Your roadmap to China’s tech market

The Chinese tech market is tough for everyone, no matter if you are

foreign or not. In addition to an extremely strict regulatory system

regarding the internet, in particular social media, there is a fierce

competition among tech companies which fight to attract the

attention of a growing number of sophisticated Chinese consumers.

Foreign tech companies interested in having a presence in China

must learn to play with a more restrictive set of rules. The

“Great Firewall” has proven itself repeatedly to be a significant challenge for international firms, and not all have overcome this hurdle.

Some, like Google, made the decision of withdrawing all together, while others, like Facebook, were blocked completely and are pushing the Chinese government to ease the restrictions and grant them access. 

Companies such as Amazon, Viadeo and Airbnb were permitted to have a presence in the tech market but failed to gain traction. There was also Yihaodian, which was Walmart’s online business, but eventually Walmart sold it to JD.com in exchange for some of JD’s shares.

Among the few which have been successful are Linkedin and Evernote. Both companies hired locally and adapted to the cultural context. Similarly, they partnered with local firms, such as Sequoia China and China Broadband Capital to understand better the regional market and used marketing strategies by leveraging social media like Weibo and WeChat.

LinkedIn launched in China in 2014 with a dedicated Chinese site, Lingying, and within two years grew their user base to 20 million subscribers.  They hired a president for LinkedIn China, giving the team more autonomy to integrate and cater to local needs. Some of their initiatives include working with Tencent’s WeChat so users could link profiles, launching a Chinese business social networking app “Chitu” and planning to release a Chinese version of its Pulse news reader app. 

Before arriving in China, in 2012, Evernote did extensive market research to understand the Chinese consumer and launched with an easy-to-remember Chinese name (Yinxiang Biji), which proved to be the right approach. Within the first year they had 4 million users in China, and by 2015 their user base reached 17 million.

While the major Chinese social websites of Baidu, Ren Ren, Sina Weibo and Youku Toudu are copies of Google, Facebook, Twitter and YouTube, respectively, since their launch they have developed their own unique image and turned their resources into innovative ecosystems. They are no longer the low-quality clones that many people thought they were.

The case of WeChat is particularly interesting, because they managed to transform their platform from a simple messaging system (similar to WhatsApp) to a sophisticated connectivity method that allows Chinese consumers to do almost everything they need, from transferring money and make payments, to buying movie tickets, hail taxis, and pay for utility bills, among many other services.

The business model of WeChat has become extremely powerful in China and has left many competitors out of the game.

Over the last fifteen years, the tech market in China changed and evolved significantly. When Alibaba launched to compete with eBay, more than a decade ago, the local tech market was considerably basic. Since then, tech companies have grown to be much more sophisticated. Chinese innovators create digital ecosystems that capture and keep consumers engaged on their platforms, while foreign players tend not to be as effective in building such systems.

Despite the ban, China still factors into the equation for US companies such as Facebook, which saw an estimated $5 billion in ad revenue from Chinese-based companies in 2018, making the country the company's second largest ad market.

That "firewall" is not completely impenetrable, either, as some Chinese citizens have found ways to circumvent blocks on websites by using virtual private networks (VPNs).

Authorities in China have long censored Google, especially on questions related to politics. Google.cn, the company's China-based search engine, was shut down in 2010 following disputes over censorship of search queries. Google's family of apps — including Gmail and Google Maps — went offline multiple times, including in November 2012 and December 2014.

Reports emerged in 2018 that Google was working on a censored search engine for Chinese users called Project Dragonfly. The project was cancelled in December after facing outrage from Google employees and human rights groups, but some activists are not fully convinced Google has officially scrapped plans.

Another site working despite the ban is Twitter, which still has an estimated 10 million active customers in China, who use VPNs.

Two important factors that foreign tech companies should consider if they want to succeed in China are understanding and adapting to the cultural context of the country. Hiring local management is crucial, as well as empowering your local team and allowing them to do the right thing. China is a difficult market to penetrate for anyone, but not impossible if they are willing to learn and adapt.

Chinese innovators are developing new intellectual capital and crafting business models that reinvent strategy and organization. Alibaba and LeEco are two leading examples.

Jack Ma has built Alibaba into a sprawling internet business through “multiple jumping” from one business area to another, while building its capabilities along the way through a combination of self-built and collaborative partnerships. This disrupted the conventional “core competence” approach that has ruled modern business for the past 30-odd years.

LeEco is a “lifestyle” company, with a diverse ecosystem of infotainment content, smart devices, and internet-connected mobility. Experts recognize the ability that Chinese tech companies show to adapt quickly to changes, and their strong drive to push the boundaries and stay ahead of the game.

China’s digital market will continue to grow, and it will provide additional opportunities for many players, including foreigners.

 

In the future, success will be determined more by a company’s leadership and capabilities than by only a function of “being blocked or not.”

In the tech manufacturing sector, China is working hard to transition from a low-tech producer to a high-tech manufacturing hub. As the US-China trade war continues, this ambition may face its biggest test yet.

So far, the US has imposed tariffs on US$550 billion worth of Chinese products. China, in turn, has set tariffs on US$185 billion worth of US goods.

The endless negotiations have frustrated the international business community. More than 50 foreign companies have either already announced or are considering shifting their production out of China, according to news reports. Some tech giants, such as Microsoft, Dell, and Apple, are planning on moving part of their production line to other countries.

However, not everyone is leaving China. Most companies only intend to relocate certain segments of their production as China remains an extremely important market for this industry.

While import tariffs and the COVID-19 pandemic may be behind this partial relocation strategy, companies are looking to diversify their China production line to reduce exposure to future risks and tap into new markets.

International firms are changing their strategies to adapt to the new business environment. Samsung, for one, closed its last smartphone factory in the country and will simplify its corporate structure to weather the effects of a dwindling market share in China.

Since June, Apple has asked its major suppliers to evaluate the possibility of relocating 15 to 30 percent of their production capacity from China to Southeast Asia. Although Apple has sourced its traditional AirPods from Vietnam for a while now, this will mark the first time its wireless earphones, which came to market in 2016, will be produced outside of China.

Experts observe that rising labor costs, domestic competition, difficulties in profit repatriation, and concerns surrounding the protection of intellectual property, along with the trade war, are factors behind the migration of foreign tech firms.

This does not mean however that tech companies are abandoning China. Some are even moving production to China by implementing a market-specific bifurcation of their production lines.

Most companies are only moving segments of their production out of China at a gradual pace and adopting a ‘China plus one’ strategy to reduce operating costs and diversify workforces and supply chains. China still represents the core of their supply chain while additionally providing a highly valuable market for this industry.

Some Southeast Asian countries could be interesting candidates with their lower labor costs and fast-growing economies, but they lack China’s high-tech manufacturing ecosystem.

China is the largest or second largest market in almost all sectors. As such, China is too big to ignore for international companies. Many foreign tech companies still feel intrigued by the massive opportunities of the Chinese market.

China is no longer just a location for low cost manufacturing but a major market and key part of the supply chain. Also, China business has become increasingly efficient, while internationally trained Chinese managers and professionals have made it easier for foreign companies to find suitable partners in the country.

There is great appetite in China for the right technologies. Popular sectors include autonomous cars, AI, big data, and robotics, among others. Thirty years ago, almost all Chinese joint venture partners were industrial partners. Today, these strategic players are joined by Chinese high-tech companies, private equity, funds, and VCs.

Additionally, Chinese local authorities are highly motivated to attract the right kind of technologies to their regions. Many of these tech heavy projects have a lead investor that has a close relationship with the local government. For the right projects local authorities are happy to grant companies subsidies and preferential policies.

International companies rely upon the purchasing power of Chinese consumers eager to purchase goods and services. Foreign investment has moved from being a one-way road to China to being a two-way superhighway.

China’s emergence as a technology superpower has not diminished its appetite for foreign technology. China is a massive but also highly competitive market. Apart from being a major market for almost all products and services it also represents most of the world’s growth.

Should you have questions about your road map to the Chinese tech sector, complete the below inquiry form with your questions and comments. 

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.

MAKE AN INQUIRY

© 2020 Woodburn Accountants & Advisors. All Rights Reserved. Privacy Policy