Behind the scenes of the rise of Chinese tech giants

The numbers are impressive to say the least. Last year, Alibaba and JD.com recorded record sales of $139 billion on Single Days, the world’s largest business event. For its part, TikTok, owned by ByteDance, is the most downloaded application and is ahead of WhatsApp, owned by Facebook.

To better understand the meteoric rise of these big Chinese tech companies, we interviewed Guoli Chen, professor of strategy at the European Institute of Business Administration (INSEAD), a private management school based in Fontainebleau, Singapore, and Abu Dhabi. .

In his book ” Seeing the Unseen: Behind Chinese Tech Giants’ Global Venturing », he gathered more than 300 hours of interviews with investors, entrepreneurs and managers, all connoisseurs of Tech companies in China. It analyzes and deciphers the strategies put in place by these new giants and their successes.

Lemon squeezer: In your book, you come back to the impressive rise of groups like Alibaba, Tencent and Xiaomi. Can you explain to us how these companies became tech giants so quickly?

It is a combination of macro and micro factors. From a macroeconomic perspective, we are shaped by the environment in which we operate. China, which has experienced strong growth over the past twenty years, has created the potential for technology companies to grow into giants.

That is, a single market of a billion people with growing disposable income; the construction of transport and telecommunication networks and the deployment of mobile telephony have paved the way for e-commerce, meal delivery, the new retail model and many other business models.

It is now a gigantic national market in which technological entrepreneurship can develop rapidly. The bigger the pond, the bigger the fish can grow.

American and European multinationals are too “arrogant” to find their place in the Chinese market.

From a microeconomic point of view, the last few decades have seen a wave of ambitious companies with humble beginnings, but who fully understood the difficulties faced by many ordinary Chinese consumers. They copied each other, competed fiercely, learned from the past and quickly adapted, which allowed them to develop innovative business models that work very well in China, then to scale them up due to the macroeconomic environment mentioned above.

Another reason is that many American and European multinationals are too “arrogant” to find their place in the Chinese market. Apparently, it is a problem of product (or service) unsuitable for the geographical location. However, in substance, there are also people, business and leadership issues that many multinationals face when expanding into foreign markets. We have observed similar issues among Chinese tech companies as they leave China to engage in global or overseas expansion.

Lemon Squeezer: The case of Shein is particularly interesting. What are the keys to the success of this business?

Shein is a pure online digital platform specializing in international e-commerce. On the demand side, Shein understands consumers and markets extremely well through snapshot data collected from customers’ internet browsing and shopping behaviors, as well as data pulled from social media. Big data helps Shein anticipate fashion trends.

On the supply side, Shein has developed a flexible supply chain ecosystem in Guangdong, China. Compared to traditional fast fashion companies, such as Zara and H&M, SheIn has become an ultra-fast fashion company, with over 150,000 new SKUs launched each year (compared to 12,000 SKUs per year for Zara).

Shein has a shorter production cycle, and the minimum quantity per batch is 100 pieces (or even less), compared to 500 pieces for Zara. This allows Shein to react more quickly to market demand and increase production if necessary. Besides working closely with its vendors, Shein’s other core competency is its digital capability. Shein is a high-tech company, not a traditional fashion company. She is simply applying her digital ability to the fast fashion sector.

Lemon squeezer: Recently, the Chinese government has cracked down on some Chinese tech giants and their executives. Can you explain the logic behind this takeover? Can this policy last?

Our book attempts to provide an explanation for China’s recent shift toward tech companies (although we don’t entirely agree with the logic behind it and see the potential downsides).

After years of unbridled and fierce competition, it seems that technology in China has reached a breaking point: “everyone is forced to work harder for very little additional return – this is called involution”.

On the antitrust front, the government has been very active – Tencent Music was forced to give up exclusive distribution rights with music labels; Meituan was fined for forcing distributors to choose sides.

To sum up, the Chinese government says it wants to create common prosperity or an equal society through these initiatives. Some problems have arisen given the dominant positions of technology companies, both in the United States and in China. I am thinking in particular of the effects of the “winner takes all” principle, the wealth gap, or the polarization of society due to the manipulation of social networks and applications.

However, unlike the United States which tends to be more conservative in handling these issues, the Chinese government is less patient and less hesitant to use the “visible hand” to reform society and try to avoid the pitfalls that its East Asian neighbors have suffered after a period of strong economic growth.

Lemon squeezer: In 2022, where are the big Chinese technology companies?

There are fewer and fewer opportunities in inland China, and many of them are determined to expand into overseas markets.

Lemon squeezer: You say in your book that these Tech giants set out to conquer the world, what are their assets to achieve this?

Sorry, if I’m giving you the wrong impression that these big companies want to “take over” the world. Any company tends to internationalize once it has succeeded in the national market.

Globalization is a continuation, or a part of the growth of the organization in its geographical dimension. However, some Chinese companies, such as Shein, were already international when they were born because they do not make sales in China). Others are using business models developed in China to open up overseas (like superapps, live e-commerce).

Don’t underestimate the survival instinct of Chinese companies.

These global expansions also face great challenges. However, do not underestimate the survival instinct of Chinese companies. Some of them will fail on their overseas odyssey, but they will collectively learn from each other, rely on each other, and some will eventually stand out and excel.

To answer your question, I think the main strengths they have are: strong production capacity in China and an efficient supply chain ecosystem (for cross-border e-commerce); billions of consumers to test/develop business models; an abundant well-trained and hardworking workforce; a highly competitive internal market that cultivates a generation of talented workers, ambitious entrepreneurs and leaders, and agile organizations.

Lemon squeezer: What are the obstacles that could hinder this expansion?

The obstacles and difficulties are many. A gigantic Chinese domestic market is a double-edged sword. On the one hand, it can provide the capital and human talent needed for overseas expansion. On the other hand, any change in the Chinese market will capture the attention of executives, which will make them less attentive to the global market.

All in all, people, company, product and leadership issues are repeated over and over again. For example, with regard to leadership, do you have the mental latitude necessary to face the challengers that arise in foreign markets and make the necessary decisions?

What would be the decision-making process if the company’s performance abroad turned out to be very different from initial expectations? Will you be humble and open-minded enough to take the right insights from the local market, learn and adapt (indeed, one can become overconfident and arrogant after succeeding in the domestic Chinese market)? Does your business have the capabilities to scale successfully? If not, how can you, as a leader, develop these abilities?

Lemon squeezer: These companies clearly threaten the hegemony of GAFAM. What is the relationship between Chinese companies and American tech giants? Is the competition total or are there collaborations and interdependencies?

From a business perspective, they certainly compete globally. I would like to point out that the competition is not in the direction of a simple rivalry between Chinese and American companies, because the American technology giants are also in competition with other American companies (Meta vs Google), and the Chinese giants are also in competition with other Chinese companies (Alibaba vs PDD/Meituan).

A few decades ago, the movement of ideas and business innovations was in one direction: Chinese companies copying American companies. Today, there is more cross-pollination of business models, especially from China to the United States. For example, we can cite the case of Meta/Facebook which puts all its strength into Reels, a short-lived video product that is very similar to what TikTok/ByteDance offers. This phenomenon also occurs from emerging markets to other emerging markets.

When it comes to the China-US relationship, I think complete dissociation is unlikely, but we don’t expect the world to return to the happy days of globalization. The contest between China and the United States will continue for at least ten or twenty years. We must prepare for it, by limiting the risks but also by seizing the opportunities that will arise.