Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
Growing and making profits on the internet has been relatively easy for China’s tech firms when the industry took off, says veteran Internet watcher Matthew Brennan to the state-owned CGTN. But those easy gains are over now the government stepped in to regulate the industry and massive growth is harder to get, he adds.
CGTN:
In mid-2016, word started to go around that the Chinese internet had started to enter the “second half of the game.” The number of internet users in China exceeded 1 billion by June this year, making it the country with the largest internet user base in the world. But the rate of growth is slowing, from a 20-percent year-on-year growth rate before 2011 to single-digit growth in recent years.
“The bonus period of consumer internet is now fully over,” said Matthew Brennan, a China-based technology analyst. “The lower-hanging fruits are gone, and the growth opportunities are either going international or going into lower-tier cities.”…
“Before, it was very wild in terms of how those companies operated,” said Brennan. “Now it’s a matter of restoring orders.”…
Attempts to develop the industrial internet also surfaced, with a series of policies introduced to use technology to transform China’s industrial base. In November 2017, China’s State Council issued a guideline on deepening the “internet plus” advanced manufacturing to develop the industrial internet.
Given that China is moving up the value chain, there is a strong emphasis on manufacturing from the government’s perspective, said Brennan. “China has a considerable advantage in manufacturing, having been the world factory for many decades now. Keeping that advantage makes a lot of sense.”
China veteran Kaiser Kuo discusses the relations between the US and China, and here focuses on the splintering of the internet, at a wide-ranging interview at the Wire China. “I also think we need to recognize that our worries are more about us than they are about China. We have in this country a real problem with surveillance capitalism, as it’s been called,” says Kaiser Kuo.
Wire China:
Given that first narrative switch you described — the now-accepted idea that technology has not led to a more open political system in China — many people talk about the splintering of the global internet. Do you think a splintering is inevitable?
To some extent, we have to recognize that there has already been a splintering when it comes to a lot of popular services on the internet. A lot of that owes to China’s very severe regime of internet censorship. But I worry about the United States accepting this as a norm and simply going along with it and imposing these same types of objectionable ideas that run so counter to our core values. I think the impact of it is not so much economic as it is moral, and it would be a betrayal of our values to embrace this. I think we should all be working to have a more open internet rather than acquiescing, and proactively helping it toward this other outcome — a splintered, fragmented, and decoupled internet.
I also think we need to recognize that our worries are more about us than they are about China. We have in this country a real problem with surveillance capitalism, as it’s been called. Our concerns over Chinese tech have been amplified in large measures by our worries about how American tech companies are treating our data, and following our every click online and targeting us with greater and greater precision.
Let me put it this way: the Trump administration and its moves against companies like Tencent’s WeChat and Bytedance’s TikTok were clearly never about national security. They were never about data privacy. We’ve seen that now. It’s clear, at least to me, that they were about this broader project of suppressing China’s technology prowess, and were very much of a piece with what we’ve done with Huawei. There are important differences between them, of course. And I think from a national security point of view, you could certainly make a stronger case for Huawei being of concern. But when you look at WeChat, which has users only in the single digit millions in the United States, almost all of them are either Americans with strong connections to China or are Chinese nationals or ethnic Chinese. That national security case is very weak. With TikTok, it’s almost laughable.
The WeChat and TikTok ban is a good example of how many American lawmakers view the U.S.-China tech competition as a zero-sum game. Are there areas where you could imagine productive cooperation in technology between the two countries?
I think if you look back over the last 30 years, cooperation in technology has been fantastically fruitful. Let’s start with immigration policy. The Trump administration is going after H-1B visas and trying to restrict the ability of ethnically Chinese scientists, researchers or technologists to participate in research in the United States. All these things are shooting ourselves in the foot and surrendering, or deliberately blowing up, what is probably the single greatest advantage that this country has had in technology. You only have to look at the great companies of Silicon Valley, Seattle, or Boston, and look at a list of the surnames to realize what kind of contribution is being made by people who the Trump administration’s Department of Justice is targeting through its China initiative, that Homeland Security is trying to prevent from entering this country, and that the Trump administration is attempting to demonize. Part of productive technology cooperation would be stopping this utterly feckless policy and reversing it. We can do that and still protect American national security interests if we put a little more trust into the natural immune system of an open society.
The successful social platform Tiktok got into hot water when it comes to its relation with China, now the company goes international. Former Baidu communication director Kaiser Kuo looks at The Ringer how Tiktok thrived, like others, in this climate of uncertainty, fuzziness and unpredictability that is key for China's internet.
The Ringer:
“I just remember it was like yesterday that we were all so disparaging of China’s ability to innovate,” Kaiser Kuo, a journalist who has worked in the Chinese tech industry and cohosts Sinica Podcast, told me. “Freedom was not only the necessary condition for being innovative, but it was also even, more hubristically, a sufficient condition.” But in recent years, China has gradually disproved that theory with its mastery of dockless bikes and mobile payments. The two countries are now competing to control the growing sectors of artificial intelligence and global telecommunications. And in May, the Trump administration moved to essentially ban the Chinese telecommunications company Huawei from the U.S. market...
From its launch, this lack of clarity has been apparent to TikTok users. Many teens have complained about being surreptitiously booted from the app. Others suspect their content has been intentionally kept away from the all-important “For You” feed. In late November, a 17-year-old Afghan American high-schooler named Feroza Aziz tucked a political message into a standard TikTok beauty tutorial. “Use the phone that you’re using right now to search up what’s happening in China,” she says in the clip, while curling her eyelashes. She then criticizes the Chinese government for keeping Muslim Uighurs in mass detention centers in the country’s far western region of Xinjiang. The video was briefly removed from TikTok, and Aziz was temporarily unable to access her account. But after the incident was picked up by news outlets, TikTok apologized, overrode her ban, and brought back the video, claiming these issues were due to a “human moderation error” and a separate, unrelated issue with Aziz’s account. Whatever happened, Kuo says this kind of lack of clarity keeps with standard Chinese censorship practices. When loading a forbidden website in China, users often encounter the same standard error page you might find with a weak Wi-Fi signal. “The line has always been sort of deliberately blurry,” Kuo said. “They deliberately keep it fuzzy so that the idea is if you’re not sure whether you’re going to step over it, you’re going to self-censor. You’re going to be more careful about what you say.”...
Kuo, who worked at the Chinese search engine Baidu, says companies’ willingness to censor is often just a means to an end. “When the Cyberspace Administration of China sends somebody over, or when they’re having these conversations about what videos, or search terms, or topics need to be censored, it’s not like these companies are saying, ‘Oh, hey, let me suggest a few more to add to this blacklist,’” he said. “They’re trying to comply as minimally as possible. What goes on that list will be different every time and it will change day to day.”
Online education is a booming business in China, and regulations are catching up, very slowly, says China-lawyer Mark Schaub in a thorough overview of the legal minefield for online educational ventures at the China Law Insight. "Curiously for a business that combines two highly sensitive areas of the Chinese economy – the internet and education – online education was only first officially addressed in 2018."
Mark Schaub:
The past five years witnessed a boom in the online education sector in China with annual revenues increasing from RMB 122.54 billion in 2015 to RMB 269.26 billion (forecast) in 2019[1]. The rapid expansion is attributable to consumers’ love of the internet, the continued growth of the middle class combined with the high regard in which education is held in China.
However, the online education regulatory regime has not matched the sector’s speedy development. The regulations remain fragmented and spread across a variety of regulations that govern online activities more generally.
Curiously for a business that combines two highly sensitive areas of the Chinese economy – the internet and education – online education was only first officially addressed in 2018.
To some extent the PRC regulators are catching up as they have issued a slew of regulations in order to better regulate online education. The regulations acknowledge the hybrid nature of online education as a number of different authorities are cooperating in building the regulatory framework. ...
Despite the rigid regulations outlined above there are many large education companies that are very active in online education in China. Some have operated an offshore model, but most have adopted a VIE model.
The VIE model is where a foreign company arranges for domestically incorporated entities to be held by nominees and which are controlled by the foreign company by means of contractual arrangements. Under a VIE structure, the “controlled” domestic company obtains the requisite licenses to operate the business. The contractual arrangements typically include exclusive service agreements which allow the finances of both entities to be consolidated under GAAP accounting rules.
VIE structures are also used by foreign investors who wish to circumvent restrictions on operating in China in restricted or prohibited sectors (such as online, education and online education!).
It has long been considered that VIE structure is a “grey” area of Chinese law as it has never been tacitly approved by the PRC authorities and there have been some cases where the domestic company decided to not fulfill its obligations under the contractual arrangement and when taken to court it was ruled that such contractual arrangements were unenforceable as they were intended to circumvent PRC regulatory requirements.
In China, the internet is the economy. SOSV managing director William Bao Bean explains how international firms can enter the China market. With magic information on how Tencent and their WeChat dominate the playing field, and how you can win that war. And how Chinese companies are conquering the world.
Google's effort to enter China's censored search market has failed a second time, first in China itself, now because of opposition in the US and Google staff. Former communication director Kaiser Kuo at China's leading search engine Baidu looks back at how the internet company failed at its first move back in 2006, for the MIT Technology Review.
The MIT Technology Review:
Central to that decision by Google leadership was a bet that by serving the market—even with a censored product—they could broaden the horizons of Chinese users and nudge the Chinese internet toward greater openness.
At first, (in 2006) Google appeared to be succeeding in that mission. When Chinese users searched for censored content on google.cn, they saw a notice that some results had been removed. That public acknowledgment of internet censorship was a first among Chinese search engines, and it wasn’t popular with regulators.
“The Chinese government hated it,” says Kaiser Kuo, former head of international communications for Baidu. “They compared it to coming to my house for dinner and saying, ‘I will agree to eat the food, but I don’t like it.’” Google hadn’t asked the government for permission before implementing the notice but wasn’t ordered to remove it. The company’s global prestige and technical expertise gave it leverage. China might be a promising market, but it was still dependent on Silicon Valley for talent, funding, and knowledge.
Google wanted to be in China, the thinking went, but China needed Google...
The Google announcement shoved cyberattacks and censorship into the spotlight. The world’s top internet company and the government of the most populous country were now engaged in a public showdown.
“[Chinese officials] were really on their back foot, and it looked like they might cave and make some kind of accommodation,” says Kuo. “All of these people who apparently did not give much of a damn about internet censorship before were really angry about it. The whole internet was abuzz with this.”
But officials refused to cede ground. “China welcomes international Internet businesses developing services in China according to the law,” a foreign ministry spokeswoman told Reuters at the time. Government control of information was—and remains—central to Chinese Communist Party doctrine. Six months earlier, following riots in Xinjiang, the government had blocked Facebook, Twitter, and Google’s YouTube in one fell swoop, fortifying the “Great Firewall.” The government was making a bet: China and its technology sector did not need Google search to succeed.
Tencent watcher Matthew Brennan has an in-depth look at how the recent reorganization of the internet giant reflects on the internet in China, especially how the company that became big through WeChat and B2C moves towards a more industrial approach, he writes on his weblog at China Channel.
Matthew Brennan:
“From the management side, the biggest challenge we face is internal organization. Right now Tencent needs to get better at doing B2B.” – PonyMa, Tencent Annual Internal Staff Meeting 2017 Dec 15th.
This quote is from the annual Tencent internal staff meeting last year, it shows the higher management have been aware for a considerable time that change in organizational structure and strategic focus were necessary. Pony Ma when he has given public talks over the past year, they have mostly been focusing on the areas of B2B business most often mentioned would be Tencent’s smart retail solutions.
It seems that higher management has decided that the development of Tencent’s B2B solutions will decide the future potential of the company. B2C business has peaked as the number of mobile internet users has passed its rapid growth stage. User growth for most major internet companies has declined considerably.
Yet when doing B2B internet business in China, Tencent will undoubtably find themselves competing with their arch rival Alibaba and this competition will be tough. Alibaba unlike Tencent has B2B in their blood. From the early days their company started out with the incredibly tough job of making sales of their internet services to factory owners who’d never heard of the web before. Persuading them of the merits for this new way of gaining clients without meeting them in person.
“Many people said we only have ‘B2C’ in our DNA. B2B is not in our blood. I don’t believe that. I think that every evolutionary successful species holds characteristics that weren’t there at the beginning but were evolved over time.”- Martin Lau, Tencent Internal Staff Meeting 2017.
Tencent’s traditional strength throughout it’s 20 years of existence has always been in B2C. They have a proven understanding of how to monetize large user bases. They have access to the deep social graph of Chinese internet users and they are consistently able to produce products that Chinese consumers love to use.
Apart from investment income, Tencent’s main profit model today is to accumulate new users, cultivate their usage habits over time, and make profits eventually through games, user fees, and advertising. This monetization could be said to be a long and indirect process. By contrast, the revenue earned from B2B businesses appears to be more direct and the clients are often stickier. Once the relationship is established, transactions will continue, and the income is more stable than B2C.
“[Expansion of internet access] is a double-edged sword. It’s good for internet companies, and good for the government if they want to control the population better, but it also means there are more risks,” said Shaun Rein, the managing director at China Market Research Group. “It’s easier for a lot of criminals to push gambling, pornography or drugs because it is such a large internet market.”
As of June this year, seven in 10 Chinese internet users have shopped and paid for purchases online. About 566 million people use mobile payment, an increase of 7.4 per cent compared with six months earlier.
China's deep Confucian roots do influence the way the internet has developed, says marketing veteran Tom Doctoroff, author of What Chinese Want: Culture, Communism, and China's Modern Consumer, to the South Morning Post. “I call it pride commerce, where there is the idea that you are what you buy … and that sharing your interests is a way to make your identity stronger,” Doctoroff said.
The South China Morning Post:
Social+ apps have also gained traction because Chinese tend to be more expressive and open online compared to in person due to the strong influence of Confucian values that minimise individualism in favour of the collective good, according to Tom Doctoroff, chief cultural insights officer at branding and marketing consultancy Prophet.
“The Chinese often generate social currency through their activities and online persona. The online world is a place where you can project your identity safely, and so there is a greater amount of expressive liberation happening online in China relative to other countries,” he said.
As China continues to prosper and its middle class becomes more affluent, many Chinese want their interests or material possessions to reflect that they are “sophisticated and worldly”, so many are happy to share their personal interests or purchases with others online, he said.
“I call it pride commerce, where there is the idea that you are what you buy … and that sharing your interests is a way to make your identity stronger,” Doctoroff said.
The World Internet Conference in Wuzhen has long been derived as part of China's propaganda tool. But those days are over, writes William Bao Bean, managing director of the Chinaccelerator, who attended the conference last month, together with IT leaders from the US and China, he writes in Medium. "It is going to be a wild ride."
William Bao Bean:
While three of the top 20 political leaders in China attended the event, along with the Deputy Prime Ministers of Thailand and Mongolia, the more important part of the WIC’s guest list was its heavily curated group of global internet power elite, who gathered for open- and closed-door sessions over two days in a meticulously restored river village and adjoining conference facility built solely for the event. While Pony Ma and Jack Ma don’t hang out together like they used to, all the major players were in the house, and talking business.
The main stage presentations were each about five minutes long, and there was nothing subtle about the order of company presentations — size matters, and the largest go first. Presentations focused not on new product announcements, but on market power and technology advantage. How many users. How much data. How many AI researchers. What can we do that you can’t.
Like schoolyard rivals, each company strutted their stuff and radiated an unspoken challenge to the rest. The ARkit technology, to give one example, makes Apple the largest Augmented Reality platform in the world, because they make their existing iPhones and iPads AR-capable through software — and they don’t want you to forget it...
First it was copy to China. Then China innovation. Now even a company as big as Facebook is cribbing their Messenger product roadmap from Tencent’s WeChat.
In 2015, the US saw about US$72bn in venture investing, versus US$12.5bn for Europe combined. China was at roughly US$60bn. In the two years since, local Chinese governments have reportedly poured another US$250–350bn into Chinese venture capital firms.
At the conference, I learned that there are now 60,000 VC firms in the country, as well as 130,000 startups resident in some 3,200 incubators. There isn’t enough market in China to support this many companies at this level of investment, so China is going global. When you go from 50% market share to 15% in five quarters, as Indian handset brands just did, you will know what that means. Buckle up — its’ going to be a wild ride!
Key players in the US and China have profoundly different ways to expand, says William Bao Bean, managing director of Chinaccelerator to the Harbinger China. Those major player changed the playing field profoundly, also for startups.
The Harbinger China.
William: In the U.S., companies like Facebook have lagged behind China for a year-and-a-half to two years now. And it's taken about a year-and-a-half for Facebook to develop many of the features that are currently coming out on [Facebook] Messenger and WhatsApp around payment and commerce.
So here's the difference: in China you can go on any social network and pretty much anything that you see you can click and buy, whereas on Facebook, on [Facebook] Messenger, on WhatsApp, on any of these platforms, they have a different business model, or actually, they do not have a business model. They are not making any money. So Facebook played the long game and now they are making lots of money. But it's all advertising based and if you think about basic economics, advertising drives behavior. And usually people want to drive purchasing behavior so advertising revenue is actually a subset of the actual commerce revenues. Advertising drives game revenue; advertising drives commerce revenue.
Facebook makes money on advertising while in Asia, social media platforms like WeChat and Weibo make money on commerce such that they get a cut of the actual purchase. So if you control the payment platform as well as the user, it's much more powerful than just controlling the advertising. You can potentially have an order of magnitude of greater revenue. So we will see an interesting battle played out in other countries like India, where Facebook and WhatsApp are strong and where Chinese players have backed local commerce companies and local payment companies. So it'll be the Indians backed by the Chinese against U.S. heavyweights like Facebook and Amazon. And that'll be interesting to see how things play out, especially in comparison to China, because the Chinese retail industry is under a huge amount of pressure since people don't carry wallets or buy offline anymore.
Adam: Given that Facebook is entering new markets like India, and with the other Chinese-backed providers which have payments attached to the virtual and social experiences, how do you think Facebook might localize their products or customize in those particular markets in terms of payments?
William: Facebook does not localize. They have an “one size fits all” strategy. Facebook in the U.S. is the same as Facebook in India. They can add features, and they are adding payment methods. But the bottom line is that a product designed for one market does not always work in another market. So far Facebook has been very successful in Southeast Asia and same with WhatsApp, but they are somewhat bounded by the fact that they do not localize. So what you'll see play out is global companies like Facebook and Google increasingly going up against local players backed by Chinese companies like Alibaba and Tencent.
I think it is like the next World War. It's not going to be fought with the tanks and bullets and guns, but between global companies. Instead of having 80 percent of the money made by 20 percent of the companies, it's 99 percent of the money being made by 1 percent of the company.
China is not having one internet apart from the rest of the world, but two, tells internet expert Matthew Brennan. Both Tencent and Alibaba have their own ecosystems, and they do not talk to each other. When dealing with China's internet, you need to deal with both, he tells.
VC-veteran William Bao Bean tells about his 22-year adventure of connecting tech, banking and the internet in Asia, at Haymarkt HQ, and answers questions by Angela Kwan and her audience. How does China's internet work?
Tencent has become the major force in China, and refusing an offer by the giant is impossible for any startup, says internet expert Andy Mokto Bloomberg. Pony Ma, the CEO of Tencent, is almost like Don Corleone, he says. And it is going international too.
Bloomberg:
WeChat now has 937.8 million active users, more than a third of whom spend in excess of four hours a day on the service. To put that in context, consider that the average person around the world spends a little more than an hour a day on Facebook, Instagram, Snapchat, and Twitter combined. Tencent’s services are so pervasive in China that startups there find it difficult to refuse forging alliances with or accepting investment dollars from the company.
“It’s a little bit like the Godfather Don Corleone saying, ‘I’m going to make you an offer you can’t refuse,’ ” says Andy Mok, founder and president of Beijing-based consultant Red Pagoda Resources LLC. “If you don’t take their money, and they invest in a competitor, it can be deadly.
With WeChat’s rise, Tencent has tried to act like, or at least look like, a global technology leader. Later this year it will join Apple, Amazon.com, and Facebook in opening pricey new headquarters—a pair of conjoined glass skyscrapers designed by Seattle-based architecture firm NBBJ Design LLP. The towers, linked by three angular skybridges, resemble giant, slow-dancing robots.
The internet in China has become the country's public sphere, says China watcher Kaiser Kuo, former Baidu communication director, at the Paulson Institute. Despite blocked websites and government control, it is the place where netizens express their opinions and discuss.
Competition in China is bloody and fierce, but as the Chinese internet companies go global, also China's internet wars go global, says William Bao Bean, partner at SOSV to FTChinese.Didi taking on Brazil's 99, its home-grown taxi-hailing app, it a telling sign.
FTChinese:
“The focus for the partnership with 99 is on developing the enormous, untapped potentials of Brazilian and Latin American markets,” said Didi, adding that it has “a very firm commitment to a globalisation strategy”.
“The war on one front is now being fought everywhere, globally,” said William Bao Bean, partner at SOSV, the Chinese software start-up accelerator. “Before it was fine to be the top app in China or in the US. That’s no longer enough for Uber or Didi.”
Didi has also invested in Lyft, Uber’s main US rival, as well as GrabTaxi, which is popular in Southeast Asia. The three car-sharing apps are part of a global anti-Uber alliance in which users of one app can hail the others’ cars when travelling abroad.
More Chinese internet users are looking for good answers and are willing to pay for it. Paid Q&A apps emerge in China and business consulent Andy Mokdiscusses at CGTN America their business models and their chances to succeed.
