Chinese Digitalization Ecosystem and Its Relevance to the World
May 30, 2022
About the author:
Rui Ma, China Tech Analyst; Founder, Tech Buzz China; Executive Chairman, Rookie Fund; Venture Partner, Synaptic Ventures
Over the past decade or so, people’s lives have been revolutionized with the rise of the “digital economy” alongside mass online media. There is no other country in the world where this change has happened at such a scale, speed, and scope than China, where several e-commerce giants contributed to making the country the largest market for Internet services on Earth. How did this change happen? What are the consequences? Where is this phenomenon going?
TIO: What are the key forces driving digitalization in China? Do they differ from what is driving the U.S. and the rest of the world? Why is this important?
Ma: Digitalization in China is driven by both market opportunity and government mandate.
On the market opportunity front, China had a vast but underdeveloped economy with an extremely low level of digitalization as recently as a decade ago. The birth of the mobile Internet, ushered in by ubiquitous broadband connectivity, buoyed by a fast-growing domestic economy, and unhindered by legacy information systems, are some of the main catalysts that explain why the Chinese market was able to leapfrog some of the world’s most developed markets in a relatively short period of time.
In addition, lax regulatory standards and supportive government policies were also helpful accelerants. If we look at the rest of the world, often one or two of these key ingredients are missing.
For example, the U.S. has many legacy systems that must be supplanted, which makes disruption a more expensive and laborious endeavor. On the other hand, developing countries may not have the infrastructure or fast economic growth to sustain the level of digitalization that China has been able to. This is important to understand because even in China, not all of these factors will be present going forward, or at least not to the same degree, and this will affect how fast digitalization continues to make progress there, especially now that a large swath of the opportunities facing consumers have already been claimed and exploited.
TIO: China is ramping up efforts to roll out the digital yuan to the broader population. What are the challenges ahead? Why now and how will this impact the Chinese and other economies?
Ma: Central bank-backed digital currencies such as the digital yuan will be some of the most interesting technological and economic experiments in the world in the next few decades.
In China, the very fact that citizens are so used to a cashless society could actually turn out to be an obstacle to the digital yuan, since the existing digital alternative is already so ubiquitous, convenient, and powerful.
However, the digital yuan does provide several other advantages, offline access, cross-platform transactions, and different levels of privacy, for example, and is of course sovereign legal tender just like cash. By having a digital currency, the Chinese central bank will ultimately have greater capability to control and monitor financial flows. While intended for domestic use in the near term, there is little doubt that the digital yuan will eventually be used for cross-border transactions as well, and to facilitate global trade. Some folks have been alarmed that it may help in dislodging the US dollar as the reserve currency, but most experts I’ve spoken to believe this risk is negligible at the moment and we are many steps removed from that happening just yet.
TIO: Recent moves by the government to regulate the activities of some of the largest Internet players in China have cast a cloud of uncertainty over the digital ecosystem. What’s the logic behind this and where is China’s digital ecosystem heading?
Ma: The majority of the restrictive regulations issued in the last two years have been along the lines of what I would describe as “rectification.” This means that many of the policies are meant to correct the overly lax regulatory environment in the past so that standards look more like those that have been adopted by the developed world. Most of these are in the area of antitrust/anti-competition, privacy, cybersecurity, financial risk, etc., and many had been in preparation for years.
Assuming that the government is able to continue to adopt a reasonable level of oversight and not step into over-regulation territory, this could be healthier for the ecosystem in the long run.
The government has recently signaled that this “special rectification period” is nearing completion, and I think it bodes well for the companies that have solid business fundamentals and superior strategies. They will continue to thrive in spite of, and possibly thanks to, this more regulated business environment.
Of course, it is also important to acknowledge that there were some regulations that do not have Western analogue, such as the initiative to eliminate the for-profit after-school tutoring sector, and harsh restrictions on video gaming hours for minors. Those are the result of the government solving for issues idiosyncratic to China and resulted in extremely unfavorable outcomes to investors and entrepreneurs in the space. While these seem to be largely one-off in nature, the impact they’ve had on investor confidence may be long-lasting and can be a problem for the entire digital ecosystem going forward.
TIO: Given the scale of the Chinese marketplace and the pace of transformation into a digital economy, what do you think are the best business practices for companies? In other words, how can companies be better positioned to succeed? Is the situation roughly the same for other countries? If so, is this about governments or technology?
Ma: Most people who have worked in both China and the U.S. agree that the competition in China is much more intense.
An innovative breakout feature or product in the U.S., for example, may not see competition for months, and tech giants can take years before adopting new technologies, such as what we saw with the short video format.
In China, expect other companies to begin copying your innovations the same day they’re launched. Therefore, a core competitive advantage is speed. Foreign digital economy companies who wish to operate in China either independently or through a partner will have to adapt to “China speed” as best as they can to have a chance at success. That being said, it is clear from the last two years of increased regulation that both foreign and domestic technology companies operating in China will have to pay more attention to government policy. There will be some risks that cannot be mitigated and only avoided entirely. The company’s core IP and technological know-how will always matter, of course, but have to be considered in conjunction with current market conditions.
TIO: In what way is China’s digitalization relevant to the rest of the world and vice versa?
Ma: There are many companies, whether just starting out, or very established, who are looking to China as a reference point. I think there are three main reasons for this.
One is simply that China has made a lot of progress in digitalization in a very short period of time and has become a global innovation leader in digital entertainment and e-commerce especially, which are two very large sectors with broad applicability everywhere.
The second is that China has two somewhat distinct populations - coastal urban residents and inland rural ones - who exhibit sufficiently different behaviors so as to make good examples for entrepreneurs in developed and developing nations both.
Finally, China is so large that even its smaller market segments represent hundreds of millions of users. This means that many companies, whether they are servicing the general population or a smaller niche, often become the largest global company of their type, at least by usage and sometimes by revenue as well, therefore warranting serious study.
As for vice versa, Chinese entrepreneurs, while no longer relegated to always chasing after Silicon Valley, have global ambitions and are therefore as curious about the rest of the world as ever. With locally birthed champions like ByteDance (TikTok) and Shein taking the top spot in their respective categories worldwide, I am only seeing the drive to globalize and the eagerness to understand and learn from international markets intensify.
TIO: In your opinion, what are some of the digital innovation megatrends to watch?
Ma: China leads the world in mobile digital entertainment and e-commerce, and that’s where I think there is still a lot of room for trends from China to be popularized in the rest of the world.
The intersection of digital content and commerce, such as gamification of e-commerce, or live streaming e-commerce, for example, is especially interesting. Livestreaming e-commerce is quickly remaking the online retail sector in China and is expected to account for 20% of total GMV (Gross Merchandise Value) this year. But it has yet to establish itself as a significant distribution channel in other countries, and so I am watching the space carefully for investment opportunities.
In general, China still has one of the highest e-commerce penetration rates in the world, and I’d expect many successful business models to take root in other parts of the globe.
Finally, there is also just the general upgrading of the entire enterprise sector, especially in manufacturing, which I’m watching closely. While this trend may be more difficult to globalize in developed countries, given the relative uniqueness of China’s manufacturing-heavy economy, it represents an incredible opportunity in China and has been one of the most popular investment theses of the last five years, one that I don’t foresee going away any time soon.
This interview was conducted by Kang Yingyue, International Communications Officer of Taihe Institute.
This article is from the May issue of TI Observer (TIO), which is a monthly publication devoted to bringing China and the rest of the world closer together by facilitating mutual understanding and promoting exchanges of views. If you are interested in knowing more about the May issue, please click here:
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