China’s Market Of Billions
Five ways the global ambition of China’s business platforms will disrupt European business
In the 1980s, at the birth of the desktop computer revolution, leaders within the European Community realised that a lack of market scale was holding European producers back. No single country offered a market of more than 60 million people. The US, by contrast, had a single market of 350 million.
Scale was perceived rightly as a major competitive advantage, especially if it were accompanied by one uniform language and a common culture (two elements Europe still lacks of course).
Proof of the pudding lay in the fact that there has been no major European involvement in computer manufacture or operating systems for 20 years. Bull of France, ICL of the UK and Siemens of Germany all tried and failed.
In mobile telephony, Siemens, Philips, Alcatel and Sony Ericsson came and went, as did Nokia, the champion of global mobile, once US companies understood the importance of the smartphone.
Now think about China with an internal market that will soon be 1.4 billion people, four times the size of the US market and with a growing middle class (the US middle class is in decline).
Chinese companies will also be able to access the Eurasian landmass, as well as Africa, giving a market potential of more than 6 billion people. The scale advantages that are beginning to accrue to China are a major disruptive factor as reflected in the huge potential of its business platforms.
Alibaba, the Chinese ecommerce platform, achieved over $25 billion in sales in one day this November Single’s Day. In contrast, Amazon scored $1 billion in sales on Prime Day. That’s not to say Amazon and other US platforms are not in contention. They are. But there is an absence of European challengers. Policy makers and business people need to find a way to deal with this.
1. Rapid market dominance
In the space of two years China’s DJI has achieved 85% share of the global consumer drones market forcing US companies to downsize in response. In another area of the economy, IoT specialist Ingdan is on course to be the platform of choice for IoT component manufacture around the world (having already launched 16,000 IoT projects and experienced 365% growth through the first three quarters of 2016). These numbers represent hugely dominant performance. Waiting in the wings, 5 AMOLED factories in China are gearing up to make flexible screen displays. China rules in quantum computing.
Innovative and very smart, scale is allowing Chinese companies to quickly amass expertise in new areas by interacting rapidly with customers. This “participatory capitalism” means Chinese companies can draw on tens of thousands of consumer advocates to help with iterating new product features quickly, a key factor in its dominance of the drone industry.
The EU has a strong background in participatory democracy that is simply has not transferred to the business domain. Time to start thinking how EU companies can democratise, and fast.
2. Policy adaptability
China’s conversion to green politics going from an emerging economy position (the north has polluted and now it’s our turn) to global ecological leader has taken next to no time in political terms.
The EU uses eco-politics to create new market positions. Greenhouse gas emissions reduction policy helped foster a carbon trading capability in Europe, and created some eco-leadership (as well as a good deal of fraud in the auto sector!).
An autocratic leader with a keen eye on global policy impacts China’s Xi Jinping has easily sidestepped the EU. China is now about to launch the world’s largest carbon market. The initiative only began in 2013, which in effect means China has managed 20 years of catch up in just four years.
If it wants a decent share of China trade, the EU has to make up the ground lost to the likes of Amazon, the only serious contender to Alibaba. Niche platforms and well conceived ecosystems could work, if only the EU had a platform and ecosystem policy.
3. Dominant economic platforms
Business platforms (think Amazon.com, Apple iOS, Alibaba) represent one of the great economic restructuring franchises. These are private firms that reorganise vast markets on their own terms. Apple, initially reorganising the trading of music through iTunes, and then boosting apps revolution (which led to the creation of an estimated 4.8 million jobs in Europe!); Amazon.com reorganising how a large part of the world shops. Alibaba creating a global three day logistics network to link buyers with sellers.
Europe missed the boat on platforms because of its competitive race to reduce corporate taxes on firms like Apple and Amazon, gifting them an additional 30% of free cash flow. But those platforms are becoming ever more important, especially now that they are beginning to integrate a range of services.
Alibaba now integrates finance, logistics and trade. Using its on-platform data it can anticipate which firms are good for a loan (Airbnb is doing something similar). It knows intimately the performance of the many millions of businesses that use it. That means it can price risk accurately and even use its platform to help the performance of companies that are running into delinquent territory.
Platforms like Alibaba and Ingdan, DJI in drones and of course Amazon, will put the squeeze on the EU economy like IBM and Apple, Toshiba and Sony did in the 1980s.
4. Changing trade & logistics patterns
China, through Alibaba, is pushing the WTO to consider special tariff conditions for small package delivery so that it grows outside the multilateral system.
Shifting trade to package logistics is hurting companies like Maersk and threatening companies like Deutsche Bundespost +DHL as platforms like Amazon and Alibaba get better at it – in a pilot project in Munich Amazon took 30% of DHL’s business. There can be short term gains for logistics companies but longer term (Amazon is one of DHL’s largest customers) the concern is that platforms will dictate the terms of business. In addition they are just more innovative and will move quickly into alternatives like drones, autonomous vehicles and last mile delivery options.
5. New ways of working
Platforms are configured for scale, scope and speed. The EU, and the UK of course, needs new ways of working that incorporate rapid decision making at the bottom of the hierarchy inside firms.
Companies need to foster continuous multifaceted innovation typified by the idea of continuous delivery in software where teams deliver updates dozens of times a day.
In Flow, a book I co-authored with Aviva’s international CIO Fin Goulding, we look at those new ways of working, pioneered by companies like Spotify and Paddy Power, characterised by continuous improvement, continuous innovation, continuous learning, continuous delivery. That’s digital transformation for you. In short, as the economy restructures around platforms: continuous everything.
Haydn Shaughnessy is an economist, strategy advisor and author specialising in the development of business ecosystems and the impact of business platforms on global competitiveness. He has written Flow: A Handbook for Change Makers, Mavericks, Innovation Activists and Leaders & also, Shift: A Leader’s Guide To the Platform Economy