Quite a few times I hear people say, in the Internet sector there are only two superpowers countries: U.S. and China. It is apparent for U.S. to be No. 1, and It is tempting to think that China has secured the second place, given the fact that China has quite a few giant companies that are as influential domestically as their U.S. counterparts, as Baidu to Google, Alibaba to Amazon and Tencent to Facebook. There is even an abbreviation for the monopoly of Baidu, Alibaba and Tencent written as “BAT”, due to the fact that these three corporations’ investments almost cover every realm of China’s Internet business. Just to name a few: Baidu is in coalition with Qunar, Chinese version of Priceline, Alibaba alliances with Youku Tudou, Chinese version of Youtube, and Tencent is behind DiDi, Chinese version of Uber. Talking in turns of market evaluation, as of November 25 2015, Baidu is worth 71 billion while Google is at 532 billion. Alibaba hovers at 201 billion while Amazon is at 315 billion. Tencent has an equivalent USD market cap of 188 billion and Facebook is at 298 billion. Except for Baidu, the other two seems quite close to their respective counterpart, which seemingly validates the claim that China is the other superpower.
But, can we safely assume that China’s current advantage is an indicator that this country’s companies will continuously thrive without any looming crisis? If you look closely, you will find that the underneath factor that gives Chinese companies an edge today is likely to hinder their competency in future: the closed loop business environment.
How does China’s closed loop business environment look like? Just imagine a glass-made greenhouse which lets sunlight to radiate through, so the internal plants can obtain their necessary energy and heat, but allows no air exchange with outer environment, so in-house temperature can be maintained at a high level for fast plant growth. To Chinese Internet companies, those newly emerging IT technologies are sunlight, which you can have access to the instant it is being released, and the domestic market share is in-house air, which you can secure by preventing sharing with outside competitors.
Chinese companies benefit tremendously from such a business environment. The free flow of technology in the Internet industry is a brand new thing that you can hardly find in any other sector. For Internet companies, often only user and business data is considered classified information, while technology is not. Not only so, those well established companies make great efforts in formulating new architectures, frameworks and open source them, in order to be more influential and popular in the tech world. This young tradition of freely sharing intellectual products become viral in the last few years, making the intellectual cost of starting up an Internet business much lower compared to a decade ago. In today’s China, though it is still very difficult for domestic companies to produce jet airliners to compete with Boeing, semiconductor chips to compete with Intel, or even commodity automobiles to compete with Ford, but Alibaba handles a much higher web concurrency than Amazon using backend architectures (such as V8 engine for NodeJS) that are conceived and built by Google on the other side of Pacific ocean, for free!
Technology alone is far from being able to ensure Chinese Internet companies to prosper. The other equally, if not more, critical factor is that China has a 1.3 billion people’s market and there are many hurdles lying between it and foreign competitors. Alleging there may be national security concerns (though not openly), China has been using Great Firewall to block or partially block almost every foreign information sharing or media platform, such as Google, Facebook, Twitter, Youtube. Without this “wall”, some argue, many of China’s domestic Internet business would not exist at all. For those international businesses that do not involve “sensitive” information handling, China’s unique judicial and societal environment poses another challenge. It is well known that China’s largest video portal site Youku Tudou had been long using pirated content to attract internet traffic, and Taobao, Chinese version of eBay, has been so tolerating to counterfeiting goods that it is labeled as “fake goods hub” by many Chinese netizens. Unlike that Internet companies spend a lot of time dealing with excessive frivolous lawsuits in the U.S., when infringement happens in China, it is very costly for the victim to escalate a case to judicial level, and even when you win a lawsuit, the compensation is often not that serious. For companies brewed in a pure capitalism environment, doing business in China is very tricky, and even more so for those young foreign Internet companies. This is why you see Uber recently vowing “we want to be the first real successful U.S. Internet business in China” by taking a series of “unusual” steps.
Although seemingly that free flow of technology and a uniquely closed domestic market is helping China’s Internet sector at the current stage, its long term effect may be quite adversarial, and it is not difficult to ponder. Relying on free imported technological stack leads to sloppiness and reluctance in investing in next generation technologies, because such investments will always be dwarfed by making fast money using current available resources. While you can see Google is betting heavily on auto-driving vehicles and Facebook is testing drone based Internet coverage, you can hardly find similar news from Baidu and Tencent. By the time the next business model emerges and open source becomes not applicable, Chinese companies are very likely to falter because they have long been acting as followers. A uniquely closed domestic market is also harmful for Chinese companies to think globally and expand their business worldwide. Without the ability to operate globally, Baidu is worth one seventh of Google in turns of market cap, even though it dominate 60% of a 1.3 billion people’ search market. When you are highly dependent on a single market, it almost always makes your business fragile to resisting economic fluctuations.