How Chinese Innovation Will Transform Tech Landscape

Judging from the headlines, you might think Chinese technology companies are on the ropes. The Justice Department has been investigating and indicting telecom giants Huawei and ZTE. Rising U.S. tariffs threaten to displace China’s dominance in the global supply chain for electronics. And Chinese internet Goliaths Alibaba Group (NYSE:BABA) and Tencent saw their market values shaved in 2018 by investor jitters over government policies and a softening economy.

Despite these apparent headwinds, Chinese CEOs remain remarkably bullish about the future. An increasing number of Chinese tech companies have serious ambitions beyond the Middle Kingdom. And as a recent article in the New York Times revealed, even Facebook’s Mark Zuckerberg is thinking he may need to recalibrate his business strategy to mirror the innovations pioneered by Chinese Internet giants. For these reasons, every investor should be weighing the potential impact of China’s technology challengers to build new business models at home and disrupt the dominance of American tech giants abroad. If you are not watching China, you’ve taken your eye off the future.

From Copycats to Tigers

 For many years, most Chinese internet companies copied proven American concepts, slightly retooled for the domestic markets. Baidu (NASDAQ:BIDU) was “the Google of China,” Renren (NYSE:RENN) was once billed as “the Facebook of China,” etc. By imposing strict regulations that most foreign companies were unable or unwilling to comply with, the Chinese government essentially created a walled garden in which domestic players could achieve dominance even without being terribly inventive or original.

This has changed as China’s vast scale and unrelenting competition have caused Chinese Internet companies to mutate into Hydra-headed hybrids that infiltrate every corner of their customers’ lives. A great example is the “Tencent ecosystem,” in which the gaming company has leveraged the popularity of its WeChat messaging platform (with over a billion monthly users) to spawn a dense web of “mini-programs.” WeChat users can do everything from streaming music and movies, booking doctor appointments, securing a loan, and ordering food, without ever leaving the app. I recently discovered that you can even pay cab fare in NYC using WeChat cash. It’s as if you mashed up Facebook, Netflix, Seamless, JP Morgan Chase and a dozen other companies onto one platform — you can lead your entire digital life in one app. This is the platform Zuckerberg would like to match in the U.S.

 In areas like online payments and fintech, China is leap-frogging developed nations into a fully digital cash economy. The low penetration of traditional credit cards and the innovation aversion of large state-owned banks created an opening for Chinese internet companies to gobble up large chunks of the financial services industry. Mobile payments transactions reached $17 trillion in China in 2017, with many consumers abandoning cash altogether as a growing number of merchants refuse to take paper money. Ant Financial and WeChat’s user base and volumes dwarf the entire U.S. market, putting them in a very strong competitive position as other developing countries begin adopting digital cash, credit and banking services.

A Growing Herd of Unicorns

Until fairly recently, Chinese technology companies got nearly all their growth from the domestic market. But this is changing rapidly. Chinese tech tigers have the opportunity to dominate some of the fastest growing markets in the world, including Southeast Asia, the Middle East and Africa, where the ability to monetize large numbers of users at a low cost is key to success.

 Ant Financial’s Alipay service recently crossed the billion-user mark by expanding into markets including India, Thailand and Pakistan. Alibaba is vying for market leadership for e-commerce in Southeast Asia, where its Lazada subsidiary has higher market share than Amazon. Uber, which already surrendered its China dream to Didi Chuxing, recently folded in Southeast Asia as well, selling to local ride sharing player Grab. Didi has bought or invested in ride hailing companies in India, Brazil, Australia, Mexico, and Africa, in addition to a $100 million investment in Lyft in the U.S.

Digital content company Bytedance has accumulated over 500 million users on its platforms, including an AI-Powered personal news service Toutiao, and the addictive video sharing app TikTok. If you haven’t heard of TikTok yet, ask your kids, since they are probably streaming it right now. Facebook was so impressed with the app’s growth that it introduced a copycat app, Lasso. TikTok is sucking eyeballs away from Snapchat and Twitter as it climbs the charts.

Many of these companies are likely to be coming to American shores soon as new U.S. IPOs. With 186 private companies with valuations north of $1 billion, China now accounts for the majority of the so-called “unicorn” companies in the world. Chinese unicorns span sectors including online services, e-commerce, medical services, big data and robotics. While not all of these businesses will succeed long-term, China promises to generate an outsized number of new public companies for the foreseeable future.

For all these reasons, American investors cannot afford to simply ignore China’s next wave of technology names. Whether as potential IPO investments or disrupters to the dominance of American companies, China’s tech tigers promise to have a growing impact on investors’ portfolios in the coming years.