Sponsored article: China is the only country besides the USA to have delivered several multi-billion dollar technology companies. Why is this? Robin You attempts to unpack the key ingredients.
China is uniquely positioned with the world’s largest population and first world characteristics. Its infrastructure is superior to many developed countries but despite considerable progress, it remains an emerging market with most of the population living poorly. However, a command economy with a rising middle class are contributing to significantly increased domestic consumption.
There are many key ingredients that are required to create a technology giant. They are all prerequisites and the lack of one can create headwinds.
China leads in every aspect of the ingredients required. It has the world’s largest internet population. They largely speak the same language; the culture is homogenous and there are no internal trade barriers. Europe has a common market, but each country has different cultures, consumer habits and languages. India’s population is rapidly catching up with China, but internet access is inconsistent, and it has the most number of languages spoken in any one country.
The Chinese population is technology savvy and is used to digital payments like Alipay and WeChat in a way that is beyond any other country. They are also ahead in the roll-out of 5G, with even smaller cities already covered. The Chinese consumer is not replacing traditional commerce like in developed markets: physical retail is not as advanced in China especially outside of the major cities; therefore, old and new forms of retail co-exist and technology-enabled consumption faces less resistance.
Lastly, China’s first world infrastructure means that a consumer can purchase an item in a distant town and have it delivered from Shanghai or Beijing within a day or two. The following chart shows the sheer scale of China’s edge in physical infrastructure.
Imagine the power of being able to sell anything anywhere in a country with 850 million internet users. A Chinese company doesn’t need to expand globally to become a $100bn company. The following chart shows how China’s Meituan dwarfs other food delivery companies.
China’s edge in building a technology company
Building a technology company and taking full advantage of the market opportunity requires experienced entrepreneurs, science, skills and growth capital. China has all of these.
There are many instances of entrepreneurs that have now built their second major company
The venture capital infrastructure in Beijing is only second to Silicon Valley with many angel investors to validate business plans, hundreds of venture capitalists to finance growth and many private equity and strategic investors to attract the capital required to help the company grow its sales from hundreds of millions to tens of billions.
This scale is extremely important in times of hardship as capital dries up rapidly during a recession. Time after time we have seen European start-ups suffer when venture capitalists have to cut back and focus on their larger allocations in the US.
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China has major strategic investors to guide promising companies through thick and thin, whether it’s the locals such as Tencent or Alibaba or international sovereign wealth funds and technology funds. Plus there is a government that is willing to financially support certain sectors.
Finally, there are the unique aspects of language, culture and regulation that make it harder for global competitors to step in. The person who built Uber’s business in China told us that they had to completely recreate the app for China whereas the same app is used everywhere else in the world.
Regulation
In closing, a few words on the regulatory threat to technology in China. The communist leadership will always intervene where it sees malpractice or initiatives that go against their strategic goals.
Almost every sector has had its turn under the spotlight whether it was online gaming or Alibaba and the education sector more recently. This risk always needs to be monitored closely although over the longer term it helps the quality companies to emerge more successfully as inferior competition is wiped out.
Opportunity
In summary, China has both scale and the key ingredients to continue churning out large technology companies at a far faster pace than other countries.
Robin You, senior investment analyst at RisCura.
Photo by Steven Wei on Unsplash
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