How China leapfrogged the West on internet innovation


Picture of Ed Sander
Ed Sander

Co-founder of ChinaTalk

I have just spent two years in China, working in an environment where the online world seemed to change every month. I saw the rise and decline of China’s most popular microblog Sina Weibo, and the explosive growth of Wechat, a new ‘chat app on steroids’. Along with the shakeout of hundreds of group-buying websites, I saw a country leapfrog technology because Chinese consumers skipped desktop and laptop computers and went straight for online access through high quality smartphones.

After China, I found that the pace of change back in the Netherlands sluggish; compared to China some areas seemed to be five years behind. The only major difference that had occurred back home seemed to be that people were no longer using SMS but Whatsapp, which seems to me like an inferior version of WeChat, while data mining was for some reason now being called Big Data.

We need to realise that the days of ‘China the copycat’ and ‘China the factory of the world’ are soon to be far behind us

Over the past two years I have written more than 50 columns about China, most of them covering internet innovations. In most of these columns I try to convince my readers to keep a sharp eye on China, not so much because it’s a potential threat, but because they’re so far ahead of us in areas like e-commerce, mobile commerce, social media and O2O (offline-to-online sales, or the other way around). The Great Firewall, which effectively blocks most western social media, has made infiltration into the Chinese market impossible for companies like Twitter and Facebook. This has given way in turn to many copycat platforms in China. Competition between social networks is relatively limited in the West, but within China these copycats have had to engage in tough competition to win users and keep them. The only way they could do this was by innovating and continuously improving their products, and this is why social networks like Sina Weibo and WeChat have become superior to the platforms they were originally copying. Three years ago, microblog Sina Weibo already included functionalities that Twitter is implementing today. And Sina’s microblog, which is more like a cross between Twitter and Facebook, still remains a superior product.

A characteristic of China’s online world is the dominance of smartphones. Many Chinese netizens have never owned a computer or laptop; they had internet access in cybercafés or at the office, but for most the purchase of a smartphone with a data bundle is their first access to the internet. Nearly 90% of online Chinese access the internet through their mobile phones, and the booming market for smartphones has resulted in new business models. One manufacturer, Xiaomi, offers its smartphones only slightly above cost-price, making high-end phones affordable to less affluent consumers even in rural areas. Instead of making its profit on the phones, the company sells accessories, content and software. Its unique business model by-passes third party distribution and traditional advertising as it sells only through direct online channels and uses social media for promoting its products and services.

The rapid penetration of smartphones combined with improving coverage of 3G, 4G and Wi-Fi hotspots means that whole new demographic groups like migrant workers and people in China’s smaller cities and even the countryside can now afford to connect to the internet. Poor logistics in a huge country where many products are simply not sold outside major cities means that this newly-gained internet connection offers unlimited access to products sold on Alibaba platforms like Taobao and Tmall, or through its main competitor Jingdong (JD). Even the urban netizens, who often do not own a car and are pressed for time, prefer to shop online.

Other factors that are stimulating China’s speed of innovation are economies of scale because of high numbers of users, a large pool of software engineers, ambitious entrepreneurs and a government determined to stimulate national innovation

Alibaba’s biggest competitor, Tencent, has highly popular products like the WeChat app. In August, Tencent revealed that WeChat has 438 million monthly active users. This means, that most of China’s smartphone users now have the app installed. Since 2013, WeChat started incorporating many options for mobile payment and mobile shopping within the app, so you can use your mobile phone to pay at vending machines, in taxis, to buy movie tickets or events, or even to go Dutch and split a dinner bill with friends. Because Chinese consumers spend so much time using WeChat, these new in-app m-commerce functionalities are posing a serious threat to Alibaba. The shift from microblogging to WeChat has even been one of the reasons for a serious decline in the once popular Sina Weibo microblog, which Alibaba bought an 18% stake in only last year. All this fierce competition is sparking innovation, so like Tencent’s WeChat, Alibaba is adding more and more functionalities to its Alipay payment app.

This turbulent online landscape means China is starting to overtake the West in ICT innovation. China still has a long way to go, but in some areas like m-commerce and social media it is now several years ahead of us, with more areas to follow. Other factors that are stimulating China’s speed of innovation are economies of scale because of high numbers of users, a large pool of software engineers, ambitious entrepreneurs – both of which have often been trained in western universities – and a government determined to stimulate national innovation.

My primary worry is not that Chinese technology represents a short-term threat to Europe; there is still much distrust of Chinese products from the perspective of quality, privacy and intellectual property standpoints. Many Chinese innovations also have specific characteristics that suit Chinese rather than the western consumers. WeChat’s core functionality of voice messaging is an excellent alternative for the cumbersome entry of Chinese characters, but seems to make most westerners uncomfortable.

What is of much greater concern is the speed of Chinese innovation, because it makes it painfully clear that western development has been grinding down in comparison. So how might we regain our edge? I don’t claim to be an expert in this field, but after watching China for several years and working for most of my career in ICT-related projects I would suggest a few areas that are ripe for improvement.

Years of offshoring ICT projects have resulted in a dwindling number of software engineers, with demand for software engineers much larger than supply

First, we need to start paying greater attention to what’s taking place; we need to realise that the days of ‘China the copycat’ and ‘China the factory of the world’ are soon to be far behind us. We need to recognise and respect the power of Chinese innovation, especially online and for smartphones and we have to be willing to learn from it, just as they learned from us. Second, we need to improve our resources. Years of offshoring ICT projects have resulted in a dwindling number of software engineers, with demand for software engineers much larger than supply. This is seriously slowing our capacity to compete, so now we are actually importing ICT resources from China.

Third, we should stimulate ways to innovate. One of these ways might be to step-up competition in our own markets. One way is making it easier for people to switch ICT platforms, just as it has become easier to switch banks, telecom providers and insurance companies. An example is that once signed up to Facebook it is extremely hard to quit because all your contacts are stored in a platform that has cunningly made it impossible to export your contact data. Quitting Facebook basically means cutting of communication with many online friends. It helps explain why a platform with superior functionality like Google+ has failed. Contact data should be the property of the user, not the platform. If this ownership were protected, and exporting your data to other platforms became possible, competition with the likes of Facebook would do much to stimulate innovation and new technologies.

China’s advantage has been partially due to a whole generation of users who leapfrogged desktop technology and went straight to mobile phones. The west should be careful not to stick to its legacy systems much longer.

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