The Humbling of American Tech Giants in China
The Humbling of American Tech Giants in China
Uber's decision to throw in the towel in China holds
lessons for Facebook, Apple and others still craving success in the world's
biggest technology market.
By Christina Larson August 2, 2016 — 3:38 AM PDT
Not so long ago, American tech giants viewed China as
theirs for the taking: 1.4 billion people, a growing middle class, an affinity
for American pop culture from Titanic and Friends to Michael Jackson. And,
apparently, a tendency to see U.S. goods and services as attractive or
superior.
That triumphal script was again rewritten as Uber
conceded defeat in its no-holds-barred dust-up with Didi Chuxing. After a
costly battle in which both sides shelled out billions subsidizing rides, Chief
Executive Travis Kalanick decided to call off the war, agreeing to a deal in
which the local champion acquires Uber’s China operations in return for a seat
on Didi’s board and a slice of the Chinese company. The move came only a year
after the famously brash Uber impresario declared China, the world’s largest
ride-hailing market, his most important target.
In other words, Kalanick came, he saw, he most certainly
didn’t conquer.
“Uber’s approach to markets around the world has been
fairly arrogant,” from flouting local taxi regulations to threatening to
sabotage media critics by digging up personal dirt, says Zennon Kapron,
managing director of Shanghai-based consulting firm Kapronasia. “But arrogance
is a very difficult attitude to have to be successful in China.”
The particular twists and turns of Uber’s battle for
market share in China are distinct – it went up against a nimble competitor
backed by deep-pocketed internet standard-bearers Alibaba Group Holding Ltd.
and Tencent Holdings Ltd. But its ordeal reflects a changing reality for
Silicon Valley stalwarts like Amazon.com Inc. or Apple Inc. that may view China
as a gold mine, but wind up floored by formidable competition and shifting
consumer tastes. As Kalanick said in announcing Uber's withdrawal, "U.S.
technology companies struggle to crack the code."
“The days of simply entering China with something
new" – a soda brand or a novel smartphone – “are gone," said Tom
Birtwhistle, a senior manager at PricewaterhouseCoopers in Hong Kong. "Now
if you’re entering China, you’re having to compete with lots of companies
already there.”
Moreover, it’s no longer the case that Chinese consumers
and companies are “happy with crappy,” as one China hand explained to The
Atlantic Monthly in 2007. Observe how
Huawei, Xiaomi and Oppo have taken a big bite out of Apple, a series of
successes stemming from savvy marketing and homegrown tech wizardry.
“The local competition has improved dramatically. Look at
smartphones: the Chinese smartphone manufacturers used to offer phones that
were cheap and crappy, but now they’re both affordable and very good,”
Birtwhistle said. “There also used to be a challenge around branding," he
said. "But today, a lot of the newer companies are doing brand and
marketing as well as western brands. Now they can offer high specs, low
price-tags, and world-class branding – that’s hard to beat.”
Silicon Valley grew cocky after successes in Europe,
where Google’s runaway dominance, for instance, has seen it defending against
anti-trust accusations. But perhaps Europe is the exception, suggests analyst
Duncan Clark, author of Alibaba: The House that Jack Ma Built.
“In a market the size of China, there should be a ‘home
court advantage,’ driven as much by culture and language as by government
diktat or influence," he said. “Many U.S. companies had got used to the
fact that they could succeed overseas through their dominance in Europe. But
China is different; it has a ready supply of entrepreneurs and capital, and a
government that if anything prizes dominance over competition.”
The deal Uber finally accepted – retreating from direct
competition in China, in exchange for shares in a Chinese champion – echoes a
similar arrangement struck between Yahoo and Alibaba in 2005. Ebay saw its
early promise in China eclipsed when Alibaba found better ways to attract
consumers in a low-trust environment: using escrow, instead of up-front fees
for goods. Google chose to pull its search engine in 2010, rather than accept
Beijing’s censorship terms (and following discoveries of hacking, it said).
To be sure, the Middle Kingdom doesn’t always tease, and
leave suitors empty-handed. Apple iPhones have sold handily in China as both
tech gadgets and luxury objects, although with the smartphone market
increasingly saturated and competitive, Apple’s future prospects are now less
certain. Its market share in China has eroded over the past year, driving down
earnings. But the company has displayed smarts in China in the past, winning
consumers over with a hardware-software-apps ecosystem that's proven tough to
replicate. Its reliance on Foxconn and other manufacturers with factories in
China creates hundreds of thousands of jobs -- winning points with Beijing.
There're still sectors where foreign companies have the
edge, especially where product safety and cutting-edge technology hold sway --
think infant formula, computer processors, automobiles, passenger aircraft and engines.
While Google, Yahoo, Ebay, and now Uber have retreated
from China or settled for a narrow market position, some like Microsoft,
Qualcomm and Apple are still slugging it out. Meanwhile, one Silicon Valley
behemoth, currently blocked from China, is gunning for its chance.
Facebook was briefly allowed in China, before being
blocked in 2009. In recent years, founder Mark Zuckerberg has made clear his
intention to bring the platform to China. To win favor, much to the amusement
of Chinese netizens, he's handed out copies of Xi’s tome, The Governance of
China, to Facebook employees; showed off his Mandarin skills; and posted photos
of himself jogging through hazardous Beijing smog. It remains to be seen
whether that multi-faceted courtship will be effective.
“All the kowtowing and meeting the leadership maybe won’t
matter so much if Facebook won’t agree to allow some level of censorship, or
allow the Chinese government access to data on the site, in exchange for market
access,” Kapron said. LinkedIn Corp. operates in China, but only by agreeing to
abide by content restrictions. “Otherwise, he’s just hitting his head against
the wall.”
More fundamentally, in the age of WeChat, do Chinese
consumers still need Facebook? Tencent's ubiquitous service has a virtual lock
on mobile social media, while dozens of other niche services cater to all sorts
of needs.
“Globally, maybe 7 or 8 years ago, when social networks
went mainstream, the general consensus was that there will be one social
network to rule them all. We’d all join one, and it would be dominant,” says
PwC’s Birtwhistle. “But what we’re actually seeing is a huge proliferation of a
variety of social networks."
The rise of Chinese tech powerhouses isn’t exactly new,
even if it’s recent headlines – the pounding of Uber, the faltering of Apple –
that have caught readers’ attention overseas. “What a lot of western policy
makers and institutional investors have not recognized … they’ve been focused
on how the outside world is going to change China. What many people have missed
is actually how China is going to change the world,” says Andy Mok, managing
director at Red Pagoda Resources in Beijing. He cited how Chinese audiences are
now influencing Hollywood casting decisions. “The more and more the Chinese
middle class becomes a driving force globally of product decisions, that’s
becoming more apparent.”
Elliot Ng, now director of product management at Google,
returned to California in 2015 after four years in China leading development
projects for the company. He thinks that tech companies in Silicon Valley may
have to settle for changing half the world, counter to the industry's mantra.
“China demands total focus and optimization in order to
win … and practically speaking, most companies have to choose whether to accept
those terms, or instead focus on the 40, or 70, or 190 countries and markets
that global companies would define as the world ex-China.”
Indeed, while Uber’s Kalanick may have misgauged his
company’s prospects in China, one prediction he made about the country could
turn out to be true. At a “Geekpark” conference in Beijing in January, he told
reporters: “In the next five years, there will be more innovation, more
invention, more entrepreneurship happening in China, happening in Beijing, than
in Silicon Valley.”
This week, he was proven right.
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