Magazine Summer 2018 Issue Research Highlight

Lessons From China’s Digital Battleground

The dramatic rise of China’s digital leaders has put the squeeze on Western internet giants. Western players must learn quickly if they are to get back in the game in the world’s fastest growing digital market.

Shu Li, François Candelon, and Martin Reeves Reading Time: 10 min 

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China Online Business Digital Internet

The explosive growth of the digital market in China, a country with more than 700 million internet users, constitutes a rich prize to companies that can exploit its opportunities. Five of the 10 largest public internet companies in the world — Tencent Holdings Ltd., Alibaba Group Holding Ltd., Baidu Inc., JD.com Inc. (aka Jingdong), and NetEase Inc. — have emerged from this $1 trillion market. And, by February 2018, Chinese companies accounted for 33% of the world’s unicorns (privately held startups valued at $1 billion or more), with almost three-quarters of them targeting digital or online markets.

So why have so few of the leading Western players succeeded in holding a winning share in China’s digital market? They know well the winner-takes-all stakes in digital business, and they have successfully dominated international markets in the past — after rolling out their digital products, platforms, and business models in other countries, without significant resistance.

But in China, they have struggled:

  • In 2002, eBay Inc. entered China and quickly captured a 70% market share. Five years later, its market share had dropped to below 10%.
  • In 2004, Amazon.com Inc. acquired Chinese online book retailer Joyo.com, heralding its high-profile march into China. In 2008, Amazon’s share was 15%; now, it’s below 1%.
  • In 2005, Microsoft Corp.’s MSN China went live and gained a 53% market share among Chinese business users. But its market share decreased to less than 5% before it quit the Chinese market in October 2014 under strong attack by Tencent’s QQ and WeChat.
  • In 2014, Uber Technologies Inc. formally entered China and spent billions in fierce competitive battles to gain market share from its Chinese competitors. In 2016, it sold its Chinese subsidiary to Didi Chuxing Technology Co. and exited the country.
  • In 2015, Airbnb Inc., the world’s largest online marketplace for short-term lodging, landed in China. As of today, it lags far behind its Chinese peers. In 2017, Airbnb had 150,000 rooms for rent; market leader Tujia.com had 650,000 rooms.

Why have so many powerful Western players hit a wall in China? Protectionism is a convenient excuse, but we believe that it is an exaggerated one. Worse, it oversimplifies and obscures some important competitive realities in China that many Western players have missed.

These factors arise from the very different starting point at which China entered the digital era.

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About the Authors

Shu Li is a partner in the Beijing, China, office of The Boston Consulting Group (BCG). François Candelon is a senior partner in BCG’s Shanghai, China, office and a BCG Fellow. Martin Reeves (@martinkreeves) is a senior partner in BCG’s New York City office and global leader of the BCG Henderson Institute, the firm’s think tank for new ideas in strategy and management.

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Comment (1)
William Markle
No question that foreign businesses, particularly American businesses, must learn better to manage and market in China.   And we should stipulate to all of the current Chinese superlatives - largest market, most innovation as measured by patents (whether meaningful or not is another question), growing middle class.  

But I wish that business school authors and consulting companies would do a bit more due diligence on the traditional Chinese perspective on dealing with foreigners - that the foreigners are barbarians, and certainly those to whom the ethical guidelines of family and guanxi network do not apply.  One can say that modern Chinese no longer think this way; perhaps.  But it is a mistake to think that their bosses, or the CCP, do not have these ideas lurking in their heads, whether is it retribution for the "hundred years of shame", the rough and tumble of the marketplace, or simply traditional deception in negotiation.   Chinese respect the current president of the US because he projects power, is wildly unpredictable, and deceptive in negotiation, as suggested in Sunzi and in the Thirty-Six Stratagems. I will be discussing some of these ideas in my blog, Chinareflections.com.   I certainly am in no position to make recommendations for high tech business in China, but it is critical - deadly critical - to ignore the political and historical elements of doing business in China.