Silicon Valley comes up against the Great Firewall of China
http://www.telegraph.co.uk/13 AUGUST 2016 • 2:23PM
Mark Zuckerberg is one of the world’s most high-profile Sinophiles. The Facebook founder , in which he regularly addresses Chinese audiences in speeches and online videos. His own Facebook profile has photos of him beaming while walking the Great Wall, jogging through Tiananmen Square and peering over the Terracotta Army. Zuckerberg, a keen diplomat, is constantly wooing China’s political leaders, and has been eager to secure praise from its tech chiefs.
And yet, try to reach Facebook.com in mainland China, and instead of the social network’s familiar blue and white, you will be met with a blank page saying “this site can't be reached”. Since July 2009, when the social network was fingered as a breeding ground for protesters demanding independence in the north-west region of Xinjiang, under the state’s programme of blocking websites that have been unwilling to co-operate with rules on censorship and surveillance.
Facebook is far from alone in living outside China’s “Great Firewall”, which also blocks access to Google, Yahoo, YouTube, Twitter and Wikipedia. The country, which now has the world’s biggest internet population with an estimated 720m users, has an online economy that is almost completely isolated from the rest of the world.
Despite this, the Chinese internet would not be wholly unrecognisable to the Western consumer. To search the web, internet browsers can use Baidu, the country’s answer to Google. In the gap left by Facebook and Twitter sits Weibo, a cross between the two that more than 100m people log on to every day. For their fix of cat videos, the Chinese internet user has no need for YouTube when Youku Tudou does the job just as well.
Outside China, Silicon Valley is relentlessly conquering the world. Facebook has 1.7 billion people logging in at least once a month – almost two thirds of the non-Chinese internet population. Google has seven products with more than a billion monthly users. The world’s five-biggest public companies – Apple, Amazon, Facebook, Google parent Alphabet, and Microsoft – all hail from hi-tech clusters in California or Seattle.
The internet’s powerful network effects, and software’s infinite ability to scale, mean this small set of companies accounts for an increasing share of the world’s attention. So why does the economy that will be the world’s largest in around a decade elude them?
Beyond the Great Firewall
Website blocking is undoubtedly a factor in this. Google, which introduced a censored version of its search engine in China in 2006, had millions of users in the country . But it was already a distant second to Baidu, enjoying just a 35pc share of the search market, far below the practical monopoly it enjoys elsewhere.
Just as significant as China’s censorship of the web is the reality that products baked in the California sunshine often don’t appeal to Chinese consumers, or are implemented so poorly that a copycat with local knowledge can easily dominate the market.
There was no better example of this than the monstrously expensive, but ultimately doomed effort by Uber to dominate China, .
Almost everywhere else in the world, the car-hailing app has got on the wrong side of taxi drivers and, in many cases, regulators, but has become the default way for young, social city dwellers to get around.
Didi Chuxing has managed to beat Uber at its own game in China CREDIT: EPA
In mainland China, however, it was dwarfed by Didi Chuxing, a domestic competitor with the know-how and local connections to beat Uber at its own game. Since Uber had set the wheels rolling on its Chinese subsidiary in 2014, it had lost billions, subsidising rides and handing drivers heavy bonuses in a bloody scrap for market share. But Didi had matched it yuan for yuan.
Two weeks ago Uber . It agreed to merge its Chinese business with Didi, a partnership in which the American company will have a 17.7pc share. While the alliance was celebrated as a way for the combined group to end their brutal race to the bottom and finally make profits, it was hardly the surrender that Travis Kalanick, Uber’s ultra-competitive founder, would have hoped for when he first entered China.
Uber was not able to blame the Great Firewall for its inability to repeat its success in Western markets. Neither was eBay, which arrived in China with great fanfare in 2004, . Alibaba – which at that point was a minnow compared with eBay – had beaten the American colossus away with Taobao, its own consumer auctions website.
Amazon, the dominant web retailer in most of its markets, has repeatedly tried to establish a foothold in China but has largely resorted to partnering with domestic players. These are deep-pocketed companies, which are not used to running away with their tails between their legs, but the litany of failures in the country is starting to look like a pattern.
A different internet
It is not for the want of effort or interest. China’s internet-savvy population and rising middle class make it an ideal market. But when the internet’s giants set foot in the country, they have typically failed to understand its culture and habits.
The mass internet in China did not arrive until years after the West, so many users’ first experiences with it was via a smartphone, rather than a desktop computer. This means that many of the services that were born on the PC – the email, search engines, even the web itself – do not form the basis of the Chinese internet.
Instead, life revolves around WeChat, a messaging app which became popular due to the prohibitive expense of texting. China is not alone in this – WhatsApp, Facebook Messenger and Apple’s iMessage have replaced texts around the world – WeChat is a far more advanced portal to the wider internet. It is used for shopping, peer-to-peer payments, and booking doctors’ appointments.
The dominant smartphone manufacturers in the country – beyond Apple, which has been a rare US success story – are brands unfamiliar to most in the West: Huawei, Xiaomi, Oppo and Vivo. And the majority of China’s online payments do not directly go through credit cards and banks, but via Alipay, a service introduced by Alibaba more than a decade ago. Try to survive in China outside the bubble, as Uber did when it took its first steps into the country, and you may as well not exist.
“Chinese companies almost all use Alipay and WeChat – if you come into the local market and don’t use them, you won’t work here,” says Xiaofeng Wang, an analyst at Forrester. “They have huge user loyalty.”
Didi, unlike Uber, , which many Chinese smartphone owners use to book transport, although the fact that WeChat’s owner Tencent is a major shareholder in the taxi app may have greased the wheels.
But domestic operators have also proved to have strong stomachs for low prices and heavy losses, which have allowed them to compete with the invaders of Silicon Valley long enough to stand on their own feet.
The rise of the Chinese internet giant
“Chinese consumers are very fickle and aggressive in being price conscious; that leads to a very ruthless market, you see that across many sectors,” says Benjamin Kennedy, a managing partner at DealGlobe, a Shanghai-headquartered investment bank that helps Chinese firms invest in Europe. “It’s very hard for a Western player to come in who doesn’t understand the market and the consumer in depth and create a value proposition. Chinese businesses are willing to take really thin margins, even smaller firms will happily lose money in that battle.”
The result of these ultra-competitive but loss-making Chinese businesses has been a spate of mergers, which has created domestic behemoths capable of standing up to their foreign rivals. Didi Chuxing itself was formed by the merger of Didi and Kuadi, which were China’s two biggest taxi apps. Youku Tudou, the dominant video site, is also a result of a duopoly that could not sustain itself.
Taking on these giants, which serve an enormous market, is a lot tougher than entering a smaller country where the incumbent cannot hope to compete.
So will Silicon Valley, which dreams of a connected world without national borders give up on China, having spent billions there? The gargantuan opportunities there suggest not. Zuckerberg continues his courtship of officials. Google is once again hiring in the country, suggesting it could rekindle its efforts there.
But Wang, of Forrester, says that domestic giants are now so entrenched that it is hard to see Silicon Valley players ever dethroning them. “I don’t think they’d have a chance,” she says.
Kennedy says a better strategy would be to, as Uber has done, partner with a local player, citing the success of companies such as Volkswagen which have grown in China by establishing joint ventures. That may be so, but whether the utopians of Silicon Valley can swallow such a pill is another question.======================================== Another Special Announcement - Tune in to my radio interview, on Rider University's station, www.1077thebronc.com I discuss my recent book, above on "Your Career Is Calling", hosted by Wanda Ellett.
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