Kai-fu Lee: Why American Companies Struggle in China

Kai-fu Lee, chairman and CEO of Sinovation Ventures, spoke at the Davos World Economic Forum on the development of China, European and American venture capital and technology companies. In his speeches, he talked about the four reasons why American companies struggle so much in China, and four merits that Europe and the US should learn from the Chinese market. The following is the speech of Kai-fu Lee:

SEE ALSO: Kai-Fu Lee: I disagree with Elon Musk’s “AI will destroy humanity”.

There are four reasons why American companies encounter so many difficulties in China.

One, users cannot be measured only by their quantity, but by their degree of activity and commercial potential.

From this perspective, the estimated population of the third demographic dividend in China is 300 million, which is more valuable than the rest of the 700 million new users because they have payment and economic ability. Interestingly, for them, the Internet is WeChat. (The first dividend was PC to mobile; the second was young people from small towns; and the third is older people – especially older women – in second-, third- and fourth-tier cities.)

Second, as a developing country, Chinese entrepreneurs have unique advantages.

Domestic competition is intense, and companies that cannot win at home can always win abroad – for example, in southeast Asia, India, South America or the Middle East. They usually copy a product from China, such as live broadcasts, shared cycling or Toutiao. This is because the habits of Chinese users are similar to users in these countries.

Third, Internet giants have developed the international market rapidly.

Take Didi as an example. Didi has already invested in several companies, and has applied Didi’s technology to the companies in which it invests. This flexible approach is more likely to succeed in developing countries.

SEE ALSO: Didi Sets Up AI Labs to Upgrade Smart Transportation.

By contrast, American companies focus on platforms. This strategy worked when the US had a dominant position in science and technology (which is why Microsoft, Google and Facebook have a large global market). But today, technologically, Chinese companies are not weaker than those in US. If the latter continues to use the giant companies’ platform, without cooperation or investment, but only looks to conquer the world, this model will definitely not be applicable to the next users.

US products are likely to prevail in in English-speaking countries, theoretically. But as the EU is not satisfied with the US, it may pose a great challenge. (Of course, it is not easy for Chinese companies to enter Europe.) Chinese technology companies entering the emerging markets of southeast Asia, India, South America, Africa, and the Middle East will become a long term trend. I expect in the near to long term (in 3 years), users in these countries will largely depend on Chinese products.

Fourth. Americans generally believe that protectionism is the primary reason why American technology companies haven’t developed well in China.

That might have been a factor years ago, but it’s definitely not the case today.

I saw four major problems of American tech companies:

1. American companies intend to enter China with an existing platform, without offering any flexibility for localization nor autonomy for local teams. They mainly regard their China operation as a marketing project.

2. Chinese companies have already surpassed the US in product capability. WeChat is technologically superior to Facebook, the Taobao model is more sustainable than eBay and there are new models and products in China, such as Meituan, Toutiao and sharing bikes. Chinese technology is also catching up with the US, such as in computer vision, face recognition and speech recognition. In China, American companies have no obvious technological or product competitiveness.

3. The heads (general managers or CEOs) of American companies in China are always foreigners who barely know anything about the country. They usually start their jobs in smaller countries, get promoted to general manager of China general and return to headquarters for their next promotion. But their main skill is sales, and they neither know nor care about product technology. They don’t understand Chinese, don’t speak Chinese and have no long-term commitment to China. And they are mainly responsible for the headquarters index, and their biggest wish is to protect their job. They only report good news and ignore the bad. These people are vulnerable to the fighters who head up domestic Chinese companies.

4. China’s top talent, from undergraduates to professional managers, used to think that foreign companies were the best jobs. Most now see China’s big companies – such as Baidu, Alibaba and Tencent – medium-sized companies – such as Meituan, Didi and Xiaomi – and startups such as VipKid and Face++ – as better options. Without the best talent, the development prospects of foreign companies in China is not optimistic.

Europe and the US should learn these four points from the Chinese market.

I. “Quick trial and error” vs. “Consensus”

China’s rapid trial and error model is more efficient than that used in Europe and the US, and it would be a good idea to explore the balance between the two models.

For example, artificial intelligence has caused problems for human society, including security, privacy, inequality, the replacement of work and prejudice. There is also a lot of discussion in this Davos Forum about how we should move forward with so many challenges and immaturity.

The topic is actually a standard Chinese debate, as well as a standard Euro-American debate.

Chinese thought is that safety is, of course, important. But in addition to security issues, technology develops too fast. Startups must quickly implement and promote entrepreneurship. AI needs a large amount of data, so we can get things done first and then improve using the data. We can correct errors soon.

Europe and the US might say we can’t be hasty with such important things. We must have a thorough debate from each aspect. For instance, how can we ensure driverless cars are safe or moral. When a car is bound to hit one person or two people who in the other direction, it is very difficult for AI itself to make this judgment. Europe and the US want to hash this problem out, have a rational, deep and logical discussion, and finally reach a consensus. Based on the consensus they will decide how technology should advance.

There’s a very significant difference between the two ways of thinking.

The difference in thinking is not just at the policy level; it permeates the thinking of entrepreneurs, investors, teachers and professors, and of course, government policies. Based on the way of thinking in Europe and America, policy must first address the issue of wealth inequality. Privacy should be taken into account, and each data acquisition should be authorized. They want to give the data back to the individual and then rewrite the business rules.

If everyone came over, this pattern would likely to be one of the most powerful ways to build a lasting company. But Google and Facebook have made so much money in Europe off their exclusive user data – how can it be possible that they will share it with others?

Of course, we also see the EU is forcing Google and Facebook to change their practices through fines. This can bring challenges to the company’s business model, and can bring opportunities to Chinese companies. Google and Facebook won’t create a system soley for Europe – they only want to make a system suitable for the whole world. In this way, Tencent can get into Africa more easily, because Facebook has made its rollout too complicated. I think this thinking will create many variables for enterprises.

Of course, as global citizen, I can’t criticize the European idea as wrong. It is because of this intense consciousness that Europe has such a long history, such a good system and such a good culture. But today, the tech world is running faster than any time in history. Could it make the EU obsolete? I think this is an interesting observation.

II. Cashless Society by Mobile Payment

China’s mobile technology products have surpassed those in Europe and America, and copying products from China can bring more opportunities to countries around the world. The classic example is mobile payment.

I visited the US and Europe in January. Over the past decade, China’s Internet has grown so rapidly that many original business models have emerged, from copycats to creators. In particular, in fields like 2C products, mobile Internet and shared economy, China is indeed far ahead in terms of business model and liquidity.

Mobile payments is one formidable area. It will be the most important “infrastructure” in the future. Some 600 million to 700 million users in China rely on mobile payment. It has three benefits: no commission, point to point and small payments.

In the past couple years, China’s mobile payment transactions increased several dozens times. The number of daily mobile transactions on WeChat and Alipay exceeded 300 million. Such vigorous expansion of mobile payments will bring a huge change to consumption in China.

There are three reasons for this:

First, the convenience and painlessness of electronic payments greatly promotes consumption growth. When using electronic payment, users don’t feel like they’re spending a lot of money and may buy more things.

Second, electronic payment has brought about the expansion of consumer credit, not only as a means of payment, but also with financial leverage. China’s credit payments only had a 10 percent penetration rate in the past, while mobile payments ensure that 60 percent to 70 percent of all Chinese users have a credit card. This means that every consumer now has huge consumption leverage. The spread of consumer leverage will accelerate the country’s rapid expansion in consumption.

Third, mobile payment is not the same as credit card payment. It is on the phone, and can occur at any time, any place and on any occasion. Mobile payment can be applied in a variety of complex scenarios. For example, if there was no mobile payment, only credit cards, it would have been difficult to incubate the bicycle sharing business or new retail. Credit cards don’t run on an App.

The US and Europe have some constraints on this. Americans, for example, have a strong credit card habit. Americans love credit cards because many return money to users. Credit card companies earn 3 percent from merchants, return 2 percent to users and leave themselves with 1 percent. Credit cards are connected to the interests of these people, and it is hard to deter Americans from using credit cards.

But America and Europe must find a more open model.

III. China’s “consumption upgrade” will bring opportunities to Europe and the US.

China is facing an upgrade in consumption and higher demand for high-quality products, which is an opportunity for the US and Europe.

China’s consumer market is changing dramatically. For one thing, the Chinese market is experiencing its biggest consumption upgrade. Consumer upgrades happen in material consumption, spirit, culture, sports, family and also in health and pension structure in the long term.

On the other hand, the Chinese market has changed from a “seller’s market” to a “buyer’s market”. Digitalized online thinking is integrating with offline thinking, and will fundamentally improve the operating efficiency of management.

More importantly, weighing value above price is the trend for the new generation of Chinese consumers. Companies and products with the following three core competencies will easily win:

1. Operators and entrepreneurs have the ability to form consumption values and influence.
2. Be able to upgrade the supply chain, and select products and services that provide such value for followers.
3. In the process of operation, use new technical features as a lever to upgrade.

American and European companies should seize the changing consumer opportunity in the Chinese market and connect with users.

IV. The world should pay attention to the opportunities and challenges brought by AI.

No matter how the country is divided or competing, we all face the same challenges. When we use AI to create the largest amount of wealth in human history, we will also face problems in security, privacy, prejudice, work location and an increasing wealth gap.

But the possible solutions are diverse.

A craftsman is likely to be highly respected in Switzerland and Japan. The service industry is also important in some countries, such as Myanmar and other Buddhist countries in Southeast Asia. It is easy to statisfy people. Some people will be happy to work only two or three hours per day – even if they earn less money.

We can refer to each kind of model. I think everyone present at Davos should pool the wisdom of the world, discuss how to face the problem, promote overall human wisdom and find a solution that can be used everywhere.

Angus Stewart Deaton, a British economist, provided the following data in a separate presentation: “The extreme poverty rate in China and the US is actually close – 1.8 percent and 1.6 percent – given the country’s different factors. China’s poverty rate is staggering and should be worth studying in the US.”

This article originally appeared in Kai-fu Lee and was translated by Pandaily.