The Western world always sees China through a veil. People get the impression that there are lots of “opportunities” in the country, For example; A friend of mine went to China as an English teacher and ended up building an immigration company that helps Chinese investors buy properties in Portugal. Though it’s a labour-intensive business, his company achieved £1 million turnover within a time frame of 1 year. Following his steps, many of his friends now plan to march over East and “conquer” China. People think of it almost like the gold rush in the Wild West, except that this time, it’s the Wild East and Pacific Ocean/ Atlantic Ocean instead of the Sierra Nevada Range.
However, there is one scary data point that may make you think twice before you migrate to the east: comparing with the aprox. 25% startup success rate in the West, only 1% of startups in China actually survive. There are some common reasons for this:
There are a handful of Chinese Mark 2 tech companies growing from copycats to lions in China. Let’s take a look at the “Chinese version” of popular western concepts.
Chinese startup 101
The internet and tech companies are some of the biggest startup success stories to come out of china. There are almost no success stories about western/international startups achieving any momentum in China. Is it a miss or a myth? I guess we could closely observe Amazon.com to have a better answer. In essence startups from the UK, America and around the world should start thinking about how they’re going to approach China.
Baidu.com is the Chinese version of Google. It reached ¥22.3 billion (around £2.23 billion) revenue in 2012.
Taobao.com is the Chinese version of eBay. It was founded in 2003 by Alibaba Group. It has 370 million registered users with ¥61 billion transactions (around £6.1 billion) value in 2011. It takes up to 80% of the Chinese e-commerce market share.
360buy.com is the Chinese equivalent of Amazon. It was founded in 2004 with a focus on consumer electronic B2C sales and has now expanded to all categories. It reached ¥110 billion (around £11billion) transaction value in 2013.
Kaixin001.com is the number one Chinese version of Facebook. When Facebook was blocked in China, the founding of Kaixin001 was an inevitable outcome by targeting white-collar workers. It takes up to 41.4% of China SNS (Social Network Site) online sector.
The number two of SNS is renren.com. It was founded in 2009, focusing on the student community and social network gaming. It takes up to 25.4% market share.
However, both companies are suffering due to their Weixin competitor. It will be interesting to find out, one year down the road if Kaixin001 and Renren will be completely wiped out.
Due to Chinese culture difference, connecting with people online with professional purpose had yet to mature until recently. Founded in 2008, dajie.com duplicates LinkedIn’s model to build a network for Chinese professionals. The Chinese are known for being very protective of their own “Guan-xi” (it means connection/relationship in Mandarin).
The connect-inbox-meet behaviour of LinkedIn users was believed to never work in China. That is why, though found in 2008, it took dajie.com quite a few year to accumulate 24 million users. Thanks to China’s gradual internationalisation, dajie.com has gained significant momentum and is about to close series C funding from large American VCs.
The rest of the world has Youtube, China has youku.com. founded in 2006. It applies “speed-to-market” tactics religiously so that it offers the best service to its users at all times. In 2010, youku.com IPO’d on the New York Stock Exchange. It is now marching towards a $23 per share target in 2014.
Tudou.com was the main competitor of youku.com. It went IPO on NASDAQ in 2011. In 2012, tudou.com and youju.com merged.
While WhatsApp is suffering from lack of monetization, its Chinese twin, Wechat, is conquering the world. The company Weixin was established in 2012 by Tencent.
Tencent has always focused on instant messaging solutions. Its first blue chip product was QQ (an equivalent of MSN) on laptop and, in 2011, it launched Wechat that targets mobile messaging sector. Within 433 days of its launch, Wechat’s users grew to 100 million. As of Oct. 24, 2013, Wechat’s number of users reached 600 million, literally half of Chinese population.
It’s now launching the Wechat newsletter functions for business to publish content to its followers, Wechat mobile payment, Wechat group buy, Wechat go dutch and other fascinating functions that could expand quickly based on the ripple effect of the “close friend” group that Wechat has taken pride in. By using Wechat, one can chat, shop and pay based on close friends’ recommendation and effectively avoid scam; therefore, it has gradually eroded the market share of other eCommerce platforms such as taobao.com.
Entrepreneurs often aim to cover the entire Chinese market straight away. China is a huge and has extremely diversified needs, unless you have deep pockets, entering without targeting a specific market sector and hoping to grab market share by spending horrendously on marketing and advertisement will not work. As for how deep your pockets should be, let’s take a look at a few failed cases.
Etang.com aimed to be the Yahoo of China that covers A to Z Internet service that one can ever think of. It raised $50 million from DFJ and Sevin Rosen.
It burned through all $50 million of investment capital before the team even figured out a successful business model that worked in China.
24quan.com was the Chinese version of Groupon. Its founder was an investment manager of KKR, a prestigious private equity firm. He successfully raised $100 million in total based on his connections and expertise.
They burned through all the investment capital before figuring out an effective operation model to manage an over expanded team.
Internet startups with no barriers to entry often fall pray to copycats (copywolves) that chase after them. Take the Groupon model, for example, there were up to 5,000 Groupon type websites in China at its peak before 2011. The market was overly saturated and more than half Groupon type companies died quickly. It is believed that only the 3 to 5 top players with deep pockets and the most optimised operational model will eventually survive and thrive in the Chinese market.
In addition to copying the low hanging fruit, there are big players that take this game to the next level, such as the most notorious hostile copycat Tencent based in China. From QQ (MSN equivalent) to Wechat (What’s up equivalent), Tencent has been able to capture the most Chinese users and monetize its huge user base in the most efficient ways. It pays close attention to tech startups in the Chinese market. As soon as a tech startup shows traction, Tencent will offer a very low price to acquire the startup. If the startup refuses to sell, then Tencent will copy the startup’s product/service overnight and use its existing user base to win the battle hands down.
The most fickle Chinese consumers
It is shocking how many consumer-oriented tech companies have ebbed away in China. Following western tech companies’ footsteps, the Chinese have gradually launched QQ (MSN equivalent), Renren and Kaixin001 (Facebook equivalent), Weibo (Twitter equivalent) and Wechat (Whatsapp equivalent). However, while all the western counterparts are here to stay and to some extend/ compliment each other, the Chinese ones get wiped out entirely whenever a new product/service is launched in the Chinese market.
Renren was launched in 2005 and Kaixin001 in 2008, both peaking in 2009. Sina Weibo was launched in 2009 and peaked in 2012. Wechat was launched in 2011, and its market is still going extremely strong. From the pace of how Chinese tech companies fall out of Chinese users’ favour, it is a norm that today’s cash cow will be tomorrow’s stray dog if companies fail to catch up with Chinese users’ fickle preference and appetite for innovations. Without a doubt, the Chinese market is a huge pie with juicy profits for startups. However, when it is hard, even for even insiders to mine the gold, it is far less than certain that outsiders will be able to.
But what about the Chinese economy?
This might just be why you’re looking at this article: you’ve heard, from nearly everyone that claims to be business-savvy, that China’s gold rush is coming to an end.
You know the story: it has been all good and well in China, but now the party is drawing to a close. The bull is finally starting to retire: at the very least, we won’t be seeing the old glorious 8%, even 10% annual growth rate for quite a while – growth rates are now unlikely to exceed 3-4%. More ominously, as growth slowed, China’s mountain of debt will be piling up; and old debts could be due. China has thrived on borrowed money, now runs on borrowed money, but one day the borrowing will come to a stop.
If you think it is game over – think again!
Pessimists will tell you that these signs of economic decline are sure signs that it’s time to pull out: it’s ‘game over’ time in China, or it’s going to be in the future ten years or so. But we beg to differ: The market might be in trouble, but being in trouble does not necessarily equal ‘crashing’. The government and business world is already rallying and adapting, and while it’s true that business opportunities will potentially be less potent than before, ‘to quit’ is not the right conclusion. ‘To wise up’ is.
The truth is, the national stereotypes we know about China and the way business is run within it might not necessarily apply anymore. As China was brought to a rude awakening from the soaring profits, it will have adapted; not only will foreign businesses have become more careful foraging into China, but your business partners on the Chinese end, potentially even government officials – will also have become more careful, more reserved and most importantly, more rational. Doing business deals over drinks may yet be the Chinese model for a good many years, but you’ll be surprised to see just how many recognizable elements in China there are: Contracts are thickening and getting more detailed, and the general attitude towards business is becoming more pragmatic, focusing more and more on practical results than which year’s wine you brought to the dinner table.
Tackling economic decline
Moreover, there is no party in China more eager to stop economic decline than the government itself. And many of the current inhibitions on China’s economic growth are stoppers: post-Snowden backlashes, restrictions on foreign banks and even the restricted internet access that most working in China have learned to adapt to. Should the situation require it, the government could potentially be willing to remove these stoppers – it has shown that it’s practical enough to allow a slower rate of growth in exchange for seriously modernizing the system and fixing the problems left by the economic surge, and it has gradually been relaxing control in various aspects of trade and commerce that it feels has the need to be unimpeded. These are all opportunities for a bold, but cautious entrepreneur with the right support and approach.
Everyone wants a gold rush, but the truth is just that a gold rush does not continue forever. For China, the end of the gold rush could potentially be China’s chance to sober up and stabilise – and your chance to secure your place in the Far East.