Entrepreneurship and China’s big three

Introduction: How can China's emerging entrepreneurs compete in a culture that is dominated by three big companies? Baidu, Alibaba and Tencent the B.A.T, the big three that imitate or consume any smaller competitive new company.

From the University of Sydney Business School. This is Sydney Business Insights. The podcast that explores the future of business.

Sandra Introduction: Hi I'm Sandra Peter. And today we talk to Barney Tan about one of the most dynamic entrepreneurial environments in the world, China. An economy dominated by three big companies but also the place for mass entrepreneurship and innovation. Barney Tan is a senior lecturer in Business Information Systems at the University of Sydney Business School and he's conducted hundreds of case studies in start-ups of existing tech giant and entrepreneurs in China. 

Sandra: So welcome Barney. Thank you for talking to us today. 

Barney: My pleasure. Thank you for inviting me.

Sandra: So what are China's big three?

Barney: In the e-commerce scene these big three firms are collectively known as the B.A.T businesses - Baidu which is a search engine, Alibaba which is an e-commerce giant and Tencent which is a social media platform and basically they are the three pillars of the e-commerce arena in China.

Sandra: What did the B.A.T businesses represent for China today?

Barney: Well these organizations are both pioneers and trailblazers. They have essentially shown to the rest of the aspiring e-businesses in China that there is scope for the development of a parallel e-commerce universe in China, and these B.A.T businesses they're essentially the three pillars of this parallel universe.

So anything that's happening in the West you could see a similar development happening in China as well, like for example if you have YouTube in the West you have Youku in China.

If you had Facebook in the West you have WeChat in China and also previously you would have Renren.com. So there's always a parallel development that's happening. So Baidu would be like Google in China. Alibaba would be akin to amalgamation of both Amazon and eBay and Tencent would be the Chinese version of Facebook essentially.

Sandra: These companies have developed let's say over the last 20 years or so. How has this development of this first wave of tech giants shaped opportunities for the subsequent generations of start-ups?

Barney: Well essentially they provide a template and an example for business development in terms of the strategies they've adopted, the way they have navigated China's regulatory environment, which is a very important factor if you want to succeed in e-commerce in China, as well as the business models that they have created. For example a lot of what's happening surrounding Fintech with all the emergence of firms and start-ups looking to provide Fintech services, all of those firms would actually use services that are provided for example by WeChat, by Alibaba to basically assess the credibility or the credit worthiness of their customers. So they provide services in that way and not only that these big three firms they tend to be the hot bed for the development of technical capabilities and expertise within the entire domain as well because a lot of these start-ups and new emerging tech firms they actually hire former employees of the B.A.T firms and in that way knowledge is generated at the B.A.T firms and subsequently by hiring employees from these B.A.T firms, knowledge diffuses across the entire sector.

Sandra: We've seen a rapid growth in China's e-commerce and companies like Tencent are now actually – I think since April – in the top 10 companies by market cap in the world. Are we seeing equal growth in number of Chinese tech start-ups?

Barney: There are a great number of start-ups. I would say hundreds of thousands if not millions of start-ups. There are a lot of them. But the fact is that many of them do not and will not succeed or the moment they achieve some measure of success they'll be bought into by one of the B.A.T firms. So there is a great number but unfortunately it's very rare that any one of them would actually achieve any measure of success that would be significant.

Sandra: Speaking of their success is it possible for these new start-ups to compete against the B.A.T giants without being bought out or without being copied? And indeed how innovative are these start-up companies?

Barney: These start-ups tend to be very innovative because of the way the competitive and regulatory environment in China is structured. There are a lot of grey areas and generally I believe the philosophy of the Chinese government is that they do not step in to regulate until a particular sector or particular market offering becomes very very significant. One example I have of this would be Internet live streaming TV in China. It used to be that any provider of this service would just do a live stream of say CNN or some other cable channel and nobody would care until the market got too big and then all of a sudden the Chinese government would step in to regulate it. So Chinese start-up companies are very innovative because they're given the scope to be innovative but essentially like I said earlier once they achieve any measure of success they tend to attract the attention of the B.A.T firms. And when they do that they're in trouble. A good outcome for them at that point would be that if they're acquired by the B.A.T. firm, so that would be good, because then they're consumed in a good way. But if the B.A.T firm launches a similar offering, so if you think about the market clout of these B.A.T firms and the size of their user base which could be 500 million users or thereabouts, these innovative start-ups would be crowded out very very quickly.

So in the sense the only e-commerce or online businesses that have been quite successful in the Chinese e-commerce arena over the last decade or so would be those that would already have some established foundation.

Companies especially that are going what in China they call O2O which is a term that you will not hear in the West. It stands for offline to online. So these are large offline companies seeking to move into the online space. Examples of these would be JD dot com which is their version of Amazon. It started out as a logistics company and they have already all of their logistics channels in place, the distribution channels in place so they are able to sell and maintain competitive pricing because the channels have been very well established. Another example would be Suning which is a electronics retailer so they have a chain of hundreds of electronic stores all across China. And because of that when they moved online to sell electronics online they already had a base they had distribution channels they were using stores as distribution points that enabled them to succeed. You must have clouts in order to establish yourself essentially in the e-commerce space. Otherwise you're just waiting to be bought by the B.A.T firms.

Sandra: These B.A.T firms have also been quite successful at keeping companies like eBay and indeed Amazon out of China. What innovative techniques have allowed them to do that?

Barney: Well let me use the example of Alibaba. Alibaba, when they first emerged, in order to compete with some of the western offerings that were already on the market at the time they were just simply relying on their knowledge of the local market. So simply put they were more attuned to the preferences of the Chinese online consumers. I think the most clear cut example of this is if you compared the interface of the Alibaba Chinese website which is 1 6 8 8 dot com that's the URL, 1 6 8 8 if you say it in Chinese its Yiliubaba which it sounds like Alibaba. Now if compared the interface of that website to say the interface of Amazon, you'll see there's a huge difference. So the Chinese market maybe because of the nuances of the Chinese language, they love textual links. They like links in the form of words. But if you look at the websites of the Western e-retailers, everything looks very professional, everything is very organized, and it’s full of pictures and graphics. But the Chinese netizens and the Chinese online consumers they don't like that, they like textual links. Why do they like textual links? I don't know. Right. But they do. And Alibaba knows that and that's the sort of look and feel they provide for their consumers. And another example with Alibaba is with the launch of TaoBao which is their version of eBay, and right now it's pretty much the dominant c2c website in China. Now when TaoBao was first launched eBay was actually there first and they had an offering called EachNet, and in Chinese it’s called Each-u-one and back when TaoBao was first launched EachNet actually had a 70 percent market share. So they were essentially dominant in the market at the time. But what EachNet was doing at the time was they simply replicated what eBay was doing in the West. So whatever eBay was doing the ported it over to China. That worked for a while, but Alibaba knew better and they knew what the Chinese market preferred. So they did very very simple things. And the simple things that they did just allowed them to take over the market. Take for example Chinese consumers when they buy things they love to bargain. If you ever are shopping in China you walk into a store, whatever price you quoted right, feel free to return an offer of maybe half the price you are quoted because they love to bargain. That's just how the Chinese market works. Obviously EachNet replicating eBay didn't allow that but something as simple as when TaoBao was first launched, they actually incorporated an instant messenger with their service and they allowed buyers to actually reach out to sellers and say you know I really love your product but the price is too high. Could you give me a lower price? And it allowed buyers and sellers to negotiate in that way. They love to bargain. And that worked. Something else that was very important at the time was eBay when it first started when nobody knew what buying and selling online was, I'm sure you know if you first bought something online you might be going - Is it safe? You know because I have to pay first before I buy...

Sandra: Who is on the other side? What happens after the money goes away?...

Barney:...What if I don't get my product?

Sandra: Exactly.

Barney: There are a lot of these concerns. And in China it's probably even more of a concern because traditionally the market has had a deeper mistrust of what's on the other side. So what Alibaba did was they actually launched an escrow service even for small ticket items. So the money is put with an escrow. When you receive the product you would tell the escrow to release the money to the seller. So that's sort of just helped the Chinese consumers to get over their fear of buying things online. So it's all of these very very...

Sandra:...And the process made the company a lot of money.

Barney:...Yes that's right. That's right. And there's this very, very little things that really, right, that are so attuned to the preferences of the Chinese market that allow TaoBao to take over, to the point where today its actually TaoBao that probably dominates over 90 percent of the market share. EachNet is nonexistent, nobody goes to EachNet anymore unfortunately.

Sandra: These days it seems like with services like WeChat they are so different and so much more attuned to the Chinese market that these three dominant companies are starting to imitate or to borrow more from the local markets rather than from large companies like Amazon or eBay.

Barney: The big three companies even though they're imitating and consuming smaller start-ups they are still very innovative so they still invest extensively in R&D and the classic example is that of WeChat. Because with WeChat it was essentially developed completely by Tencent and what was interesting about WeChat at the time was it started off as a parallel offering. Before WeChat there was an entire social network called QQ.

The story of WeChat is almost as incredible as if Facebook was to launch something called Facebook 2.0 that had nothing to do with the original Facebook.

So WeChat was one of those things and the thing about WeChat was it started off being a WhatsApp clone. Really you know WhatsApp was proliferating, everyone was using WhatsApp outside of China. They wanted to come up with something that was like WhatsApp but they added an additional feature again because of the preferences and needs of the Chinese market and that additional feature is what they called the walkie talkie feature which allows people to record voice messages and just send it. That came out in WeChat first. That was very very popular in China because if you were typing Chinese characters before smartphones for example, and if you're typing in pinyin it's very very cumbersome, you would type a lot of characters just to form the work, and that walkie talkie feature allows you to just record it and send it, it’s a lot easier. Whenever I communicate with my Chinese collaborators they love to use that and then I always type a response in words back in return because I don't have the habit of using it but they do it and it has become so much a part of what they do. So yes they do still innovate but at the same time another thing that we know that the B.A.T firm does is to actively monitor the market as well for new things. Baidu for example they have a parallel Wikipedia type offering which they call Baidu Baike which is you know Baidu encyclopedia essentially. So they look at what the West is doing and sometimes these ideas are first created or developed by smaller start-ups. Baidu just look at what the start-ups are doing, again take it, do the exact same thing but by virtue of their immense user base the moment they launch an offering that's like whatever a start-up is doing to essentially crowd that start-up out, everyone will start using the Baidu version or the Alibaba version of that offering instead. So in that sense, right, they have two ways of innovating but it's never naively imitating what the West is doing. If a good idea comes out of the West they usually take it like WhatsApp and they try to make it better.

Sandra: So how can little tech companies then compete in this space? What does that ecosystem look like?

Barney: Well with the success of the B.A.T firm, an interesting development is that resources become available. Everyone aspires to be the next B.A.T and e-commerce success is seen as something that is implausible but still there right, their success stories out there that a lot of entrepreneurs can aspire to. Speaking to a lot of entrepreneurs based on the studies that are conducted in China, they do it because the technology is available. The infrastructure all of that has been developed because of the success of the B.A.T firms. Like for example the success of Alibaba has essentially created so much development across the country, logistics companies are now shipping to rural communities that previously would have difficulty getting their products to market or even accessing mainstream products from a store. But all of the infrastructure has been developed. So all of that becomes something that start-ups can now tap into and leverage to develop their own business. Sure, it is difficult to gain the measure of success that the B.A.T firms have achieved but for a lot of especially young people who tend to be the demographic who that would form the majority of entrepreneurs, it is not difficult to actually come up with an innovative idea and make a living off that idea. And if they achieve success then that's sort of just icing on the cake. And a lot of them would actually be hoping that's maybe part of their exit strategy is to be bought out by their B.A.T firms also.

Sandra: Who are some of the emerging names in Chinese entrepreneurship that you would be looking at?

Barney: I would say look at the Chinese tech unicorns that we are seeing. So some of the Unicorns and the Chinese taxpayers would include companies like Xiaomi and the founder of Xiaomi would be someone called Lei Jun. There's also Didi Chuxing which is their version of Uber, but with taxis and the founder of Didi Chuxing would be someone called Cheng Wei. Now the thing about these entrepreneurs is that a lot of them, they are merging names and they are now founders of billion dollar businesses as well. All of those names that I've mentioned, the businesses are billion dollar businesses. But of course you might ask the question - Would any of them actually reach the level of Jack Ma, the founder of Alibaba or Ma Huateng who is the founder of Tencent or Baidu? It's very difficult simply because the first generation of e-commerce pioneers they're still around. If you are looking for the next Jack Ma what are you going to do about the existing Jack Ma? It's a bit like what's happening in the West. Bill Gates was the father of PCs for the longest time. Now if you wanted to look for the next Bill Gates - who is the next Bill Gates? You might say oh yeah the Google guys, the Larry Page and Sergey Brin, they are Mark Zuckerberg from Facebook, it's Jeff Bezos from Amazon. But if you think about the next generation of the Bill Gates they happened after that next step shift advancement in technology has occurred. Even then this next generation this next crop of the kings of the Internet, they're based on a different technology. And each of them have carved niches for themselves. So Mark Zuckerberg is social media, Jeff Bezos is e-commerce, Larry Page and Sergey Brin they're the search engine they are the internet portal people. Currently with the B.A.T firms they are already well defined niches and it's very difficult for any one of these to actually step up and become the next Jack Ma. I would say the next Jack Ma would emerge when the next wave of technology emerges that would basically invalidate the old way of doing things. And what that is, nobody can predict and that it's not likely to happen at least in the foreseeable future. Maybe with the advent of artificial intelligence and robots maybe that could be an opportunity. But just looking at the current names, the current entrepreneurs and what they're doing it's very, very unlikely that it will supplant Jack Ma any time soon.

Sandra: So the Western tech giants companies like Apple or Amazon or Facebook, Alphabet, have they lost their chance of moving into and succeeding in the Chinese market?

Barney: At the moment I will say yes or rather I would say that they never had a chance to begin with. Because simply put the Chinese government will likely never allow them to succeed or they may require them to do things that they may not be willing to do which could be what happened to Google. Google was operating in China for a while and then they pulled out probably because the Chinese government wanted them to do things that they were not willing to do. So it's incredibly difficult. And there's always going to be some extent of protectionism going on. And if you look at what's happening with the B.A.T firms the success is actually a source of much national pride. When Alibaba was listed on the New York Stock Exchange it was nationwide news. People were saying yes we have made it, Chinese e-commerce firms have made it into international arena.

In that sense the local market may always be more receptive of local offerings as opposed to a western offering and there there's this perception that anything the West can do we can do it better.

So why not support our own local offerings. So in that sense it's immensely challenging. I would say that the only way that Western tech firms can enter the Chinese market is through partnerships. And the classic example of this is Uber, they've recently formed a partnership with Didi to sort of merge their offering with you know that of Didi. They tried to go at it alone and you know competition was really really tough. And perhaps they realized that the Chinese market would always be a little bit more attuned or more inclined to support one of their own. So because of that I think partnership would be at least the only feasible way to go in the short to medium term. And that's not likely to change.

Sandra: Thank you so much for talking with us today.

Barney: You're welcome. It's been a great pleasure. Thank you for having me.

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