Chinese Tech Beats the US at Their Own Game

technology giants in China set to take over

Apple Inc. [NASDAQ:AAPL], Facebook Inc. [NASDAQ:FB],, Inc. [NASDAQ:AMZN].

They are some of the largest, most powerful companies in the world.

How did they get there? Innovation.

The word gets thrown around a lot, so it’s worth clarifying.

In 2007, Apple’s iPhone wasn’t technically innovative. They borrowed the software from the iPod. Other phones already had touch screens. You couldn’t store more data on an iPhone than a Nokia, at the time.

But they were innovative in the way they created the iPhone.

They gave customers something they wanted but didn’t know they needed. A hand sized computer. One that was attractive to look at, and intuitive to use.

You could say the same about Facebook. The idea for the social network wasn’t anything new. In fact, there were plenty of social platforms before Facebook.

What made Facebook successful was their user experience. They constantly tested out new features to make the experience better for users.

What killed most of the other social networking sites was that they didn’t think of the customer. Many argue the death of Myspace was their ads.

No one wants to jump onto Facebook to watch ads. They want to see what their friends are up to. And it’s why you now see Facebook changing the way they’re showing ads on their platform. Always trying to balance the customer’s experience with financial concerns.

And I don’t need to tell you about Amazon. They are nothing but customer focused. Their goal is to be the most customer-centric company in the world.

So while they initially sold books online, they’ve expanded their products and thought of innovative new ways to bring the customer the lowest price.

Question is, will these companies stand the test of time, or fall to rising stars in the east?

Who’s copying who?

Technology is a fast-paced, cutthroat industry. Any sign of profits is quickly competed away. The three companies above have been able to carve out an advantage, which makes them extremely dominate.

But in the east, all three aren’t so popular.

In China especially, hardly anyone knows about Facebook. Amazon has also said the region is too hard. And Apple hardly dominates smartphones in the middle kingdom.

Many argue this is because of China’s protectionist policies. They have restrictions on investment, as well as strict censorship laws.

The latter are why companies like Google and Facebook are outright banned from the country.

While this probably did help China’s tech industry at infancy, now it’s far less of an issue.

The reason Apple and Amazon aren’t big in China is because the country has their own tech goliaths. Xiaomi, Tencent Holdings Ltd [HKG:0700] and Alibaba Group Holdings [NYSE:BABA].

You might’ve heard these names before. And if you have, it was probably words of frustration. For a long time, China was the world’s copycat.

The biggest objection Western tech companies had against China was that the government demanded to see their source code if they were going to enter the country.

But today, it would be hard to say Tencent is copying Facebook, Alibaba is copying Amazon or Xiaomi is copying Apple.

I’ll use the former to explain. 

The consumer is key

Tencent was originally a messaging app, which is why I compare them to Facebook. Along the way they’ve built an online gaming empire, become an online retailer and launched China’s first online-only bank.

But let’s just focus on the messaging app for now.

Tencent’s crown jewel is WeChat. Just like on Facebook, WeChat users can see what their friends are up too, they can shop online, order food and read articles.

And over the last two years, both have continued to roll out new features. But by comparison, it looks as if Facebook has done nothing.

Facebook has rolled out Facebook Live, reactions, a few games, and tentatively launched Facebook Market Place.

WeChat on the other hand, launched an app store, a workplace messaging portal, clamped down on ‘fake news’, offered in-store mobile payments and was even broken into court rooms.

Bloomberg wrote yesterday:

No company worldwide has come close to the depth and breadth of WeChat usage.

Exhibit A: WhatsApp. Bought by Facebook Inc. for $19 billion four years ago, Mark Zuckerberg has barely done anything with it. Don’t blame Chinese censorship and protectionism for the fact that you can’t book and pay for a doctor’s appointment over WhatsApp.

If you look at user engagement, which is what advertisers like to see, WeChat wins hands down.

At the start of 2018, Facebook said they’ve made changes that will reduce time spent on Facebook by roughly 50 million hours every day.

WeChat users wouldn’t dream of jumping off the platform. They use it for everything…and I mean everything.

Take a look at a typical day for WeChat user Celia Chen, as reported by Medium.

A typical day on WeChat 09-03-2018

Source: Medium
[Click to enlarge]

Every dot point is time Celia spends on WeChat.

And because WeChat continues to test and invent more features, users should continue to be engaged. You could say that WeChat has been more user conscious than Facebook over time.

That’s exactly what will bring in a flood of advertising dollars to the platform.

Setting yourself up to profit

In Wednesday’s Money Morning, I wrote about how China’s tech industry could soon rival Silicon Valley.

Not only is China aiming to be the innovation nation. Some of China’s biggest tech companies, like Tencent and Alibaba, are pouring hundreds of millions into start-ups.

Tech companies globally, especially in China, have now become so much more. They’re not just search engines or social networks. They’ve become tech conglomerates, spreading across every aspect of our lives.

This is not to say companies like Alibaba and Amazon, or Facebook and WeChat can’t co-exist. However, right now you could argue Chinese tech has a much longer runway for growth.

And there could be a lot more money flowing into China’s tech-teeming cities.

Make sure you’re on the other end.

Kind regards,

Härje Ronngard,
Editor, Money Morning

Harje Ronngard

Harje Ronngard

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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