Bold Predictions For China Tech Over Next Decade

July 19th, 2010

The past decade have seen the rise of many Chinese Internet companies which have become wildly successful, and which most in the west are only now beginning to notice. These are companies with names like C-Trip, Shanda, Tencent, Alibaba, Taobao, Baidu just to name a few.

For the consumer-facing companies who benefited from China’s rapidly growing consumer spending power, this growth was unrivaled. They rode two waves to maximum advantage: the popularity of tech among Silicon Valley venture capitalists and private equity firms, and with the Chinese government; and with the rise of China’s urban middle class. In contrast to many American firms which really did invest in significant technology, many of these companies had less in terms of technology; preferring instead to spend their investment money on hiring people and building a human salesforce. C-Trip, the popular travel site, was mainly a call center with a website when it went public; Baidu built up a network of resellers which it bought out when it went public, and Alibaba has an aggressive salesforce to work with Chinese SMEs.

Over the next ten years, there will be dramatic changes. Here are some of the trends I see:

  • Growth in the economy will slow gradually at first, then will become more dramatic. The Chinese economy’s period of rapid growth has already passed its peak.
  • Slower growth means that income gaps will widen in the society, along with opportunity gaps for individuals. From a marketing point of view, segmentation becomes more important. Qualified lead-generation businesses will become lucrative.
  • As the economy slows, targeted advertising will become more important for the Chinese Internet. Advertising-based Internet models which did not work well in China previously but worked well in the west will be re-introduced into China. Successful companies will adapt them to the realities of the China market without trying to force a western model.
  • Because of the slower economy, real technology adaption will take place in medium- , and even small-sized, firms. These will focus on working with very large datasets and data mining, and will focus on describing the topology of the Chinese Internet in a way so that other businesses can use this data.
  • Lower disk space and bandwidth costs will mean that even though Chinese companies adopt more technology, their costs will be lower.
  • From a venture capitalist’s and private equity investors point of view, the biggest cost will be the founding team. The best teams will be few and far between, and will be much sought after. Compared to Silicon Valley and the rest of the world, Chinese Internet startups will still be more likely to be led by individual entrepreneurs than by founding teams in the western mold. This is a culture thing.
  • The trend to Chinese government preference for RMB funds and local investors over US- and western-based venture capital and private equity funds will pick up pace. The more unfavorable the economic environment becomes, the more dramatic action the Chinese government will take. This will cause some tension with the US, but the Chinese government will be willing to take the hit because domestic concerns for social harmony take precedence.
  • Some western venture capital and private equity firms are studying the possibility of Chinese IPO exits. Don’t hold your breath waiting for these to happen; they are likely to be few and far between.
  • Hong Kong will gain some advantage because it policies are different from Beijing’s and like China, smart entrepreneurs will look for opportunities in the long tail instead of the large consumer market.

China’s economic development so far is based on two assumptions which will come under pressure over the next decade. The first assumption is that rapid urbanization is a good thing, since that will lead to the development of an urban middle class. The challenge over the next ten years will be how to find jobs for that urban middle class, whose living costs have gone dramatically higher, while the global macro climate has dramatically worsened? This is already showing up in the rise of the ant people, educated white collar workers who cannot make it up all the way to the top of the pyramid. For the first time in its history, the belief that education is the path to success in Chinese society will be challenged.

The second assumption will be a shortage of blue-collar factory workers, which has already begun to show up in southern China in the form of strikes and slowdowns at foreign-owned factories. As China’s working population dramatically ages over the next decade, this situation will worsen. Technology can, to some extent, ameliorate the labor shortage, but it cannot generate demand.

During the next decade, we will find out if China can become rich, on a sustained basis, before it grows old.

If the Chinese government does not succeed, then China will head into a prolonged economic slump after 2020, which will be much like Japan’s, and further adding to what is likely to become a prolonged global economic depression. In addition, the workforce which starts working after that year will have to deal with a worsening environment and dues, in the form of non-performing loans (NPLs), from spending in the high-growth years.

That is why this next decade is make-or-break for China.

Small Things Which Say A Lot

December 7th, 2008

For a long time, I have been telling my friends that China is not going to use its foreign exchange reserves to bail out the US and the rest of the world. Aside from the fact that China does not feel like a superpower, it is becoming apparent with each passing day that China has very real problems of its own, and is going to have use its own reserves to help itself.

Another popular argument is that the newly rich Chinese consumers will go out and spend their yuan, helping the newly poor west out of its self-made predicament.

I have a few stories to tell you which make me doubt this.

Recently, at an apartment in Beijing, I went out to take the garbage, which is in the common area of the building near the elevators. Shortly after going into this area, I noticed that the only lights in the area, which has no windows, were two low-energy consumption bulbs on the other side of the area. Nothing else was on except for those two bulbs, including the stairwell, which was completely black and did not have any lights on. Obviously, the building management company, in an effort to save electricity, had turned off the lights to less than what I would consider safe.

So these are the same guys who are going to bail out western consumers from their problems? Hmmm….

Anyone who has stayed in China for any length of time will find small cards which have a photo of an attractive young woman smiling prettily, with a rate card and mobile phone number on the back. On these cards, the young woman will offer “massage services” with services called 西班牙骑士 and 综合保健 offered. Sometimes the cards mention that the young woman is a university student.

Now, what caught my attention recently was that their rates had gone down! The most expensive package 综合保健 or Total Healthcare Package had gone down from 398 yuan to 298 yuan. My guess is that the market was pulling back, and these young women were asking for less, at least according to my completely informal China Masseuse Index.

Then yesterday I flew from Beijing to Shenzhen. On arrival at Shenzhen airport, I took a small 20+ person bus to downtown Shenzhen. During the ride, as we were going downhill, I noticed that the bus mysteriously went silent. Then, it occurred to me that the bus driver had turned off the engine to save gasoline/petrol costs and was coasting downhill until we reached the toll booth. After we reached the toll booth, he restarted the engine, and we were on our way.

Taken in isolation, I would have said that each would at most, have been an interesting and amusing anomaly. Taken together, they paint a picture of a society which is indeed worried about the future, and is doing its best to cut expenses.

So that, from the street, is my reasoning for thinking why China will not help the west. It has too many problems of its own.

UPDATE: Caijing, the leading economics and business magazine in China, has a short report which supports my observations about falling energy demand from Chinese consumers. (h/t to Bill Bishop)

Understanding the Chinese Hockey Stick

February 3rd, 2008

baidu.jpeg

One of the things past experience has taught me that while it is possible to guess that some business will take off in China, it is almost impossible to tell when. The most common scenario is that for many years, a western business will devote its people and resources to making its business popular with Chinese, it will not show results. Frustrated, it will depart China with nothing to show for its hard work and investment. (This happened frequently in the eighties and nineties; now it is much more rare.)

This rule does not just apply to business; it even applies to Chinese government policy. For years, the Chinese government actively urged the Chinese people to travel more; it even increased the number of public holidays, creating the Golden Week holiday around the May Day holiday in the late 90s to get Chinese to travel more, and spend some of their savings. For years, the policy yielded no solid results.

But later it worked, and beginning this year, the May Golden Week holiday will be abolished. Put simply, it’s no longer needed. Chinese now travel freely, are willing to spend their savings, and the incentive is now no longer needed.

The same phenomenon occurred in the auto industry. For years, local Chinese automakers were unable to get Chinese to spend money on automobiles; most of their production went to taxis and to Chinese government ministries and officials. These habits changed suddenly with the SARS crisis in 2003. All of a sudden, Chinese were afraid to take public transport and started buying cars. And unlike in the west, they paid for their cars in cash.

This trend, which started in 2003, has continued to this day. Now, if a young man in China’s cities wants to get married, more and more young brides are expecting an apartment and car to go with their husband-to-be. Today, in Beijing, 1,000 new cars are being added daily to the city’s traffic woes.

This creates a phenomenon which I call the “Chinese hockey stick”. In simple terms, this means that “It is likely that a new business/service/product will take off in China, but it is hard to say when.” This can be endlessly frustrating for businesses which need to plan their expenditures on an annual or quarterly basis. When are they going to see some of their investment money come back? Country heads need to tell their head offices when the hockey stick will finally take off, and more often than not, it is very hard, if not impossible, to tell.

Part of my rationale for the Chinese hockey stick is that Chinese consumer spending patterns will track more closely to the spending habits of their Asian neighbors in South Korea, Japan, Hong Kong and Taiwan, than to the west, as Chinese society becomes more prosperous. If you want to understand how Chinese spending habits are likely to develop, take a close look at these places. You will learn a lot. In culture and language, these places are closer to how Chinese think, act and behave than the societies of North American and the EU.

Most frequently, the businesses which are able to time the rise of the hockey stick are local Chinese entrepreneurs. Unlike western companies which try to sell their foreign-designed products in China; these Chinese entrepreneurs stand in the wings, just waiting to swoop in at just the right moment. Unlike western corporations, these companies do not have the big budgets of western companies, but their knowledge of their countrymen’s thinking and spending habits more than compensates for this. This is why many leading Chinese Internet companies such as Tencent, Baidu and Sohu have been able to prosper, while their much larger and richer western competitors have been unable to gain traction.

With the dramatic growth of the Chinese consumer market in the past five years, you would think that western observers would learn to be quiet instead of sticking their necks out and betting against the spending power of Chinese consumers.

Apparently not.

David Wolf’s Silicon Hutong has pointed to an article by Donald dePalma in which he claims that China’s buyers account for only 1.1% of what he calls “online GDP”. Unfortunately, he does not explain his methodology as to how he gathered his numbers.

In the west, the Internet led to the creation of some whole new businesses, with Amazon and Google being the best examples. In China, many Internet companies are front-ends for established brick and mortar businesses. For many Chinese consumers, the Internet is like a shop window; when they buy, they still prefer to buy from a person in a store.

These fundamental differences in consumer spending habits make me question the value of even measuring something like “online GDP”. And as David Wolf alludes to, the eGDP is a static number; it does not capture or reflect trends. It is like trying to understand a movie storyline from a still photo.

That’s why I’ll stick with my analogy for the Chinese hockey stick, at least for the time being.

Ogilvy Mindshare Report on Chinese Consumer Behavior

January 28th, 2008

chinamobilephoneuser.jpeg

I just came across this Ogilvy Mindshare report on Chinese consumer behavior which goes beyond the normal reports which cover exclusively the Tier 1 cities.

This one also covers the tier two and three cities, which are becoming increasingly important for marketers. According to the report, consumers are still frugal, and are reluctant to go into debt.

How old-fashioned can they get? And I’ll be that they think savings are a good thing…

Sheeesh…