a computer supports a human, who is the decision maker. However China is in the midst of skipping this computer assisted model and jumping straight to Artificial Intelligence driven decisions. China’s President Xi Jinping has set a goal of making China the global leader in artificial intelligence by 2030. Part of it is out of necessity as serving the sheer size of China’s population requires intelligent automation with throughput far beyond manual, human efforts. But part of it is also opportunistic as the impact of China’s AI economy is expected to be worth hundreds of billions of dollars. Judging by the pace of fundamental AI research going on in China, where they are now publishing more papers than any other country in the world, China looks to be well on their way towards another platform skip.

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(8) The golden age of China startups is upon us

In the chart below, I’ve queried Crunchbase for consumer and enterprise China unicorns (consumer or enterprise startups that have achieved a billion dollar valuation) since 2005 and plotted them by their founding date. One thing to note is that you have to ignore 2014 onwards because companies take time to mature and grow in value so there will obviously be fewer unicorns in recent years. However the up-and-to-the-right trend from 2007 to 2014 is clear. There has been increasingly more breakout startups in China, both in consumer and enterprise, since 2007. The echo of the economic boom in China’s GDP from 2004 to 2007 has created the raw ingredients for great startups to emerge now, and emerge they have.

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Epilogue

“Google decides to return to China, we are very confident we can just player-kill and win again”

Robin Li, CEO of Baidu

Imagine for a moment that the Chinese government welcomed all US tech companies into the market with open arms and a level playing field. What would happen?

Ecommerce companies would be dealing with a Chinese incumbent who on their busiest shopping day last year (November 11, 2017) delivered a package only 12 minutes after it was ordered, and is investing $16 billion to create a logistics network that can deliver any package in the country within 1 day. Social networking and communication companies would be dealing with a Chinese incumbent that has 83% mobile penetration in China, and can be used for everything from chatting with your friends to paying your utility bills. The China Search incumbent has 70% market share, the China Ride Sharing incumbent completed 7.5 billion rides last year, the China On demand Delivery incumbent averaged 18 million daily orders. These numbers aren’t just impressive for companies in China — they are some of the most eye popping, impressive business metrics for any company in the world.

On August 1, it was widely reported that Google was planning on re-entering the China market with a censored version of its search engine, codenamed Dragonfly. Google had previously operated in China until 2010, when it withdrew due to ethical concerns around censorship. Just a week earlier on July 25, Facebook was briefly granted a license to open its first subsidiary in the Zhejiang province, only to have that license rescinded after a few hours. Amazon has struggled to find success in China with less than 2% e-commerce market share, but has continued to aggressively recruit in the country with hundreds of job openings. If at first you don’t succeed, try again right? It’s clear that the China market opportunity is too big and important for these US tech giants to ignore, but will they ever be successful in China?

That’s yet another question that will continue to make China fascinating for years to come.

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