Year of the Dog

What We Can All Learn from China in the Year of the Dog

Understanding the scale and influence of China affects us all: why has China leapt ahead in terms of eCommerce, Mobile and Social, and discover why Tencent and Alibaba are a glimpse of the future.

Chinese New Year, called the ‘Spring Festival’ in China, begins on Friday, February 16, 2018, and it triggers celebrations all across the globe. Millions of Chinese people travel to their provinces to celebrate the festival, the most important holiday in the Chinese calendar. Think Christmas, New Year and Easter all rolled into one – albeit with one billion people on trains, boats and planes all at the same time. As the ‘Spring Festival’ is based on Chinese Astrology, the date changes each year, and Chinese New Year’s Day normally falls between January 21 and February 2. In 2018 it will be the Year of the Dog, the ‘Earth Dog’, and this is the first Year of the Earth Dog since 1958.

Chinese families get together for dinner on New Year’s Eve, with children given red envelopes, called hóngbāo with ‘lucky money’ and good wishes on New Year’s Day. This being China in the 21st century, China’s biggest Internet companies—Alibaba and Tencent— have created virtual red envelopes, enabling app users to send monetary gifts with a few taps of a smartphone, and billions of virtual red envelopes are going to be sent over the next week or two.

The scale and Influence of China

You can read all you like, but until you have experienced it first-hand, you cannot get your head around the scale. I’ve spent a lot of time in China in the last few years. Whatever your preconceptions are, forget them. Indeed, if you have a preconception, multiply it by a factor of 100! How about the fact that there are 15 cities to Europe serviced directly from China by rail as part of their ‘Belt and Road’ initiative 1. And, when I say, Europe, I mean Hamburg, Madrid and so on. Indeed, Kazakhstan and China have built a giant inland ‘dry port’ called the Khorgos Gateway to service all of the trains going to Europe.

I recently visited Chengdu in Sichuan province, famous as the home of the giant panda, spicy food and an enormous Foxconn iPhone manufacturing facility with over 100,000 employees spread across two campuses. And with over one million employees as a whole within China, Foxconn is the world’s largest contract electronics manufacturer and the fourth largest information technology company in the world. All those beautiful new iPhone Xs that are manufactured by Foxconn are shipped worldwide by airfreight from multiple locations in China with a military precision. Indeed, the success and timing of an iPhone has a significant impact on the revenues of air cargo firms across Asia.

China appears to change overnight: whilst manufacturing is what we hear about over here, what you notice on a day-to-day basis is how China is going outbound through overseas acquisitions.

If you think this won’t affect you, then think about something much more prosaic: football. Wigan Athletic is set to become the latest English club to be acquired by wealthy Chinese buyers, following the likes of Southampton, Wolverhampton Wanderers, West Bromwich Albion, Aston Villa and Birmingham City. Chinese tycoons have invested more than $2.5bn over the past three years in 20 European clubs, from giants such as Inter Milan, to minnows such as FC Sochaux 2.

If you are sartorially inclined, Shandong Ruyi, the Chinese textile and fashion group have just bought a controlling stake in Swiss luxury shoes brand, Bally, to add to its portfolio of global brands, including the 250-year-old UK suit maker Gieves & Hawkes, UK clothing maker Aquascutum and Italy’s Cerruti 1881 3.

Speaking of luxury, Chinese customers have now overtaken British customers as Harrod’s biggest market. They spent more than £200m in the store in 2016, 10% of Harrods total revenues. Indeed, the Financial Times notes that ‘the numbers indicate that a significant portion of Chinese spending in the UK takes place at Harrods’ 4.

The Scale and Influence of Tencent and Alibaba in China

The vast majority of web activity in China happens through proprietary applications run by Alibaba and Tencent. The two companies dominate digital life in China and they are an effective duopoly. In the West, we talk about the influence of the big Internet giants, such as Google (Alphabet), Apple, Facebook and Amazon. However, understanding what the Chinese Internet giants – Tencent and Alibaba – are doing with apps, mobile payments and eCommerce can give us a real insight into what will happen in the West.

Alibaba is known globally for its B2B portal eCommerce platform, Alibaba.com, as well as Aliexpress and TaoBao. Alibaba’s online payments system is Alipay which controls about half of China’s online payment market. Alibaba’s rival Tencent (meaning “soaring information” in Chinese!), owns WeChat, which has one billion users, as well as its older messaging app, QQ. WeChat is Facebook, Twitter, Spotify, WhatsApp, Paypal, YouTube – as well as gaming and reading – together into one ‘superapp’. Combine eBay, Paypal and Amazon and you get an understanding of Alibaba and its Tmall and Taobao brands.

Alibaba and Tencent are big – very big: Tencent has already got a bigger market valuation than Facebook, and is the fifth most valuable company in the world by market cap, with US$23 billion of revenues. Alibaba is no slouch either with a market cap just behind Apple, Google, Microsoft, Amazon and Tencent.

Both platforms are a way of life, with WeChat recently called the ‘operating system of China’. For marketers, Tencent and Alibaba own the interface to the consumer across multiple touchpoints, and own the data that comes as a result of that. If you want to reach the Chinese consumer, you have to do that through Tencent and Alibaba. These Internet giants increasingly control the interfaces to consumers across multiple touchpoints. And they own the data that comes as a result of those interactions.

Why has China leaped ahead in terms of eCommerce, Mobile, and Social?

Taking a step back, why has all this happened? The unprecedented growth of success of Alibaba and Tencent and the ubiquity of mobile-enabled services is due to a combination of cultural, economic and political factors.

First, young Chinese people are open to sharing personal content online – and, indeed, broadcasting their daily lives through live streaming. China has become the largest market for live streaming, with 2018 revenue expected to reach US$4.4 billion, according to Deloitte. YY has over 70m users on its live-streaming platform with some earning 10 million yuan (US$1.6 million) a year.

Second, Chinese companies jump straight into new opportunities, businesses and industries without fear – anything that could bring more revenue or profit. Edward Tse’s book China’s Disruptors: How Alibaba, Xiaomi, Tencent, and Other Companies Are Changing the Rules of Business, gives us an insight into how Chinese entrepreneurs think: to succeed, companies must continuously generate new sources of advantage, and view change and reinvention as the heart of a company’s activities. Exit stage left the concept of ‘sticking to the knitting’ or ‘core competence’. Instead, lots of iterating and launching new products aimed at the immediate future. No five-year plans or decision making by committee: intelligent leaps of faith are the order of the day.

Third, mobile is ubiquitous in China, a way of life, not only a medium of communication. The question asked in the West is – what is our strategy for mobile? In China – mobile is the strategy. China is now entering the next phase of e-commerce – digital shopping is the norm for Chinese consumers. The e-commerce paradigm has shifted to brands and platforms that offer a complete brand experience rather than a narrow focus on sales and as a result, many Chinese brands are doing things that are yet to be seen in the West, integrating experiences across all touch-points and channels to create a seamless and immersive experience.

For a glimpse of the future, look at China today

Today, in the West, we are used to seeing the Internet as much more open than in China, with lots of options to reach, acquire and engage customers digitally, such as websites and email. But take a look at the growth in proprietary messaging systems, like Facebook Messenger & WhatsApp, voice services such as Amazon Alexa, and, of course, the market share that Facebook and Google have of digital advertising. You can see that they are moving both up and down the value chain, significantly restructuring the dynamics of marketing.

So, what are the outcomes of the dominance of Tencent and Alibaba on the Chinese landscape?

  1. The ‘Killer App’ of electronic payments: Alibaba and WeChat not only dominate the Internet in China, they also dominate payment. Instead of credit cards, Chinese use QR codes on their smartphones to pay for everything. For example, within WeChat, you can shop for anything from groceries to shoe repairs, book cabs, hospital appointments and karaoke rooms. Eating out is simple: scan a QR code on the tables to open the menu on their phones, order and pay. Even buskers can use WeChat’s QR code to get tips.
  2. eCommerce everywhere – all the time: Mobile is not only a medium of communication, and brands are not just purveyors of products and services, but as partners helping consumers with daily living. Most Chinese companies have recognised this, and build their advertising and marketing, social communication, shopping, purchasing, and payment programmes around mobile. As a result, China is now entering the next phase of e-commerce – digital shopping is the norm for Chinese consumers.
  3. APIs and investment for Research & Development: Tencent and Alibaba open access to their services through APIs, as well as invest in lots of start-ups that create apps to work on their platforms. Another way of looking at this is to see it through the lens of outsourced R&D. As well as having lots of internal R&D, opening access to the platform as well as investing in start-ups hedges risk and finds winners, without risking all on one or two bets.
  4. Alibaba and Tencent as vertically integrated marketing platforms: During Cannes Lions last year, Alibaba launched a set of marketing services called ‘Uni Marketing’ that they claim will “transform the way businesses do marketing”. Uni Marketing aggregates and analyses data collected from the company’s 600 million active users using a ‘unified ID’ across all its sites, such as Taobao Marketplace and Tmall, as well as entertainment sites such as Youku. Alibaba can also personalise the virtual storefronts visited according to their browsing and buying habits of consumers. No surprise that Tencent launched their own set of marketing services called ‘One Tencent’ at their conference last year.
  5. eCommerce and Retail lines blurring: With echoes of the Amazon deal to buy Wholefoods, Alibaba has taken stakes in retail groups such as Auchan Retail to expand their ‘New Retail’ initiative as well as build its own chain of fresh food grocery stores called HeMa. Likewise, Tencent has just done a deal with Carrefour China.
  6. Media assets are the ‘battering ram’ for traffic online: Rupert Murdoch described sport as the ‘battering ram’ to persuade viewers to sign up for TV subscriptions. In a similar vein, Tencent has taken stakes in SnapChat, Spotify and bought Supercell, the Finnish games creator of ‘Clash of Clans’. Most recently, Tencent has bought 10% of Skydance Media, makers of ‘Mission Impossible’ and ‘Star Trek’ and the forthcoming ‘Terminator’ movie 5. All of these franchises will be used for promotion and distribution of content across the Tencent network.

What we can learn in the West? Back to the Red Envelopes

The pace of change in China is incredible, and the ‘China Internet speed’ and competitive landscape is faster than anything we can imagine. There are signs that the big tech firms in the West are learning from China: Facebook just hired a WeChat executive, and Facebook Messenger now includes payments, games, and the ability to hail Ubers. Group chats are growing exponentially on Facebook Messenger and WhatsApp. Twitter has added stickers, and Apple’s iOS 10 features apps that have been available in Asia for a long time, such as the “emojification” and animations.

But these are small time, compared to the behemoth that is mobile payments: the mobile payments market in China is almost thirty times bigger than the US in 2017, and Alibaba’s Alipay carries more transactions than the state-owned payment network connected to China’s central bank.

So, are mobile payments what we really can learn from China? And, if so, how did mobile payments grow so fast?

Back to the ‘hóngbāo’ – the ‘Red Envelopes’ of Chinese New Year and good old-fashioned marketing tactics. These virtual ‘hóngbāo’ – virtual red envelopes – have turned into the real battleground between the Alibaba and Tencent to grab market share of the massive Chinese mobile payments market. Prior to 2014, Alibaba practically owned mobile payments in China. The creation of virtual red envelopes was Tencent’s secret weapon in getting users to use WeChat mobile payments, which, in turn, created the monster that is WeChat.

How did WeChat get such traction with their mobile payments? Through good old fashioned paid partnership and advertising! In 2015, WeChat paid for the rights to CCTV’s (Chinese Central Television) national programming for Chinese New Year, with 800 million viewers and gave away over US$80 million of digital money to WeChat users who used the WeChat ‘shake your phone’ feature right at their TVs to grab a red envelope of free money, and then, after the show, WeChat distributed another US$500 million of red envelope discount coupons.

Today, red envelopes are sent in the billions over the Spring Festival, and red envelopes are not just for Chinese New Year. Red envelopes are messaging mediums themselves, because over 60 million WeChat users send them everyday – just like we send emojis. Famed Silicon Valley Venture Capitalist firm, Andreessen Horowitz 6, call them ‘money as a message’. And, We Chat are rolling the idea out elsewhere: their partnership with Starbucks that allows users in China to buy coffees or pastries for a friend or family member and brings WeChat Pay to Starbucks’s 2,500 Chinese outlets.

Of course, the regulation and cultural landscape in the West is totally different to China, and there are lots of pre-existing competition. Maybe it won’t be red envelopes, but it’s hard not to imagine a new payment mechanism that combines gamification, gifting and social that takes advantage of our existing habits to exponentially grow the mobile payments market. Whoever can do that will have the banks going red in the face!

So, ‘Happiness and Prosperity’ to you for the Year of the Earth Dog. Or if you want to practice your Chinese Mandarin, 恭喜发财 (pronounced gong-sshee faa-tseye), or Cantonese, 恭喜發財 (pronounced gong-hey faa-choi)

1https://www.economist.com/news/business/21728981-new-silk-railroad-will-challenge-airlines-and-shipping-firms-new-rail-routes-between-china

2 https://www.ft.com/content/8387901e-0d90-11e8-8eb7-42f857ea9f09

3 https://www.ft.com/content/5a349e56-0da8-11e8-8eb7-42f857ea9f09

4 http://www.chinadaily.com.cn/world/2017-11/28/content_35074719.htm

5 https://www.ft.com/content/b4e7c614-0238-11e8-9650-9c0ad2d7c5b5

6 https://a16z.com/2016/07/24/money-as-message/

Originally published on LinkedIn by Kieron Branagan, CEO, OpenJaw Technologies: http://bit.ly/2GbkHCI

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