Google vs. Baidu. Amazon vs. Taobao. Whatsapp vs. WeChat. And, most recently, Uber vs. Didi.
There is clearly a divide between China and the rest of the world when it comes to internet companies. Homegrown Chinese tech firms have fought off American challengers attempting to enter the Chinese market. Chinese firms have tried to expand their presence abroad. Alibaba had the largest IPO in the history of the New York Stock Exchange. Tencent is trying to market WeChat to non-Chinese consumers, and has invested significant stakes in Western video game companies, including an outright purchase of League of Legends’s developer Riot Games.
Why have Chinese firms been able to compete effectively against American internet companies? Is it just protectionism and China’s internet restrictions? Or is there something inherent in the Chinese internet business model that makes these companies better suited to the developing world?
Marco Gervasi’s East Commerce: A Journey Through China E-Commerce, and the Internet of Things is an attempt to answer these questions. Through several dozen interviews with consumers, entrepreneurs and tech investors, Gervasi attempts to demonstrate that China’s e-commerce sector is fundamentally different what exists in the United States.
Gervasi focuses on two elements: consumer behavior and China’s lack of infrastructure. While I am not sure how unique Chinese internet consumer behavior is (Gervasi argues that Chinese consumers treat the internet like entertainment, unlike Americans who see it as a source of information), China’s lack of infrastructure may be the more interesting story. East Commerce argues that China’s lack of trusted supporting services pushed Chinese e-commerce firms to develop many of these systems themselves. For example, the lack of trusted banking services in China meant that Alibaba was forced to handle much of the transaction and clearing themselves. Now, Alipay and TenPay (Tencent’s e-payment mechanism) are arguably more trusted than the debit and credit cards offered by formal banks. The growth of China’s more social version of e-commerce is another reaction to underdeveloped infrastructure—the lack of dispute mechanisms and trustworthy sources of information means that social networks are developed as a way to build trust.
In contrast, American e-commerce firms grew in a mature economy where much of the supporting infrastructure was already built. The American website eBay, for example, grew in an economy with well-developed electronic payment systems, logistics and distribution mechanisms, and delivery channels. If there was a problem with an item, there were trusted ways to handle disputes. However, when eBay moved to China, it was suddenly missing all of these supporting services. And it couldn’t build these services itself in an entirely foreign country with little knowledge of the market. Alibaba, on the other hand, was better placed to build these services.
Gervasi argues that China’s model of e-commerce, tailored to a “transitioning” economy, is more suitable to the rest of the world than the American model—Gervasi specifically cites Indonesia as one country where Chinese-style firms can do well. These countries also lack the supporting infrastructure that can sustain Western-style internet firms.
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It does sometimes seem that Gervasi is talking around the issue in East Commerce. The book is focused on the intelligence and keenness of his subjects. Gervasi also often inserts himself when he is describing his subjects and his interviews. However, the best argument as to why Chinese internet firms have beaten back Western challengers is more a story of China’s economic structure than one of business smarts.
The problem with using China’s lack of “infrastructure” as the reason for its different e-commerce sector is that it is largely an impersonal story. One expects that China’s internet tycoons are smart people, but if China—by virtue of being a large economy—was likely to have its own internet firms anyway, then people like Jack Ma and Ma Huateng were more the right people at the right time rather than visionaries in some uniquely Chinese way.
It also means that this is less a “Chinese” model, and more a model that all transitioning economies will eventually follow. Countries that have large domestic economies are likely to have their own internal internet dynamics. The country doesn’t even have be a transitioning economy. Japan’s internet works very differently from its American counterpart, being much more focused on mobile phones than personal computers. Japan even uses its own websites: Yahoo Japan dominates Japan’s internet in a way that the American version hasn’t done in over a decade.
India is perhaps the country that is most similar to China, in terms of potential to grow a domestic internet sector. India’s infrastructure is in an even less developed state than China’s. China’s problem is that debit and credit cards are still not trusted forms of payment; India’s problem is that most people don’t even have payment cards. Indian e-commerce firms like Flipkart and Snapdeal thus have designed their systems to handle “cash on delivery” as payment; while Amazon was able to tailor their systems, it had less of the first mover and size-advantages it had elsewhere in the world.
Finally, Gervasi portrays China’s model of e-commerce as an unequivocally good thing—a model that will truly integrate the online and offline worlds, and usher in the “Internet of Things.” I am not so sure. One effect of the Chinese model appears to be centralization in a small number of internet firms: Baidu, Alibaba, and Tencent. These three firms between them control almost all the major internet destinations in China. Contrast this to the United States. While individual American firms do dominate individual activities, it is the rare website that dominates multiple activities. Amazon may dominate e-commerce, but it doesn’t dominate electronic payments—that falls to PayPal, a separate and competing company.
At the moment, competition between China’s internet firms (especially between Alibaba and Tencent) seems fierce enough to limit the pernicious effects of centralization. But (despite the talk about disruption), there is no reason why the internet should be insulated from the ill-effects of monopolization. It should be something to keep in mind as China’s internet firms continue to grow.