Looking back on how choice and trust have shaped the country’s Internet economy
Last August, the Chinese government announced that the number of Internet users in the country had reached a mind-boggling 802 million, which is more than the combined populations of the United States, Russia, Indonesia, and Brazil (CNNIC). Of these users, more than 29 million gained Internet access for the first time in the second half of 2018 (CNNIC).
The tale of China’s Internet economy is akin to seemingly every other story about the country since the turn of the Millennium, where speed and scale appear to be of the essence. While it may be tempting to attribute this dizzying growth to China’s rivalry with the West, academics, analysts, investors, and the like agree that such a conclusion is overly simplistic when making sense of its digital transformation.
One such authority is SOSV General Partner William Bao Bean; with over two decades of experience in the space, he is frequently cited as one of the leading non-local authorities on the Chinese Internet economy. He points to the country’s developmental path and cultural perceptions about trust and choice for creating an environment that’s conducive to astronomical rates of digitization.
Bean began his career as an equity research analyst, where he was ranked as the number one stock picker in tech, media, and telecom by Reuters Starmine in 2006. He also worked on Alibaba, Kingsoft, and eLong’s international initial public offerings (IPOs) before moving to the investment-side with SoftBank Group, and later, Singtel Innov8.
He now manages two of SOSV’s accelerators: MOX–a mobile-only accelerator focusing on emerging markets–and China’s first and longest-running accelerator, Chinaccelerator. Having witnessed China’s Internet economy grow from nascency to its globally dominant position, Bean acknowledges that “the only constant is change” when it comes to characterizing the landscape.
Choice and trust
The inception of the Chinese Internet during the late 1990s was defined by ‘copies’ of U.S. companies of the early Internet era. Founded in 1996, web portal company Sohu was much like Yahoo. Tencent came on the scene in 1998 and introduced their take on AIM Instant Messenger, QQ, in 1999. Alibaba was founded the same year, going on to launch Taobao, ‘China’s Amazon,’ in 2003. Baidu, the country’s equivalent of Google, was founded in 2000.
Phase two, beginning around the early-2000s, was a crucial growth stage for the Internet economy. Employees from the first generation of tech companies began to found their own startups, seeking solutions to problems their predecessors had yet to solve. It was also during this time that China’s GDP experienced astronomical growth, increasing around 80% between 2000 and 2010, from US$1.2 trillion to $6.1 trillion (World Bank). With the influx of capital, venture capitalists, in turn, hit the jackpot with many of their early bets.
One such example is Youku; founded in 2006 by former Sohu President Victor Koo, the company raised US$40 million in five rounds by 2007, going on to list at the New York Stock Exchange in 2010 (Crunchbase). After only four years, Youku was, by all measures, China’s leading video streaming platform (Nielsen).
Although significant shifts were taking place for the country’s rising middle class during this time, China hovered as a country on the precipice of global leadership, while invariably facing the challenges of an emerging economy. Mobile penetration began its dominance, where it now makes up 98% of all Chinese Internet users (CNNIC).
“[GDP growth] doesn’t change the fact that there was not a lot of underlying financial infrastructure. For example, credit cards. So we had a leapfrog effect, from cash to mobile wallets,” says Bean.
For this reason, fintech took off as a solution for those who previously resided outside of the formal economy, much like other mobile-first markets, such as Southeast Asia, Latin America, and the Middle East.
Underdeveloped financial infrastructures also paved the way for high adoption rates for peer-to-peer (P2P) lending. PPDAI Group launched in 2007 as the first online lending platform in the country; by 2016, a total of 3,383 P2P platforms were managing combined monthly transactions of RMB130 billion (Home of Online Lending).
Bean says it became clear during this phase that American Internet giants couldn’t compete because “the solutions that were built to solve an American problem often times don’t solve problems in China.” He notes that U.S. enterprise solutions, for example, weren’t able to gain any traction in the country simply because demand was virtually non-existent.
“The American Internet leaders have run their playbook; it’s a good playbook, and it worked in every single market in the world,” he adds. “U.S. companies are U.S.-centric, and Silicon Valley investors and entrepreneurs are famous for being navel-gazers.”
Aside from U.S. companies’ inability to solve Chinese problems, they also failed to account for the population’s perception of the Internet, given how important a tool it was in modernizing the country. In many ways, the Internet economy brought choice to existing systems, be it financial institutions, retail, or transportation.
In his TED Talk ‘The rapid growth of the Chinese Internet,’ SCMP CEO Gary Liu used the Chinese New Year travel rush as an example of how technology and the Internet have enabled choice. Connectivity aided a strained transportation system that had to meet the needs of 290 million migrant workers traveling to reunite with their families: around 70% of ticket sales are now digital. New solutions, such as Didi Chuxing’s carpool platform Hitch, also serviced 30 million travelers during the 2018 holiday period. This ‘needs economy,’ as Liu describes, has bolstered a sense of empowerment among users.
“When capital and investment become focused on the needs of people who are hanging on the bottom rungs of the economic ladder, that’s when we start to see the Internet truly become a job creator, an education-enabler, and–in many ways–a path forward,” he adds.
Such perceptions of choice and trust, in effect, would determine the types of business models that would succeed in China. Bean gives Facebook as an example. In the West, social networking platforms operate like media companies, as they monetize through advertising. Users who follow the brand will only see its posts if the brand pays Facebook, and they are often sensitive about the capacity in which influencers work with brands. By contrast, social networking platforms in China are more like marketplaces; they monetize through additional services, such as mobile wallets, and users are generally more open to sponsored posts.
“A lot of times, they know that a star is getting paid by a brand to promote something. They know, but it’s not the end of the world. They’re okay with it. Whereas in the West, it’s like you’re a traitor if you’re getting paid,” says Bean.
The integration of social networking and ecommerce is now known as ‘social commerce’–a model that describes some of China’s biggest tech companies today, including Xiaohongshu, iQiyi, Bilibili, and Bytedance. Social commerce is projected to account for US$413 billion worth of goods sold in China by 2022 (Frost & Sullivan).
“You don’t necessarily have to pay to get in front of somebody, but you do have to earn [users’] trust because if you’re not trustworthy, then those customers will likely not pay attention to you,” says Bean. “I think that it’s not so much that people trust technology, but that technology, for the first time, brought trust.”
This sentiment has ingrained tech into the cultural psyche, especially among the younger generation of digital natives. In line with this notion, MIT Technology Review’s Josh Feola looked to Shanghai-based artist Miao Ying, discussing that “much of her work deals with her concept of the ‘Chinternet’–a break with Western norms that supplies fertile ground for new ideas and identities to grow.”
A predominant focus within this cultural discourse is tech leadership. Having been the face of their companies since phase one, founders like Jack Ma and Pony Ma have become cultural icons in their own right, amassing extraordinary wealth and propelling their country into the era of connectivity. In kind, they epitomize a new interpretation of Chinese capitalism that inspires others to follow suit.
“From the first generation leaders, you have two types. You have sort of the godfather-type and the godmother-type. Both are inspirational, both drive followers, and both are very important in terms of retention,” says Bean.
Through this culture-driven narrative, the Internet economy has been able to carve out its own identity–one that is deeply woven into the fabric of Chinese society.
The next frontier
The current phase of the Chinese Internet is no longer a case of untempered growth, having matured significantly over the past decade. Incumbents have solved most problems, and founders need to innovate better than the next guy to succeed.
“We’re coming to that stage in China where it’s not enough to be fast and raise a lot of money,” says Bean. “The low hanging fruit has all been picked, and you’ve got some very large companies that have consolidated very large user bases.”
He adds that Alibaba and Tencent’s duopoly of the Internet economy also makes meaningful user acquisition near-impossible without support from one of the two. Investors and founders are now looking to frontier technologies–a change that has only emerged in the last one or two years.
“If you looked at frontier technologies in the last ten years in China, you would lose your shirt and go nowhere. But now they’re required in order to start that revolution. You can’t come up with a better mousetrap without leveraging frontier technologies like AI, and blockchain is opening up opportunities for industries that lacked transparency,” he says.
Bean notes that there are still opportunities for edtech, fintech, and healthtech, especially within the context of improving lives for those living in more rural areas, or Tier 3 or Tier 4 cities. With regards to the middle class, he’s interested in investing in foodtech, such as meat alternatives, and travel. In this way, he expects the Chinese Internet to become more familiar to Western markets in the coming years.
China is now in a position to look outward, especially toward countries that are following its mobile-first trajectory. The country is laser-focused on emerging markets that are currently undergoing tremendous rates of digitization–a strategy that’s also in place in Silicon Valley. According to Bean, “The battlefield is in India right now.”
“In 2016, there were virtually no Chinese plays in the top ten apps in India. By 2017, 17 of the top 100 apps in India were Chinese. And in 2018, 47 of the top 100 apps in India were Chinese,” he adds.
2018 saw China surpass the U.S. in venture funding for the first time, accounting for 47% of the globe’s venture capital in the second quarter (Crunchbase). While China still trails the U.S. as the second largest venture capital market in the world, the country is on track to overtake the hegemon in terms of aggregate deal value by the end of this year or 2020 (INSEAD).
Competition for international influence is heating up between China and the U.S., both on the technological and user acquisition-side. The outcome of this dynamic will undoubtedly be made more unpredictable by the U.S.-China Trade War and its effect on the global economy.
One only has to look to the Chinese Internet’s inextricable relationship with culture to understand why its leaders began to follow their own playbook, guiding an economic upswing that’s unprecedented in the annals of history. Of course, the caveat when speaking on the topic is the government’s hand in the market–a discussion that goes beyond the scope of this piece.
When looking at how pivotal a role the Internet economy has played in changing the socioeconomic conditions of a significant portion of the population, it becomes clear that it’s misguided to paint a one-sided picture. What’s yet to be seen is how far the world’s superpowers will go to export their digital influence, and whether their technology will continue to better lives in the process.