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 speaks fluent Mandarin, 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, Facebook has been shut off in China 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 before it reversed course in 2010. 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, which came to an end this month.
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 threw in the towel. 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, but shut down only two years later. 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, was able to build strong ties with WeChat, 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.
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