Lessons From China’s Digital Battleground

Learned a lot lending an editorial hand here:

MIT Sloan Management Review, June 12, 2018

by Shu Li, François Candelon, and Martin Reeves


The explosive growth of the digital market in China, a country with more than 700 million internet users, constitutes a rich prize to companies that can exploit its opportunities. Five of the 10 largest public internet companies in the world — Tencent Holdings Ltd., Alibaba Group Holding Ltd., Baidu Inc., JD.com Inc. (aka Jingdong), and NetEase Inc. — have emerged from this $1 trillion market. And, by February 2018, Chinese companies accounted for 33% of the world’s unicorns (privately held startups valued at $1 billion or more), with almost three-quarters of them targeting digital or online markets.

So why have so few of the leading Western players succeeded in holding a winning share in China’s digital market? They know well the winner-takes-all stakes in digital business, and they have successfully dominated international markets in the past — after rolling out their digital products, platforms, and business models in other countries, without significant resistance. But in China, they have struggled:

In 2002, eBay Inc. entered China and quickly captured a 70% market share. Five years later, its market share had dropped to below 10%.

In 2004, Amazon.com Inc. acquired Chinese online book retailer Joyo.com, heralding its high-profile march into China. In 2008, Amazon’s share was 15%; now, it’s below 1%.

In 2005, Microsoft Corp.’s MSN China went live and gained a 53% market share among Chinese business users. But its market share decreased to less than 5% before it quit the Chinese market in October 2014 under strong attack by Tencent’s QQ and WeChat.

In 2014, Uber Technologies Inc. formally entered China and spent billions in fierce competitive battles to gain market share from its Chinese competitors. In 2016, it sold its Chinese subsidiary to Didi Chuxing Technology Co. and exited the country.

In 2015, Airbnb Inc., the world’s largest online marketplace for short-term lodging, landed in China. As of today, it lags far behind its Chinese peers. In 2017, Airbnb had 150,000 rooms for rent; market leader Tujia.com had 650,000 rooms.

Why have so many powerful Western players hit a wall in China? Protectionism is a convenient excuse, but we believe that it is an exaggerated one. Worse, it oversimplifies and obscures some important competitive realities in China that many Western players have missed.

These factors arise from the very different starting point at which China entered the digital era. Unlike many Western economies, China’s economy was not yet mature when the digital tsunami broke on its shores. In many of the industries most affected by digital technologies, offline offerings were limited, physical infrastructure was lacking, and other essential market components, such as payment systems, were missing. Thus, in China, digital technologies offered a solution to fundamental bottlenecks in consumption, rather than a disruptive alternative to existing solutions.

Against this backdrop, China’s digital market developed in an exceptionally rapid and dynamic manner, one based on need rather than preference. Furthermore, the winning game plan for dominating digital markets turned out to have some unique characteristics with regards to localization, speed, online and offline integration, and local ecosystem development.

It is important for Western players to recognize and understand these characteristics. They are not only key to winning in China but also in other countries that share a similar profile, such as India and Indonesia. In addition, they provide valuable insight into how China’s digital giants may compete as they go global. Read the rest here.