Lessons From China’s Digital Battleground

  • Posted by admin on June 12, 2018

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. Unlike many Western economies, China’s economy was not yet mature when the digital tsunami broke on its shores. In many of the industries most affected by digital technologies, offline offerings were limited, physical infrastructure was lacking, and other essential market components, such as payment systems, were missing. Thus, in China, digital technologies offered a solution to fundamental bottlenecks in consumption, rather than a disruptive alternative to existing solutions.

Against this backdrop, China’s digital market developed in an exceptionally rapid and dynamic manner, one based on need rather than preference. Furthermore, the winning game plan for dominating digital markets turned out to have some unique characteristics with regards to localization, speed, online and offline integration, and local ecosystem development.

It is important for Western players to recognize and understand these characteristics. They are not only key to winning in China but also in other countries that share a similar profile, such as India and Indonesia. In addition, they provide valuable insight into how China’s digital giants may compete as they go global.

A Different Starting Point

In the West, the internet era offered a new channel to industries that already rested on solid foundations. But when China entered the internet era, the maturity levels in many of its industries were quite low, with many underserved needs and lots of pent-up demand. The internet was the main solution to these bottlenecks.

The extremely rapid growth of e-commerce in China is explained by this very different starting point. Whereas the modern retail system took shape in developed nations in the late 19th century, China didn’t have such a system until the 1990s. During the early years of the internet, China’s offline retail channels still had limited coverage and operated with low efficiency. In 2005, for instance, the retail floor space per 1,000 people in China was only 18 square meters, far less than the 1,105 square meters in the U.S. Moreover, 53% of China’s offline channels were independent retailers, such as mom-and-pop stores, that operated far less efficiently than modern retail chains.

The internet dramatically expanded the shopping options for China’s bourgeoning middle-class. It provided the convenience, selection, and price transparency of modern retail, without the accompanying floor space. Not surprisingly, by the end of 2016, e-commerce made up 16% of overall retail sales in China, 1.5 times the percentage in the U.S.

Payment systems provide another illustration of the dramatic difference in starting points between China and the West. In 2011, at the dawn of mobile payments in China, cash accounted for 65% of consumer transactions, while developed nations already had well-established credit card ecosystems. Because China lacked strong credit-rating systems, the penetration of credit cards was very low, just 200 cards per 1,000 people versus 1,700 cards per 1,000 people in the U.S. And there were not enough point of sale (POS) terminals in stores: China had eight times fewer POS terminals per capita than the U.S. in 2011.

This need helps explain the success of Chinese mobile payment player Alipay.com Co. Ltd. Alipay sidestepped the need for POS terminals to carry out in-store purchases by providing consumers with a mobile app they can use to scan QR codes of the things they buy. The company also built up Sesame Credit as a credit rating system for online and mobile consumers. These moves allowed Chinese consumers and retailers to leapfrog over credit cards as their first noncash payment method and opt for mobile payments, which, by the end of 2016, had surged to $ 8.5 trillion annually — 70 times the volume of mobile payments in the U.S.

A Different Digital Market

Unfilled demand and lack of systems, along with the rising income of its citizens, have provided an unprecedented impetus to China’s digital market. Online spending in China has increased 32% annually for the past five years — it’s rising by the equivalent of France’s entire annual online sales volume each year.

A market that doubles in size every two and a half years also evolves very rapidly. Alibaba’s Taobao, the most prominent Chinese e-commerce platform, reached half of the nation’s online consumers in nine years, a level that took Amazon 14 years to attain in the U.S. Alipay, the largest mobile payments provider, hit 50% penetration in China in four years, a level that none of the U.S. online payment vendors have yet hit. Ride-sharing company Didi broke through the 50% mark in three years, while Uber’s penetration in the U.S. remains under 20%.

Driven by the same factors, the Chinese digital market has given rise to an entrepreneurial milieu that makes Silicon Valley seem stodgy by comparison. By May 2017, nearly half of China’s 63 unicorns had reached their $ 1 billion valuations within two years of founding, compared with just 10 such examples in the U.S.

A Winning Game Plan

To compete in China’s digital market, companies must adopt strategies that are customized to China’s unique conditions. They must learn to provide localized “in China, for China” solutions, act with extreme speed, build integrated online and offline capabilities, and partner with local ecosystems. The former two elements — localization and speed — may be familiar challenges for companies that have struggled to gain footholds in markets overseas. The latter two — integration and ecosystem development — are likely to be less familiar.


Companies seeking market share in China need to develop online solutions that meet the unique pattern of local demand and needs. Chinese internet companies are adept at introducing such innovations. For example, in the early days of e-commerce, when the lack of trust between buyers and sellers inhibited all of China’s retail channels, Taobao invented the “escrow transaction,” which fully covered any losses consumers might incur. In response, eBay Inc. eventually countered with a similar product that offered limited coverage, but it was too little, too late.

To win digital battles in China, global companies need to be prepared to empower local teams to innovate, engage in local research and development, and adjust their global operating models (which are typically designed for more developed environments).


With a strong focus on eliminating bottlenecks in existing industries, China’s digital companies have been principally applications-driven. For example, in addition to its mobile payment platform, Alipay has launched a range of innovative applications in more than 10 vertical industries, ranging from online outpatient services to car insurance services. PayPal Inc. has not followed suit.

The entry barriers to developing such applications are relatively low, and players compete on speed. This means that fast decision-making is critical for global online companies with aspirations in the Chinese market. They should not see scale as the only or even the primary basis of competitive advantage; speed of evolution and share of innovation are equally critical.

Online and Offline Integration

Internet companies in China often need to selectively engage in offline operations to eliminate friction in underdeveloped markets. For example, Airbnb’s purely online operations are not well suited to China’s short-term lease market. With a personal credit scoring system still under construction, many homeowners in China are unwilling to accommodate strangers. Further, because of the different levels of income and the imbalanced economic development in various Chinese cities and regions, individual homeowners often cannot compete with hotels and express inns in terms of accommodation quality.

In contrast, Tujia, the market leader of room and home-sharing services in China, developed many offline services to manage the user experience. For example, Tujia contracts with real estate developers to obtain houses and then acts as a custodian and rents the houses out. It also provides professional cleaning services for busy homeowners, offers door lock installation, and furnishes insurance for both homeowners and renters. In 2016, Tujia had 5,000 customer service employees on the ground in China while Airbnb had only 60.

Local Ecosystem Development

The absence of well-established offline solutions requires an ecosystem-based approach to China’s digital market. The strong payment and social network ecosystems of Tencent and Alibaba, for example, have helped drive the success of Didi. Riders can both hail and pay for a ride through Tencent’s WeChat Pay and Alibaba’s Alipay, and then seamlessly share their experience through social channels, such as WeChat and Alibaba’s DingTalk. Companies from outside of China must be willing to work with local partners to avoid being effectively locked out of markets. Uber’s failure to do so is one of the main reasons why it was unable to crack the Chinese market.

Tomorrow’s Digital Battlegrounds

Recently, some global companies have begun to demonstrate a better understanding of China’s digital market. Airbnb has given its China team autonomy to manage the business and is increasing the size of its local workforce. China is its only non-U.S. market with local product and technical teams.

Learning to win in China will make global digital companies, like Airbnb, better competitors not only in China but also in other markets that have similar starting points. In addition to homegrown competitors, they will be more and more likely to face Chinese competitors in such markets. China’s digital giants are late movers in global expansion, but they are beginning to explore overseas opportunities more aggressively. For example, Alibaba aims to generate 50% of its revenue from overseas business by 2025.

The unique characteristics of China’s digital market will profoundly influence the outbound strategies of these companies. They are used to filling market voids by growing rapidly in immature economic sectors. They invest in infrastructure and are willing to build ecosystems with local players. As a result, Chinese players will likely adopt collaborative overseas expansion models — making strategic investments and using alliances to adapt quickly to local market conditions. Indeed, Alibaba invested in and helped Paytm to develop the mobile payments market in India and grow to become the world’s third largest mobile payment platform.

In short, winning in tomorrow’s global digital markets starts with learning the lessons from the digital battleground in China, today.

MIT Sloan Management Review

Leave a Reply

Your email address will not be published. Required fields are marked *