China & the Emerging World
Why the tech innovation from China may become successful in the rest of the emerging markets like Brazil, India, Vietnam etc ?
This post is NOT about China or what it stands for. Its about finding the connection between Chinese technology companies and the next billion internet users. To be more specific, its about how companies in China are better suited right now to spread technology that can be used in emerging markets which are seeing tremendous economic growth and also rapid growth of internet adoption. Many countries and cities within those countries exhibit this behavior. If we specifically think about the growth of digital users in the last decade, you have countries like China, India, Vietnam, Philipines, Brazil on one side that have seen at a minimum 60-70% Internet growth on one side and USA, UK, Japan that have seen marginal growth of around 10-20% particularly because the Internet penetration was already very high. The image visualizes the internet growth as a percentage of population.
Internet penetration from 2010 to 2019
These emerging markets also exhibit similarities in the characteristics of its population be it in terms of how they use technology, their income or how they behave in day to day life. All of these similarities provide an interesting playground of challenges as well as opportunities.
Mobile first users & Super Apps
Its a very evident fact that Internet around the world has spread primarily due to the adoption of inexpensive smartphones and rise of mobile Internet. This has given rise to a new type of user; one whose first and only experience at using Internet (and probably at using computers) is the mobile device in their hand. This gives rise to a completely new set of constraints and opportunities which are different from users who are used to both traditional computers (keyboard & mouse) and smartphone. China has well adapted to these constraints with the rise of super apps which make it easy to provide the same smooth experience when transacting for multiple use cases. A super app like WeChat provides an all encompassing user experience. For instance, if you have to plan out a movie with your friends, with WeChat, you can chat with your friends, lookup and book a movie, pay for it using WePay and also order a cab, all within the same app. As noted in this article -
What makes WeChat superior is its integration: many features that all work together and build on each other. Once users subscribe to an official account, they can receive content pushed by that account. They can also access the WeChat page of that account and find more relevant information about the company or read associated pieces of content. They can purchase products or send money to the company. Thus, subscribing to an account opens up a world of interaction possibilities with that company, all strongly tied into WeChat.
Back in US, one might have to switch back and forth between multiple apps for the same thing. Although, apps have become ubiquitous and provide superior user experience; the fundamental navigation between them is a challenge and for a person who only uses a smartphone; this does represent a challenge.
Also, of the many ways people consume media on the Internet, video consumption has been a clear winner. As pointed out in this article.
People surveyed in emerging markets are even more likely than the rest of the world to use smartphones to watch online video. For instance, people surveyed in Thailand are 1.52 times more likely than the global average to say that their smartphone is their primary device for watching online video. In India and Indonesia, people surveyed are 1.45 times and 1.32 times more likely than the global average to say the same
Here too, although YouTube, Facebook have been able to spread their roots and find consumption in these countries, apps like Dǒuyīn or more popularly known as TikTok in USA, have been able to capture users in a much better way. As I had pointed in my earlier essay
The fact that TikTok has taken an AI first principle with curation of videos is a key differentiation from other platforms like YouTube, Instagram or Twitter which rely on a mix of AI and user’s social network (channel subscriptions in case of YouTube) to recommend content. The primary problem with this approach is that it puts too much responsibility on the user and is not a perfect proxy for what user wants to watch or consume.
Social structure & digital commerce
The social structure prevalent in emerging markets also presents an interesting dynamic that does require rethinking of conventional online shopping platforms.
Price Conscious
The per-capita income of countries in emerging markets is relatively lower. It hovers around 5-10k US$ which is almost four to five times less than of a country like USA or UK.
Source: World Bank
This means that an average consumer in China, India or Vietnam is more price conscious than a user in USA, but is still exposed to a wide variety of products online and will generally spend more time making a purchase.
Word of mouth
Since many of the consumers in emerging markets are relatively new to Internet and to online shopping, they are more inclined to take suggestions from friends and family than your average user in USA or UK. Plus, for many of the consumers in USA, a strong physical retail presence before the Internet had already exposed them to a wide variety of products as compared to someone from China or India. As pointed out in this old but still valid McKinsey research
Word of mouth plays a more central role in the decision journeys of emerging-market consumers than for those in developed markets. When we surveyed food and beverage consumers in a range of developed and emerging markets, roughly 30 to 40 percent of the respondents in the United Kingdom and the United States said they received recommendations from friends or family members before making purchases. Consumers in Africa and Asia reported higher, sometimes dramatically higher, figures: more than 70 percent in China and 90 percent in Egypt, for example (Exhibit 2).
A direct result of this is that commerce through digital social network would be more fitted to emerging markets where people would be more inclined to take suggestions from each other.
High density cities
Many emerging markets are witnessing an urban expansion giving a significant population boost to existing cities and sometimes leading to new cities altogether. As pointed out in this research
Urbanisation is a key driver of economic development. By any measure, the Emerging Markets have experienced dramatic and exponential growth in their urban population over the past three decades. Of the twenty largest cities in the world, sixteen are located in Emerging Markets.
A city just by having a large population gives itself a tremendous capital boost and the combination of high population density and first time online consumers presents a lot of areas of innovation despite having challenges.
Many companies in China have been able to capture these innovation opportunities and some of them have become hugely successful. So much so that we have multiple companies competing on a single idea and trying to capture market share.
Social E-Commerce
In China, consumers are conscious of prices and depend on each other for new product recommendations. Pinduoduo is an e commerce giant which took it to another level and built a model around group purchase to keep the prices lower and optimise logistics. As explained in this essay
Socialized team buying also gave a psychologically different pricing structure than a product like Groupon. Instead of a listed price, Pinduoduo’s team buying approach meant everything was negotiable and most items could be earned for practically free with enough work. All team buys required an upfront payment that was refunded if the minimum team size was not met within 24 hours. This reduced the friction of initially committing to a purchase, while subconsciously committing buyers to work together to reach the target.
They even gamified the whole thing to make it fun and an experience in itself. Further explained in the same essay.
In May of 2018, Pinduoduo launched Duo Duo Orchard. It was a game to grow virtual trees inside the app. The more purchases, actions with friends, and time spent in-app, the faster the trees grew. When the trees were fully grown, the player was shipped a box of fruit. It was a virtual stamp card. One month after launch, 2 million trees were being planted per day.
Many other strategies have also been applied to leverage the advantages of group buying of which community group buying is also getting popular. It allows consumers living in the same apartment buildings to shop together online and get discount. This is a win win situation for both companies and the users, since delivery in bulk in the same location reduces the cost directly.
Live stream marketing
Livestream commerce where people follow a particular influencer who will livestream different products on a daily basis which anyone can buy is becoming popular year after year. The fact that people in China follow influencers and rely on them for daily purchases can probably be explained by two things. First is that consumers are price conscious and at the same time are exposed to wide selection of both high and cheap quality products and second, video based content is liked by everyone. Irrespective of why people are flocking to influencers for online shopping, the number of livestreamers and sessions are growing at a tremendous pace. As noted here.
As of March (2020), there were 560 million people watching shopping live-streams in China, an increase of 126 million compared to last June, according to a report published by the China Internet Network Information Center. Almost half of them used live-streaming for online shopping, according to the report.
Even though commerce of 3rd party products is what driving the economy around live stream shopping, it has become an industry in and itself as well. Livestream influencers are paid millions, agencies have been created to build influencer personalities and patrons who spend the big bucks and catapult the popularity of influencers are common.
All the innovations discussed above are happening at a large scale which makes them a great fit to be applied across other emerging markets as well. The big question remains though how will Chinese companies cross the border to other emerging markets? Companies from China have already been trying to grow in the Indian market and until the recent ban, apps launched specifically for countries outside China have become hugely popular in India. As explained in this article
2018 is likely to be remembered as the year when the Chinese took over Indian smartphones. In December 2017, the top 10 mobile apps on Google Playstore looked a lot different than what they look from a year later. The Playstore rankings for India in 2018 have China written all over it. Five out of the top 10 mobile apps in India are Chinese — versus two at the end of 2017.
There is one difference though between users in China and elsewhere in the world. Its the Chinese government’s focus on tracking the activity of its citizens and not having any comprehensive law protecting the privacy of its citizens. Though it does not directly relates to inherent needs and challenges of people in China but it could have possibly made it easier for a technology to become successful. As noted here in this interview on Stratechery.
There is this extremely positive, almost Utopian take on technology in China, and a lot of the stuff that I think, our knee-jerk response from the United States would be to be worried about, they kind of embrace as a vision of the future and I think a lot of it comes from the fact that the past ten years, twenty years, which has been this great economic boom that has ended up with a lot of people doing much better, has also coincided with this massive rise in Chinese technological capabilities. So in the minds of a lot of regular Chinese people, these two things have become interlinked and most people haven’t fallen afoul of the government, so they don’t really see that side of things.
The other big concern is the political hurdle born from distrust with Chinese government’s emphasis on censorship and data collection methodologies from technology companies. With the recent Indian ban on more than 100 Chinese apps things might have become more complicated for the Chinese companies since India represents one of the biggest emerging markets. Other countries will definitely take a cue from this.
Maybe the answer is not exactly the expansion of Chinese companies abroad but home grown solutions which are either lift & shift or different flavors of companies which exist in China. The other option is that tech giants like Google, Facebook or Amazon shift their focus towards these specific opportunities. Doing this is difficult though to carry out. As I explained with one of the points made in my previous essay -
The business model and the revenue stream of incumbents actually act as a deterrent for them to try out new technologies and opportunities for innovation. If something doesn't match up to their revenue expectations, new or smaller market ideas are never able to reach critical adoption.
Of course, in this case, its not essentially a new technology or one specific opportunity, but a new market altogether with many different opportunities. It will take a lot of focus and a shift in mentality to make this work and efforts like Google’s NBU focus is a step towards that direction. Whether China will try to overcome the privacy and censorship barrier, other emerging markets will play catch up with their own innovations or tech giants like Google, Facebook will shift their focus, it will be interesting to see how this space shapes up in the next 5 to 10 years.
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