China Tech in a nutshell

or Silicon Valley on steroids

Summary of our high-level learnings from 31 meetings with Chinese entrepreneurs, tech companies and other players in the ecosystem:

  • The Chinese Tech market is insanely competitive.
    (2 mentioned the competition as “game of thrones like”). It goes as far as uninstalling competitor apps automatically, blocking access to competitive sites etc
  • There is a serious “money burning game” going on.
    This could be referred to as “Silicon Valley on steroids” with the aim to grab market share and be the winner before running out of money. We were told about some companies (especially in O2O — Offline-to-Online, i.e. delivery, car cleaning etc) that are running on -90% ROI on variable marketing spend.
  • This in turn leads to a consolidation of main competitors forced by their respective investors to “stop the bleeding”.
    The irrationale marketing spend between #1 and #2 in each market results in mega mergers forced by investors, the most recent ones being: Didi&Kuaidi (like Uber), Meituan&Dienping (like Foursquare+Groupon+Yelp, ca. $20bn value), CTrip & Qunar (like Expedia+Priceline, ca. $15bn value). FT article here
  • The overall tech market is dominated by BAT (Baidu, Alibaba, Tencent).
    Historically the situation was as follows:
    Baidu = search like Google,
    Tencent = social/games like Facebook+WhatsApp+King,
    Alibaba = payments + e-commerce like Paypal + Ebay + Amazon. Common opinion nowadays is that Tencent is strongest given their dominating position with users through QQ and WeChat. Baidu seems to have slightly lost their ground with the rise of mobile. Xiaomi (hardware like Apple + x) was often mentioned as a possible 4th big player and thus Chinese tech becoming BATX.
  • Nearly all successful startups receive investment by one or several of the BATX companies.
    This often leads to fierce competition, such as Tencent excluding Uber (a Baidu investment) from WeChat (simply saying: “Sorry, we cannot take you to this link”).
  • BATX are building products in all large and lucrative areas of tech.
    Whilst they all have a historical flagship category (see above), they are now all entering every possible field to compete with each other for market share. Be it by developing own products (i.e., Tencent’s TenPay challenging Alibaba’s AliPay) or by investing/acquiring growth companies (i.e. Alibaba’s acquisition of Youku like Youtube).
  • WeChat is clearly the most significant & successful mobile tech product in China.
    WeChat is winning big time and might put Tencent in a dominating, access controlling position for all kinds of verticals. They show metrics that are unheard of for a less than 5 year old product (500M DAU), their unique growth hacking strategy (red envelopes on Chinese New Year) enabled them to have over 100 million verified bank accounts and the enormous time spent on the platform (social feed is refreshed an average of 400 times / day) ensure their dominant position. We also met with new start-ups building their entire product on the WeChat platform alone.
  • WeChat combines some of the most powerful Western software in a mobile-first way.
    It is a powerful combination of messaging (WhatsApp), business collaboration (Slack), newsfeed (Facebook), small real-world payments at scale (Apple Pay), games app store with proprietary games, CRM of businesses (Facebook pages/E-Mail Marketing), peer-to-peer payments (Splitwise), official government communication & heavily integrated with the offline world through QR code scans (use cases ranging from ordering in the restaurant to waiting lists for appointments).
    Further reads: http://chinachannel.co/wechat-life-report-october-2015/ and http://a16z.com/2015/08/06/wechat-china-mobile-first/
  • Xiaomi produces & sells some of the most powerful Western hardware at a price point that is 2–3x below the original
    Whilst some may see Xiaomi as a clone of Apple, the company is actually much more than that. Their hardware portfolio comprises Smartphones & Tablets (Apple), TVs (Samsung), Fitness Wearables (Jawbone/Fitbit), Headphones (Beats), Smart Home Tech (Nest), Cameras (GoPro), Segways (they bought Segway) — all closely imitating the original design and being produced locally at a significant cost advantage. However, they have also built their proprietary OS (based on Android, but look & feel more like iOS) including their own AppStore, Cloud Services etc. In addition, they are highly skilled at e-commerce and amongst the Top5 Chinese e-Commerce sites — after all, their founder founded joyo.com which became Amazon China. Interestingly enough, with everything looking like Apple, the one thing they changed was to have promotions and flash sales like Alibaba — innovation where it matters most in China.
Xiaomi Store in Beijing
  • 99% of business models are clearly revenue growth driven.
    There is very little acknowledgment of strategic value or start-ups without a clear business model. We believe that the mission of Chinese companies is simple: grow your revenues and grow them fast. This leads to very flexible business models and new products being developed wherever the opportunity seems biggest.
  • Cloning is happening everywhere and perfectly ok.
    Once a product is successful, immediately clones will try copying it and they are good at it. They will absolutely get venture funding with lots of access to capital at all stages (albeit the public market’s cooldown).
  • Games are the major revenue and profit driver on mobile.
    Games are widely positively regarded and used by all tech companies to monetize their user base. To achieve success in games, a mix of acquisition, licensing and in-house development is used. The hit-driven nature of the Games business is mitigated by copying or buying proven games and scaling over the existing user base.
  • Work culture is significantly harder than in Europe or US.
    With 8000 FTE, at 5-year old Xiaomi, standard working hours are 10–10 and used to be 6 days a week. We heard the following: when working for themselves, the Chinese work 24 hours/7 days per week. When working for other visionary entrepreneurs, it is 10 hours/6 days per week (Xiaomi example). When working for others in general, it is 5 hours/5 days per week for the company AND 5 hours/5 days per week for their own ideas & projects.

We are grateful to all our partners in Beijing who were extremely kind and inviting, displaying hospitality beyond our highest expectations.

P.s. Apologies for any factual inaccuracies in advance, this is 100% our personal opinion and observations