SHENZEN, CHINA – Almost daily, newspapers in the U.S., Europe and China release eye-catching headlines about China’s technological advances and economic prowess. The accomplishments are real. But they’re not necessarily evidence of Western failure or Chinese invincibility.
In touting such achievements, commentators too often overlook the structural factors that have shaped them. Economists now recognize just how much of economic interaction is driven by such forces. For instance, the gravity model in international trade posits that the distance between countries impacts how much they trade. No matter how warm the ties between China and Bolivia, sheer distance will always limit their bilateral trade volumes. By contrast, despite frosty relations, large amounts of trade and investment flow between China and Taiwan owing to proximity and shared language.
Many of the most innovative Chinese companies have benefited not only from government support and protection, but from structural conditions that have made their businesses more viable than they would’ve been otherwise. They’ve thrived in a unique cauldron of challenges and inputs that don’t exist in most other places in the world.
Take mobile payments, where China is the clear world leader. In 2016, Chinese spent more than $5 trillion using their phones — more than 50 times as much as in the U.S., according to one estimate. That figure is expected to grow strongly again in 2017, as simple and ubiquitous platforms connect ever more buyers and sellers. In many cities, cash has become virtually obsolete.
Two structural factors have boosted adoption of mobile payments. The first is China’s archaic banking system, which has long served the interests of big companies, not consumers. That retarded the development of a credit card culture among both merchants and buyers. For many years after arriving in China in 2009, I was struck by the fact that even Chinese bank cards weren’t accepted in many places, with storeowners preferring cash.
Second, the two key players in the field of mobile payments — Tencent Holdings Ltd., which dominates messaging with its WeChat app, and online retailer Alibaba Group Holding Ltd. — enjoy virtual monopolies in China. Chinese spend roughly 30 percent of their smartphone time using WeChat, not just messaging one another but ordering taxis, exchanging business information, storing a loyalty points for retailers. Meanwhile, Alibaba cornered 60 percent of the e-commerce market in 2016 and well above 50 percent in 2017. No two companies capture consumer time the same way anywhere else in the world.
By contrast, Western consumers are spoiled for choice, especially when it comes paying for things. They can use cash, credit cards, debit cards with major payment networks, checks, Paypal and, more recently, mobile payment systems such as Apple Pay. While mobile payments are gaining, the other payment providers are innovating as well. For the average consumer, there’s little difference between scanning a QR code and waving an RFID-enabled credit card at a specially enabled reader. And at least the card doesn’t require downloading and learning a new technology.
Similar examples can be found in other sectors as well. Alibaba has succeeded in large part because brick-and-mortar retailing is so challenging on the mainland. Roughly a quarter of the world’s cities with more than 500,000 people are located in China — twice as many as India, the next country on the list. Real estate prices in those urban areas are astronomical, which limits how big stores can be and thus the range of consumer choices.
That makes platforms such as Alibaba and JD.com much more attractive both to consumers — who then provide the kind of data the online giants can use to sell them debt they can use to buy more on the platforms — and to manufacturers. Instead of fighting for shelf space, the latter can simply open online shops, take orders on Alibaba and ship directly from their warehouse. That’s led to a flourishing of niche online retailers selling everything up to and including replica NASA space suits.
Even the bike-sharing craze that’s drawn so much attention in the West has exploded largely because of China’s unique environment. Lower-income Chinese have gravitated toward the super-cheap services in order to solve the so-called last mile problem, getting to and from public transport nodes. The technology didn’t emerge first in the West partly because consumers — even in bike-crazy Holland — haven’t really needed such a cost-effective solution. (Ironically, as Bloomberg View columnist Adam Minter recently pointed out, it’s not so clear this particular innovation can work economically even in China.)
None of this is to diminish the fact that Chinese companies have produced some remarkable technologies and, given the vast amounts of research going into artificial intelligence, are likely to produce even more. The question is how successful such companies and technologies will be once transplanted into different contexts.
One of the major puzzles of corporate China is why firms have struggled to expand internationally. The answer may be that they’re offering solutions to problems that don’t exist in quite the same way overseas. Unless they can cater to the needs of customers operating under very different conditions, their remarkable progress may end at China’s shores.
Christopher Balding is an associate professor of business and economics at the Peking University HSBC Business School in Shenzhen and is the author of “Sovereign Wealth Funds: The New Intersection of Money and Power.”
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