The Strategist

Chinese hi-tech catches up with Silicon Valley

08/18/2017 - 14:16

Chinese giants Alibaba Group and Tencent Holdings are dominating the local market, but this is not enough for them. Companies from China, each of which is overtaking Intel, Cisco or IBM, are rapidly expanding their sphere of influence and becoming global investors.

Bo Gao via flickr
Bo Gao via flickr
While the US high-tech giants are targeting Western countries, Tencent and Alibaba have focused on their own Chinese market, which at the same time is the largest for technology companies. The audience of users is more than 700 million. This is about twice as much as in the United States, writes NYT. In addition, an average Chinese spends online more money than his American counterpart.

Online platforms Alibaba, Tencent and Baidu have created their own online supermarkets, built-in payment systems, logistics services, social networks, content platforms. All this ecosystem gives business a unique model of online presence in the Chinese market.

Despite the fact that the Chinese economy faces many problems, Alibaba and Tencent seem to feel fine. This is evidenced by recent financial results, which are many times better than analysts' expectations.

Growth of prosperity of the Chinese high-tech signifies a change in the balance of power on the field of global technological influence. Many countries are trying to call themselves the next Silicon Valley. However, it is the Chinese cluster of high-tech start-ups is demonstrating strong growth, and the number of promising Chinese companies is often higher than that in many Western countries.

"Now we are at the stage when China has finally caught up with the US in the Internet space," says Hans Tung, Managing Partner of GGV Capital. The expert believes that while the United States is distinguished by strong offline trading and offline entertainment, Tencent and Alibaba play a decisive role in how people buy goods, use services, and have fun on-line in China.

Soon Tencent will be the only company apart from Facebook, which has a social network with an audience of over a billion users. (Facebook is still ahead of the Chinese company by about a billion accounts). Recently Tencent reported that its WeChat messaging application, including payments and social network, has 960 million active users per month.

Alibaba has more than 500 million active users in online shopping applications. Over the past three months, Tencent and Alibaba’s income of has grown by more than 50% compared to last year, which means that they grow faster than Facebook and Alphabet, Google’s parent company.

In Hong Kong, Tencent's market capitalization rose to $ 400 billion at the beginning of trading on Thursday, closing down just below $ 396 billion. Alibaba closed its $ 415 billion trade in New York. The two companies are still lagging behind Amazon and Facebook, which are estimated at more than $ 450 billion.

Of course, we can say that Alibaba and Tencent owe their success to Chinese censorship, which has closed access to the services of many American technology companies in the Middle Kingdom. But both companies also have their own technological innovations, which, for example, made it possible to extend mobile services more widely than in the United States.

Most of Alibaba's income comes from advertising commissions from business in China. The company received approximately $ 400 million in revenue from operations in foreign markets. Tencent’s portfolio includes games such as the League of Legends, which is played around the world, but most of the revenue is still coming from games and advertising on the local market.

Both companies have recently taken initiatives to enter other markets. Alibaba invested in a payment company in India, and bought three different companies in Southeast Asia. Amazon is also preparing to enter this market, so that the region can become the first neutral territory where two titanium e-commerce are facing each other.

Last year, Tencent paid $ 8.6 billion for Supercell, a creator of the extremely popular game for smartphones Clash of Clans. Tencent also wanted to buy WhatsApp messaging application, but Facebook outstripped it. Both technical companies, as well as other Chinese companies, opened research centers in the Silicon Valley and became investors in various advanced start-ups.

Analysts say 700 million Internet users in China are enough for Alibaba and Tencent to continue to flourish, but there will come a time when it will be necessary to conquer new peaks: the market of the Middle Kingdom has its limits, no matter how large it is. The Chinese high-tech giants understand this, and therefore make the first sure attempts to get into the American high-tech.