A Week in Shanghai China - What the World can learn from the Asian Super Tiger

Last week I had the opportunity to visit Shanghai China for the first time on a market immersion trip organised by IE Business School as part of our Global & Executive MBA Program. The objective was to learn more about the Chinese market, their culture, famed economic miracle, technology landscape among others. You can read about China all you want but nothing compares to actually getting on a plane and seeing the country for yourself. I bet that afterwards you will have a completely different impression about China as I have. I certainly have a new found respect for them, how they have transformed within the last 42 years and how they are positioning to lead the world over the next few decades.

The economic, industrial and technological revolution happening in China is incredible and hard to describe. The speed at which innovation is occurring is almost unbelievable. An executive at one of the companies we visited expressed it best;

“Whenever I leave China and go back home to Madrid, I feel like I’ve gone back 10 years in time. That’s how ahead the technology space here is”.

There seem to be a solution for almost everything, their digital platforms are advanced, well integrated with the offline world and work like magic. An example is WeChat, the Tencent owned messaging app, which is like oxygen in China. Pretty much everyone is on the app and it’s used on an hourly basis. The super app connects you to everything as far as communication and commerce is concerned, and even more. With WeChat, people rarely have to carry cash because payments are done from the app using QR codes which is widely accepted across China. I experienced this first hand when I tried to buy souvenirs at the Yu garden market, most of the vendors preferred to collect payment via WeChat or Alipay with their QR code signages hanging in front of the stores. Thankfully there was cash options for first timers like myself.

WeChat in China is so powerful that it’s now more than a messaging app, it’s become a platform for other companies and one most can’t do without. With WeChat you can get a Didi taxi, pay for the metro, shop online, pay your insurance bills, hotels, movies, get a loan, donate to charity, save and invest etc. There are reports that even beggars (I never saw one in Shanghai) collect alms via WeChat QR codes! How crazy is that?

China's technology has leapfrogged many legacy system thereby making them more future ready than perhaps any other country in the world. Below are some of my learnings after spending a week in Shanghai. One week is probably not enough to learn all there is about a market, chances are I’ve only seen more of the good aspects which is impressive nonetheless.

How they got here - A Short History

At $14.14 trillion (2019) China is the world’s second largest economy in GDP nominal value terms and the largest economy using purchasing power parity. However this wasn’t always the case. Up until the 1970s, 90% of the Chinese people lived in abject poverty due to decades of war and economic stagnation.

In 1978 Mr. Deng Xiaoping, fondly referred to as “China's Chief Engineer” and “Architect of modern China", set out to change China's fortune. He began a campaign based on the idea that for China to become a prosperous nation it had to open up its economy to the rest of the world. Deng then kicked off China’s economic reform by creating special economic zones, basically 5 cities in which China could attract foreign direct investments and that would allow international companies to come in and compete. As well as selected industries in which they could do business. He also made sure that their labour force was educated, formally and informally, to support the burgeoning manufacturing industry. This was a cautious and well thought out strategy which 42 years after has yielded enormous gains for China and has positioned it as arguably the world’s most important economy today.

Today, China accounts for over 15% of the global economy and is growing at 6% per year which is strong for an economy of that size. China is roughly 70% of the BRIC economy and about as big as the Eurozone. Wealth is more evenly distributed in China than anywhere else in the world. The total income growth for the full population is at 659% compared to the US (61%) and France (35%). China’s bottom 50% is growing at 312% compared to France (25%) and the US (1%).

From the World’s Factory to the World’s R&D Capital

Due to its historic oversupply of cheap labour which drove wide scale manufacturing and production, China is often referred to as the World’s factory. However they have since passed that stage as economic growth have resulted in an increase in labour wages and cost. This is causing a growing number of global firms to move their production out of China into ASEAN countries where labour is still relatively cheap. China itself is moving more towards a technology, services and research & development driven economy (more on this under Technology & Internet landscape).

As a result, net export contributes little to China’s economic growth contrary to what people think. Infact in 2018, net export contributed negatively to China’s economic growth. Local consumption and capital formation is what mostly drives the economy. A recent Mckinsey report showed that China is more domestic-dependent while the world is more China-dependent and increasingly so.

China’s competitive advantage besides its strong domestic market and large population is that they have the most complete supply chain in the world. Added to this is an extremely strong work ethic (Even the older population, 70+, still work atleast part time) giving them a speed of innovation that will be hard for other countries to match.

Regional Competition - How Local Governments are Driving Growth

The local governments in China play a very direct role in its economic development. Last year, Tesla was invited to setup a factory and begin manufacturing their cars in Shanghai. They've always had a production problem and struggled with ramping up volumes, but this was achieved within one year (now you know why Elon Musk was dancing last week in China). This happened because the Mayor of Shanghai wanted Tesla to come in so he can take credit for the economic development of Shanghai. Tesla was reportedly given acres of land almost for free and allowed to be 100% owned in China, enabled by a change of policy by the national government. Another motivation for Shanghai was the increase in local jobs, a metric they constantly keep track of. Also at a higher level the government is pushing electric vehicles to leapfrog the traditional combustion engine which they lack the technology for. Overall the local government officials are well motivated and they get political credit for growing their region.

Innovation and the Chinese Technology Landscape

The nature of technological innovation is trial and error. When you have millions of people trying-failing-learning-trying, it’s only natural that innovation will occur which will spur more innovation and rapid growth. In China, millions of these trial and error are going on daily which is producing innovation at an incredible pace. 

An examples of this is an AI/ML startup in China (unfortunately I missed their name) building world class image recognition technology in a rather unconventional way. Rather than waiting on an algorithm to learn through millions of images, they hired 300,000 (Yes, three.hundred.thousand) people to sit in a location and daily review millions of images telling the computer what it's looking at. The computer asks - Is this a cat or a dog? the reviewers tap yes or no, and they do this for hundreds of thousands of images through out everyday. This might seem crude but it’s pretty intelligent. Remember that even advanced AI/ML today is still not at the level of human intelligence but combined they can do pretty amazing things.

China is now home to two of the world’s top ten technology companies. I’m pretty certain that there will be atleast 5 Chinese companies on the top 10 global technology company list within a decade or two. They are already extending their influence beyond the Asian continent. Africa's most popular smartphone provider, Transsion, is a Chinese owned company that is infact relatively unknown in China.

China is now leading in the number of patent applications surpassing Japan and the US. According to the World intellectual property organisation “In 2018, China received nearly half of all patent applications in the world".

They’re leading in mobile payments, 5G technology and seriously challenging the US in cloud computing and artificial intelligence. The Chinese market represents 50% of the $336 billion global semiconductor market according to the Semiconductor Industry Association (SIA). China is also leading in the Electric vehicles space, the government has invested over $60 billion to accelerate the sector.

In 2018 more electric cars were sold in China than anywhere else in the world.

They account for 99% of the worlds 250 million electric two-wheelers, nearly 100 times the total number of electric passenger cars in the world, and there’s atleast 8 times more EV charging stations in China than in the US.

Startups, eCommerce and the Chinese Digital Juggernauts

China's digital economy is massive contributing about 35% to the overall GDP and 68% of GDP growth. The industry is more concentrated than anywhere else in the world with a few players controlling majority of the market. In some cases, like messaging with Wechat, single platforms own 100% of the market.

Tencent (Social, Messaging, Payments, Platform), Alibaba (eCommerce, Payments), Baidu (Search engine), JD (eCommerce & retail) and Didi (Ride Sharing) just to mention a few are the juggernauts of the Chinese digital economy. A few challengers are rising every year but most of them fail due to the strong network effect, large capital base and the high proliferation of Incumbents. In 2019, over $50b was recorded in startup funding, steep fall from previous years. One of the companies that hosted us was UCloud, a pure play cloud computing company founded in 2012 with 30 data centers globally and set to go public.

The eCommerce space in China is also fascinating and huge, the largest in the world. For context Alibaba, China's largest eCommerce company, made $38.4b on its 2019 annual sales extravaganza called Single's day. This was 2.5x the entire US online sales for Black Friday and Cybermonday in 2018. For Alibaba though, the numbers were disappointing and below expectations. 

While Alibaba is China’s undisputed eCommerce leader with 60% of market share, a new player by the name Pinduoduo (pdd.com) emerged in 2015 with a rather innovative concept - Low cost, group based buying with referral bonuses. Using Pinduoduo, buyers can share product information on popular social networks and invite their friends, family and social contacts to purchase together, through which they not only enjoy the fun and excitement of discovery and shopping, but also a comprehensive selection of value for money products.

Pinduoduo now has 5% market share and is growing faster than Alibaba and JD, the two largest players, in the Tier 3 and other smaller cities according to a report by QuestMobile in 2018. This is a good example of how the market and startup ecosystem is pushing innovation even in the face of unbeatable incumbents.

“Chinese speed” was something I kept hearing from the executives throughout the trip, referring to the blitz-paced, iterative and scrappy yet sophisticated approach to business, tech, entrepreneurship and pretty much everything here.

To the Chinese, time is money and efficiency is life.

Teasing their Western counterparts, one of the executives mentioned that they don't wait to prepare and validate a business case, they just make decisions quickly, execute and learn from there. They don't spend too much time doing NPV analysis, 10x10 matrixes etc. If it is an important decision, they make it and move from there because they know competition is lurking.

On the Government Regulated Internet

I asked about their thoughts on the government regulated internet and every response I got from a Chinese person started with a smile. Chinese people are not worried about privacy, they know their government can see their activities and they are fine with it. They trust their government and they think it's a good thing that the government regulates the internet because it means they are protected.

The Chinese feel perfectly comfortable with the internet restrictions. As long as they have a good and comfortable life for themselves and their families.

The privacy trade off in China is explicit compared to other places where it's mostly implicit. In China the understanding is that the trade off gives them amazing benefits and they don’t want this to change. I also got the feeling that part of the internet and media restriction is a strategy to preserve their culture and traditions from too much external influence.

US-China Trade-war

It’s impossible to talk about China today without talking about the trade war with the US. Interestingly the Chinese love American brands and have a positive perception about the US. According to some of the people I spoke to, most of them prefer not to have the trade war with the US however they think the conflict is a positive sign of China’s increasingly important place in the World’s economy. China’s economy is already largely driven by their local consumption and export contributes little if any to the GDP. But China prefers not to be a self- sufficient island since opening up its economy was what started the reform in the first place. 

As one of our Professors for the trip, Prof Wang Xiaozu of Fudan University stated

“A self sufficient China is bad news for itself and bad news for the world."

Right now China is at war with the US on technology chips, now let's suppose China is completely cut off from Intel, Qualcomm and other chip makers. Now what’s going to happen? Two likely outcomes. First, China will develop those chips themselves. Second, Intel and Qualcomm are going to lose 50% or even more of their sales. So there will be one Intel in the US and another equivalent in China. For this type of product that requires a large fixed cost and large R&D going into it, if you don’t have sufficient market size the economics won't make sense. It's either the innovation will be slower or each chip manufactured will be significantly more expensive and your devices will be twice as expensive. So a self sufficient China (as well as US) is not a good China.

This is why despite all the difficulties that Huawei has had, its CEO has repeatedly come to the media to say Huawei really wants to work with the US and US companies. The whole world as one market for everybody is much better for everyone than “mini-worlds” and for each country paying by itself thereby losing efficiency. This year China is amending its policy on federal direct investment to attract more international companies while opening more of its sectors to international investment. Curious to see how its Internet/software market opens up and evolves in the coming years.

What the World can learn from China

I initially titled this section - what Africa can learn from China but after sharing the draft with my colleague, Marcos, he thought it also applied to the rest of the world. Most of the lessons are in the stories above, the points below are just the ones that stood out for me;

• Visionary leadership - For any nation that wishes to transform and develop itself like China has, I believe the starting point is Visionary leadership. China’s transformation started with one man, Mr Deng who had a bold idea and the courage to execute this even in the face of opposition. This strong results-focused leadership has now cascaded even to the local government level creating positive competition and impact.
• Human Capital Development - A nation’s greatest asset is its people and any country that wishes to grow over the long term to develop its human capital. China’s most important economic weapon is Education. At the beginning of China’s economic reform, Deng Xiaoping stressed education as the foundation for their modernisation. In 1983 he proposed three orientations for the Chinese education system - ‘education must be oriented to modernisation, to the world, and to the future”. Later in 1997, the 15th National Congress of the Communist party decided that the national development strategy would be based on science and education. The growth of any any nation is directly connected to astute investment in formal and informal education. Governments must effectively deploy its educated workforce through jobs and paid labour to drive productivity and prosperity at the individual level and national level. 
• No Single Road to Development - China shows that there is not one single path to economic development, growth and innovation. This was the single biggest lesson for me. There is the Western way and the Asian way, one is not better than the other as long as it works for them. Every nation is different in its own sense, each with it unique challenges and opportunities. However growth and economic prosperity is possible if each will put politics aside and focus squarely on effectively deploying its unique resources and capabilities.  

Closing

China is not perfect. There’s an ongoing unrest in Hong Kong, the economic growth is slowing, the population is aging and the environment is paying the cost for its rapid development.

A billionaire entrepreneur we met stated; “In the last 10 years, 2019 was the worst year in China and it will be the best in the next 5 years”.

Other executives we met echoed the same sentiments. However a nation that has transformed itself within 42 years the way China has, emerging from irrelevance to world power, leading in technology innovation, education, quality of life and equality and etc must be respected. The world’s economy is going through a flux and Africa has the chance to be the next world power within the next 20-50 years if we start now. If it’s possible in China, it’s certainly possible in Africa and anywhere else in the world. 

Thank you for reading. Please share your thoughts below.

PS: All views above are mine and don't represent those of my employer.