Outlook 2019: The China POV
How the four trends from our Outlook report are playing out in China’s unique digital ecosystem
By Lin Liu (Chief Strategy Officer, UM China)
Editor’s note: this is a special regional POV that dissects the four technology and media trends from our Outlook 2019 report. We’ll have more POVs coming up from each of the key global regions, so be sure to check back in the following weeks.
Unlike the public criticism the Big Four tech companies (Google, Apple, Facebook, Amazon) have endured in the West, China’s dominant players, namely Alibaba and Tencent, continue to enjoy public support. People applaud the strong innovations that bring tangible benefits, while self-regulation on privacy protection and fraud prevention have endeared them to consumers.
2019: Unintended Consequences
And, unlike their Western peers, who tend to be vertical players, the leading Chinese internet companies are bent on creating complete ecosystems or conglomerates. For example, they don’t stop at social or search, but want to deliver food and sell you products, resulting in fierce competition among big players in every vertical of business. It’s not just consumers who are enjoying the benefit of constant price wars and service innovations. Moreover, the companies are also kept on their best behavior out of fear that any misconduct by them will be exposed by their rivals.
The exception is Baidu. Long pestered by the decline of the importance of search and already suffering a poor reputation, Baidu search results now prioritize content created inside its own ecosystem, often yielding flagrantly fake news. The search giant has been struggling with a strategy for sustained success and was shamed by its detractors and the government for “killing search” in China. In its defense, Baidu argues that as the internet goes mobile, apps will operate as islands of information, making fair searches impossible.
In its criticism of Baidu, the government’s media outlet also voiced its concerns over the “land grab” by all internet companies. Despite that, it’s unlikely we’ll see the Big Three play in the same sandbox any time soon. As a highly mobile, e-commerce savvy nation, China simply has too much data that can easily be used to profile individuals. Executive and AI expert Kai Fu Lee has called China “the Saudi Arabia of Data”. Effectively regulating how consumer data gets exchanged and ensuring the strict anonymity of data in commercial usage is just too daunting a task. Before tech tools and laws can be effectively deployed, the government is likely to tolerate the division of data among different players, which, while appearing to be untapped productivity, could also mean smaller risks of massive abuse of data in the wrong hands.
The internet companies that took a real hit in 2018 are China’s once shiny unicorns: Didi, Ofo, and Mobike. Two murders committed by Didi drivers and one by a passenger have invited the public and the government to scrutinize the management of the company. Just as critical is the fact that two years after Didi “killed” Uber, it still hasn’t found a strategy to be successful as a service or as a business. Ofo and Mobike, the bike sharing duo, once credited for being “China’s fifth-greatest invention,” must now confront the moment of truth: There’s no profitable business model behind the business. Mobike found a graceful way out, but Ofo is still mired in the public outcry over its slow handling of members’ deposits. This is the moment to reflect upon whether admired innovations are rooted in genuine consumer needs, or just investors’ needs for fast returns.
Unbundling Search & Social
We are now close to witnessing the end of search in China as Baidu gives up on its core service. Its neutrality is now under question, mobile apps and voice search are siphoning off a significant amount of search and more searches are happening inside ecommerce platforms. In its place, influence by content and peers is subtly shaping consumers’ decisions.
Content marketing has boomed in China. HFP, a skincare brand, has, in two years, built itself into a one billion RMB brand, relying solely on social content. One of the most celebrated comedy shows in China, Roast (吐槽大会), integrates brand propositions seamlessly into its searing jokes. Celebrities are now used more as sales channels than as vehicles of brand image.
Community-based influence networks are also becoming huge. Little Red, a product review site, has become one of the most effective platforms for reaching young women, and PinDuoDuo has become a leading ecommerce player thanks to its “team purchase” model, leveraging the social power of its users to lower the cost of acquiring users.
On the social front, WeChat remains loved by Chinese consumers, and its new deployment of microprograms is likely to further cement its dominance. The brand’s nearly militant insistence on great user experience and protection of consumer data has paid off. There are challengers — Bytedance’s video-based SNS for example — but they are a long way from toppling WeChat.
Media Have and Have-Nots
The joke has become that to tip a performer during a live streaming session now represents “paying for intellectual property.” More Chinese consumers are paying for content today, yet more likely in entertainment than journalism. Often, it doesn’t give them access to better content, only better access to the same content: more of it, sooner, more interactive, with less advertising (but never no advertising).
The order forbidding VPN use is carried out more regularly than before, effectively ensuring that few could be exposed to differing point of views from the outside, although quality entertainment can still be accessed thanks to piracy. On the other hand, Bytedance (owner of TikTok and Topbuzz), known for its superior algorithms, can also target the audience with more specific recommendations of content, over time reinforcing the preferences of the target groups.
Ironically, being better off also means that affluent consumers release more data points — browsing data as well as shopping, usage, and payment data. Chinese consumers continue to place trust in bigger corporations, which prompted Baidu’s Robin Li to comment that they were willing to trade privacy for convenience. He is partially right on the lack of urgency behind this issue, yet Chinese consumers aren’t without pain points either: as many as 1.5 million people are engaged in the illegal data trade, and the victims tend to be the most vulnerable members of society. In February 2019, China’s National Information Security and Standardization Technology Committee released “Personal Information Security Act” for feedback, showing its will for stronger regulation on personal data privacy. The social agenda around privacy protection is taking shape, and consumers are likely to pay closer attention in the future.
Every Brand is a Lifestyle Brand
While the big internet players must acquire scale very fast just to survive in China, in the retail world we are seeing a breed of “small and beautiful” brands emerging with focus and momentum. Forming refreshing narratives around the founders’ vision, these brands combine innovative offerings with an intuitive understanding of the audience, and highly satisfying store experiences with cross-category offerings.
The best example is Beast, which started out as a high-end online florist shop, but has expanded into a buyer’s shop for high-end design items, with both online and retail presence. Founded in 2011, Beast first gained praise for its inspired artistic floral arrangements. As the founder, Amber Dong, evolved into an arbitrator of great taste with a devoted fan base, its product offerings expanded to include home deco, fashion accessories, clothing and fragrance. Today, online and offline stores together create a modern luxury experience for its shoppers.
Another case in point: Shanghai-based brand, 73 Hours Shoes, with the slogan “Live to the fullest and leave the rest to heaven.” Frustrated by both the lack of choices in good shoes at a reasonable price point, and by the fact that even luxury brands don’t make shoes that fit Asian women’s slightly wider feet, Amy Zhao, stepped up. A popular ex-TV show host from Shanghai, she founded the brand, which offers well-made, trendy designs at slightly below $200. She has designed the in-store experience to be a moment of pampering, offering sparkling wine to her guests. In her latest flagship shop, a customer can also come in for a full makeover, from hair styling to make up to manicure. In 2018, Ms. Zhao added a younger line, Too Many Shoes, and a make-up brand called Fat Amy to the mix. Her core business remains shoes, yet the addition of other products and services help her fans experience her vision, which they eagerly embrace to the fullest. The brand became a hit almost instantly, and in four years it has expanded into 13 markets with 27 stores and a robust ecommerce presence.
IP brands, such as the popular mobile game “Glory of King” and “The Forbidden City Museum,” have also made progress in becoming lifestyle brands representing unique values and narratives, often creating unexpected chemical reactions when mixed with more established brands. M.A.C.’s collaboration with “Glory of King” amplified the fantasy aesthetics of the game, further enhancing M.A.C.’s image in creativity and heroine-style femininity, and generating strong buzz. Many brands, including some luxury brands like Cartier, are also tapping into the equity of the Forbidden City Museum, from which it gains a more authentic connection with Chinese history and national pride.
Automation Interrupted
China’s fascination with AI continues. In October, Haidilao, a restaurant chain known for superb service, opened its first unmanned dining room. In December, Alibaba opened FlyZoo hotel, which welcomes its guests with a facial recognition device instead of a human receptionist. Inside the room, the guest uses voice commands to control temperature, lighting and TV.
Yet these examples are more experiments or PR stunts than fully functioning offerings. To start, human staff is present in every unmanned operation. There were two big setbacks for automation in 2018: The unmanned convenience store launched by Alibaba with much fanfare at 2017’s Taobao Makers’ Festival was a popup experience and was never brought to life. in September 2018, iFlytech, a highly regarded leader in voice recognition and AI, was accused of passing off translation done by a human translator as the work done by AI technology. The company’s R&D center was shut down after the scandal. These incidents, as well as reporting by state media questioning the validity of some “innovations by Chinese researchers,” have forced the business and tech community to pause and reflect.
The quest for better AI applications won’t stop. With the country upgrading its infrastructure and consumers upgrading their lifestyles, there are just too many places where AI could help leapfrog. While unmanned stores remain a vague vision, some form of the technology, such as automated payment leveraging facial recognition, is spreading fast across China. One of the most unexpected applications of AI is education: Liulishuo, a company with 80 million active members, offers to improve students’ English language skills for a low price of $15 per month. There’s no human teacher and every student is taught by AI.
In 2019, 5G will launch in China, and we look forward to more computing power, and more killer applications of AI-powered automation.
