Some of China's greatest advances depend heavily on local conditions

https://www.bloomberg.com/view/articles/2017-12-03/maybe-china-can-t-take-over-the-world

by iamthirsty • 9 years ago

117 88 9 years ago

One of the major puzzles of corporate China is why firms have struggled to expand internationally. The answer may be that they're offering solutions to problems that don't exist in quite the same way overseas. Unless they can cater to the needs of customers operating under very different conditions, their remarkable progress may end at China's shores.

Is this not the case for all companies who want to scale internationally? Maybe I am naive but I think it would have to be extremely difficult for a U.S company to immediately succeed in China w/o extensive knowledge/expertise beforehand.

TheAdamAndChe• 9 years ago

It is difficult, which is a _massive_ reason why multiculturalism and diversity has been pushed so hard in our corporations.

k__3• 9 years ago

Yes.

I don't think this will be a problem for China.

They got enough people on the inside to make their companies really big, more than the US and they got rather big too before selling to outside customers.

adventured2• 9 years ago

It's not going to be so simple for China going forward. Every aspect of their growth will get a lot more difficult, including that switching to a services dependent economy is dramatically slower growth than what you get from filling out extreme slack in a very backwards economy that hasn't fully industrialized (China circa 1980s & 1990s).

It doesn't matter how many people you have on the inside in isolation. It matters what the output per person is combined with how many people you have.

China is running into an increasing blockade with its largest trading partners, as they recognize China has been playing the game one-sided for a long time (to say nothing of the rampant state-supported dumping). It's still illegal to acquire the majority ownership of a Chinese company as a foreign entity, 16 years after they joined the WTO.

It cost China $40 to $50 trillion the last ten years, to grow as they have. The return they're yielding on each dollar of debt has long since gone below 1 to 1. Now their households are rapidly taking on large amounts of debt. Their corporations are the most indebted on the planet. It's a trick that can't be duplicated in the next ten years to keep the magic growth machine going.

In the span of ten years, China caught up to the US in terms of total debt load as a percentage of GDP. S&P is projecting they'll expand that by a further 77% by just 2021. That would entail taking on another $25 to $35 trillion in debt, in just four years or so. To put that into context, in four years they'll add roughly ~$3 trillion to their GDP; can that amount of economic expansion fund another $25 to $35 trillion in debt? We'll soon find out (by another contrast, the last $25 to $35 trillion in debt they took on, coincided with $8 to $9 trillion in new GDP; while high, a $3 of new debt to $1 of new GDP ratio sure beats a $10 of new debt to $1 of new GDP ratio).

Their large foreign reserves used to be a safety offset to their debt. Except now debt has grown ~15 fold beyond the $3 trillion they have in theoretical reserves and is still rapidly expanding while their reserves haven't net moved in years (with at least half of those reserves already spoken for).

They're well aware of this dangerous situation of course. Which is why they're attempting to slow the growth of debt, but they've entirely failed at that:

https://www.cnbc.com/2017/11/26/chinas-deleveraging-debt-sti...

And this vast collection of debt has happened while China still almost entirely lacks an actual entitlement system similar to developed nations with the highest standards of living (such as Sweden, Germany, Denmark, Canada, etc). I don't see how they can ever afford that, if they're already starting from a position of such extreme debt entanglement. As their population ages rapidly, they'll find a far greater need for those types of systems, and it will further drain their growth potential by siphoning growth capital (up to now, China has gotten a free ride on that aspect, they've had to devote very little capital to such things as a total percentage of their GDP or budget).

Probably the only reason China is still chugging along with growth at this point, despite the mounting problems, is that they've done a pretty great job learning from other developed economies. It has helped them get huge at warp speed without tipping over. They expended a lot of effort on studying other major economies and their central bank systems. If anything gives them an opportunity to not fall into the Japan-trap in terms of debt and growth, it's that willingness to learn fast, adapt fast and rechart the map quickly if needed (when it came time to change course, Japan refused, they kept piling up debt even after it crushed their budget and savings rate; they kept over-spending on public works even as the return on investment went negative, and they entered a repeating cycle of making the same mistakes over and over again for years as it increasingly trapped them in a huge debt spiral).

seanmcdirmid9• 9 years ago

Even though china borders Myanmar, there are more Burmese working at google in the USA than Burmese working for all of china’s tech companies. Now what services are becoming popular in newly opened Myanmar? Hint: none of them are Chinese.

tanilama• 9 years ago

Exactly. If you can grow so big at home...say maybe 20% of the world economy in near future, they don't need to go outside of China really.

cbcoutinho• 9 years ago

Unless they can cater to the needs of customers operating under very different conditions, their remarkable progress may end at China's shores

What kind of double speak is this? At least some of the success of wechat, alibaba, et al is due to the fact that China is not operating in an open economy. International companies can't operate in China for reasons related to IP or information availability - and we're talking about how people outside China operate under different conditions?

Color me surprised

mazerackham3• 9 years ago

Haha don't reach for Orwellian buzzwords so quickly =P. A lot of successful Chinese tech companies don't succeed just because competitors were banned. Even when Google was in China, Baidu catered specifically to local needs whereas Google just paratrooper dropped their product in. Baidu was more successful. As for Wechat, given how Facebook messenger has been shamelessly copying Wechat features for years, I highly doubt Wechat was at danger of losing marketshare to Facebook.

thewhitetulip7• 9 years ago

Not really. If you look at Baidu, the company formed because Google left/was kicked out. China is a tightly controlled market because of the banning culture. That's why, they had to build everything from scratch, their own OSes, routers, phones, car, electric cars, AI etc.

Also they are opaque because no copyright law exists and it is too big of a market that other countries will do something offensive against it.

wecash is used as an acceptable form of currency by everyone, including Starbucks in China. That's WeChat's currency launched way back. Tencent can't repeat WeChat's success elsewhere because we have an open market and they do not.

Canada2• 9 years ago

What Chinese operating systems are there?

electic2• 9 years ago

I think the main issue might be language. For companies, the english block is a huge benefit. If I launch a company in the UK, I have customers in Canada, India, United States, Australia, and New Zealand right of the back. I can then focus on refining the product and get into the mindset of making the product better for different international audiences.

Secondly, the english block tends to have a similar legal and regulatory mindset in dealing with companies. The Chinese system seems opaque and hard to understand for outsiders and for good reason. There is a lot of government influence and thinking that shapes Chinese products which doesn't appear elsewhere. That is a huge disadvantage.

When you consider all the of the other issues a young company face, having a huge multi-national singular language and somewhat similar regulatory framework is helpful in getting started.

k__3• 9 years ago

Language is a big point.

Just look at the EU. We have a much bigger population than the US, but most speak their own language, which makes grow from lets say Germany to France or Spain a bigger issue than from the US to Canada.

NicoJuicy2• 9 years ago

Yet, here we are, speaking English

adventured2• 9 years ago

It's also dramatically easier to gain huge scale in the US market first, then lean on that scale to take over smaller foreign markets one by one, even if it's expensive to do so (setting up a david v goliath scenario in the smaller market). Whereas the reverse scenario is perhaps 10x or 100x more difficult. How does a social network that wants to start in eg Portugal, defeat Facebook? That's extremely difficult on a local basis, and that much more difficult if you then want to try to grow up and out of Portugal and take over other Facebook markets.

Facebook by contrast, by the time they fully dominated just the US market, had a billion dollars per year (doubling annually) in cashflow to throw at expansion globally. If you flip that down to a smaller market, and say you start in Estonia and capture that market (while somehow fending off Facebook), how much cashflow do you have per year to spend on trying to take the next market? How well protected is your home base from Facebook taking it from you in the meantime, and so on. The US/Canada + english starting advantage is extreme.

lazyant• 9 years ago

We have a much bigger population than the US

1.5x bigger

whooshee• 9 years ago

Yeah, Language is a point, Unlikely will researchers from other countries publish their papers in Chinese. it create barriers from both sides, both foreign products go into Chinese market or the other way around. However, if China can successfully innovate some great product/models, in consumer sector, it's not a big problem, look at Japan's past successes.

cptskippy• 9 years ago

right of the back

I looked it up just to make sure I wasn't insane, it's "right off the bat" and it's a baseball idiom.

electic2• 9 years ago

Right you are...

tabdon• 9 years ago

It would've been nice if the article covered the successes and failures of the Chinese corp's international operations. If you look at Alibaba, they have been very active in acquiring international companies to compliment their homegrown international offerings. Aliexpress & Alipay are both international offerings. They bought Lazada to cover Southeast Asia ecommerce. And they are trying to buy a large US remittance company in MoneyGram. I'm sure there are many others.

My point is, yes, they enjoy large advantage in mainland that could possibly make it hard for them overseas. But has it actually? Are they failing or succeeding?

gitah• 9 years ago

Completely agree with you. The article looks at just a few companies and use them to claim Chinese brands as a whole won't succeed internationally ever. Very myopic.

The conclusion would be different if the author analyzed Chinese smartphone brands instead. Five years ago, even the domestic market was dominated by foreign brands like HTC and Samsung; now the domestic market is the complete opposite. Looking at the supply chain, back then all China provided was low-paid final assembly. Now, Chinese companies are very competitive in supplying most of the parts: displays, camera modules, fingerprint scanners, enclosures, sound components, RF components, batteries, SOC, etc. Only high-end semiconductor components (RAM, NAND, application processors) are lacking but Chinese industrial policy will rapidly help this area catch up.

Chinese smartphones (phones with a Chinese brand not just manufactured there) have seen massive success internationally in the past couple of years and now make up HALF of global marketshare. In India, OnePlus has higher customer loyalty and sales than Apple in the high-end and Xiaomi is neck in neck with Samsung as the marketshare leader starting from zero two years ago.

Now remember, all of this happened in just the last five years. What other industries will break out in the next 5 years?

woodandsteel• 9 years ago

The article makes some interesting points. I would just add that for industries where economies of scale are important, China's huge size, including its internal market, is a big advantage. Also, being the biggest means more inventors and hence a greater likelihood of inventions that can be exported.

yters3• 9 years ago

What are the Chinese inventing?

mazerackham3• 9 years ago

Just a few - world class manufacturing techniques - world class drone technology - world class civil engineering (high speed rail, bridges) - world class super computers

owenversteeg• 9 years ago

IMHO there's an interesting case to be made here (that China won't take over the world), but this article seems to have all the thought and research of an off-the-cuff tweet. The author spends almost half the article talking about mobile payments, which is a really tiny part of international dominance.

He mentions the gravity model being a limiting factor. Huh? If anything, including the gravity model would sway the balance further towards China and away from the US. China is extremely close to a massive number of highly populated Asian countries, and can run inexpensive trains to Europe. The US has Canada (population 36 million) or Mexico (127 million) close by, but not really much else. As a result, China can inexpensively ship to ~5 billion people, and the US can ship to maybe 500MM. Throw in all of South America (only 400MM or so people) and the US's reach is still under a billion.

Some figures: Northeast US to southern South America is about 11,000 km straight line, which has to be done with a complicated series of trucks, trains, boats, more trucks, etc. Beijing to Eastern Europe is 6400km, and can be done with two trains.

I think that one of the big blocks for China will be regulations around product safety and manufacturing/labor standards. There will be also regional pride ("made in USA"/"made in Europe") products and specialized equipment (processors, optics, scientific equipment.) There are a lot of cases to be made, but I don't think this article makes any good ones.

geomark• 9 years ago

Your point about trains is strong. China also is pushing new train systems into southeast Asia. There's a project going on in Thailand now that will see a "medium speed" train run from the northern border (Nong Khai) to the south. I believe at the northern border it will connect to lines running from China through Laos. At the south I'm sure it will be extended through Malaysia and on to probably Singapore in the future. China will be able to ship by rapid rail to a large chunk of southeast Asia in the not so distant future.

Boothroid• 9 years ago

I saw an incredible video about a drone motor factory in China that made me think the days of China being behind technologically must surely come to an end, and sooner than we think.

jhoechtl• 9 years ago

To acertain extend you are complaining that the US transportation strategy, which was long-time favouring trucks over train and resultet in a very old-fashioned public transport system, is now back-firing?

thewhitetulip7• 9 years ago

Yes, China can ship to 5 Billion people, but what do you think countries will do when China starts dumping products on their shores? levy duties or create awareness in the masses.

I am from India and trust me, even a small shop keepers (I don't mean to be offensive) refuses to carry Chinese goods because "Why support a country who screws up at the global stage".

It is a surging wave which might hurt China.

p.s. the 'screw up' is about designating a Pakistani terrorist as a global terrorist in the UN and China has been vetoing against it.

volgo• 9 years ago

I worked in India and see Chinese products everywhere. You're right that people will openly dislike them, but most of them don't even know things they're using are Chinese.

Like Oppo, Xiaomi phones are basically everywhere. Basically everyone uses PayTM (Alibaba owns 40% of it). Even small vegetable sellers on the side of the rode will have a QR code for you to pay with PayTM

In the end, practicality trumps blind nationalism every time. The Chinese dislike Japanese too, but still buy their cars and stuff.

noetic_techy• 9 years ago

This is one of these points that really bugs me about the US and North America in general. Did you know there is NO land route to South America from North America? You have to take a car fairy at a certain point. Its ludicrous. The US should be actively trying to raise the bar for this hemisphere. Its also not totally unfeasible to create a land bridge from Canada to Europe through Greenland/Iceland. Ideas on how to do this are out there. Why not a silk Road for the America's, and a future Europe connection! Sure you may not equal the population reach of China, but population is posed to start declining globally anyways. Better to have 300 million "rich" people than 2 billion "poor".

sharpercoder• 9 years ago

Even the bike-sharing craze that's drawn so much attention in the West has exploded largely because of China's unique environment. Lower-income Chinese have gravitated toward the super-cheap services in order to solve the so-called last-mile problem, getting to and from public transport nodes. The technology didn't emerge first in the West partly because consumers -- even in bike-crazy Holland -- haven't really needed such a cost-effective solution.

This is a misconception. Holland has the earliest (2003) and most popular bike-sharing service offered by the NS (National Railways).

astatine• 9 years ago

I think there are two perspectives that might provide a different view - the world outside the Western countries and when seen from the view of physical products vs soft services.

I travel a fair bit in sub-Saharan Africa and the extent of Chinese influence has changed dramatically in the last decade or so. The airports in most countries are being built/upgraded by Chinese companies. The major highways are almost always built by the Chinese. Often enough these are financed by Chinese banks. Even at a consumer level there is a visible presence of Chinese cars and trucks. Chinese motorcycles are everywhere. Most supermarkets are filled with Chinese products, and quite often with Chinese brand names. Union Pay from China is starting to get accepted along with Visa and MasterCard at retail establishments. Even WeChat is taking root as a communication tool of choice though WhatsApp is still hugely more popular. There are Chinese owned/run hotels in most cities to cater to the increasing number of visitors and it won't be long before they compete with the large chains like Accor and Marriot for non-Chinese visitors.

To me, there seems a very clear influence at all levels in a very large number of countries (including Sri Lanka, Maldives and many others in Asia). Even in India, where I am from, with its rather complex relationship with China, Chinese products are everywhere. A recent article (https://www.gadgetsnow.com/tech-news/chinese-fashion-e-taile...) shows Alibaba competing quite well with Amazon and Flipkart, the current leaders, in some categories.

There is also a sense that I see of the Western companies withdrawing a bit, if only anecdotally. Most flights I take to the African countries less popular on the tourist circuit has more and more Chinese people looking like they are on business, and a corresponding reduction from everywhere else.

It may be less in-your-face when compared to the spree of Middle Eastern purchases in major Western cities from the earlier decards, but this looks more steady and lasting.

yters3• 9 years ago

Once China begins innovating like the West, then I think they will be on track to truly take over. Otherwise, they may successfully copy and steal much better than anyone else, and perhaps become dominant in that way, but that does not appear to be the same kind of domination the West has produced. Historically, it did not overpower outside influence. Instead, China chose to become isolationist to protect their culture, which ended up stifling their progress.

erikb• 9 years ago

Another bloomberg article. Jees. Replace China with any country or corp you can think about. This title always applies.

Btw westerners would also use Wechat if they could. But my doctor doesn't have his computer system integrated with the Wechat appointment API. And I can't pay Taobao because I can't have an Alipay account as foreigner without a Chinese mobile number.

If we could we would use it, because the mobile market in China is way more developed than in the west. Users don't want to have 1000 ways to pay one product. They want one way to work all the time without hassle.

westiseast• 9 years ago

This is just plain wrong:

Alibaba has succeeded in large part because brick-and-mortar retailing is so challenging on the mainland. Roughly a quarter of the world's cities with more than 500,000 people are located in China -- twice as many as India, the next country on the list. Real estate prices in those urban areas are astronomical, which limits how big stores can be and thus the range of consumer choices.

Shops are everywhere in Chinese cities. Rents are often pretty low, even in the new fancy malls where they’ll offer good deals for new shops. Consumer choice in physical stores is often limited by the ‘herd mentality’ of retailers who crowd hundreds of identical shops together and rarely attempt to cater to niche markets (eg. I’m a woodworking enthusiast and it’s almost impossible to find hobbyist tools in a physical store in China).

Alibaba succeeded because of convenience and customer service - before Alibaba/Taobao, the idea of getting a refund, exchange or return on a faulty product was unheard of. Shopkeepers would often just shrug when you told them the product you bought broke the next day. Alibabas policies on returns and the competitive environment for stores to distinguish themselves changed everything.

50CNT• 9 years ago

Now Beijing is 寸土寸金, which is Chinese for "real estate is really expensive". Yet there's still ghost malls. The herd mentality is real.

That said i enjoy Taobao for how i can get out of town prices inside of Beijing. But that pales in comparison to the sheer amount of stuff you can get on there. Want a chair? Done. Want beta-amylase in a 20kg bag? Done. Want socks? Done. Want a reverse osmosis system? A rotary evaporator? 12kg of chicken wings? Done, done, done.

Slartie• 9 years ago

Consumer choice in physical stores is often limited by the ‘herd mentality’ of retailers who crowd hundreds of identical shops together and rarely attempt to cater to niche markets

Very, very true. It's one of the things about China that I totally don't understand. I've been in Shanghai and visited some of the "malls" with each of them having thousands of these tiny shops inside, everyone selling the exact same stuff as the next one. And I mean "the exact same stuff". The primary tool to differentiate yourself from the others seems to be the attempts at screaming louder than the shop next door. I mean, it's good for the inevitable price negotiation (just walk away, they'll most likely chase you and offer a much smaller price, and even if they don't, one out of the next 5 stores will definitely offer the exact same item so you can retry), but it severely limits the choices, and if there isn't a huge mall that specifically caters to whatever you currently need you may have a hard time getting whatever you want to buy.

I can't make economic sense of this behavior from the point of the shopkeepers. Why be the 50th shop selling the exact same hats as the other 49 shops right next to you? Wouldn't it make sense to sell stuff that you can't get anywhere else in the vicinity? Is the demand for the weird hats you and all the other stores sell really at least 50 times higher than for anything else not being sold in the area?

spyckie2• 9 years ago

This phenomena is much more obvious with physical assets. If you're a country that natural ore, oil, farmland, etc, you will prosper. If you're a country that has few natural resources and is land-locked, you'll suffer.

The idea that you can generate wealth independent of environmental conditions is flawed - there's no such thing as absolute wealth generation. Demand has a price point, and fulfilling that demand has a cost point, and its the environmental conditions that dictate if you'll operate at a profit or loss.

Favorable conditions enable you to operate at profit. These conditions can be a number of things, like location, access to capital, labor, competition or lack thereof, etc. Most of the time, these things are not under your control (unless you're a large corporation that can lobby the government, or you are backed by the government).

China's government has created conditions for profit by creating favorable environments. Profit allows for innovation, which is where the technical advancement comes from.

33a• 9 years ago

Staying in China right now and heavily use WePay. As a counter point to the article my experience has been that it totally sucks compared to a credit card. Credit cards offer consumer protections, convenience and don't require your cell phone to be charged. Given the choice they're a way better option. I would not characterize mobile payments as an "advancement".

bllguo• 9 years ago

I don't see any positives in underestimating China. By overestimating your "opponent", you can only come out ahead. These kinds of articles have the wrong attitude imo.

Some of China's greatest advances depend heavily on local conditions

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