The only two things that matter for digital companies in China

May 26, 2016 // By Michael Wade
I recently spent a week visiting companies in China, trying to learn as much as I could about digital transformation and trends in that country. I suspected that there were major differences between how digitization was viewed in China versus the West. There were.

As I visited large corporations like Didi Chuxing (the Chinese competitor to Uber that last week received an injection of $1 Billion in funding from Apple), as well as mid-size companies and startups, I learned that only two things matter to Chinese digital executives: scale and speed. All else is secondary. Simply put, they want to get really big, really fast.

Culturally, we might liken it to the Chinese game of Go. Go, unlike relatively complex Western games like Chess, is a straightforward battle for territory. The player who controls the majority of the board at the end, wins. The Chinese digital landscape today is comparable to a game of Go.

Scale and speed make life interesting in China. Yet, in the race for space, many traditional aspects of business are being sacrificed, like revenues, profits, and operational rigour. Cheap money, massive organic growth, and friendly government policies are hiding a multitude of operational sins.

Unfortunately, Chinese firms are not alone in this. Plenty of Western unicorns (privately held firms valued at $1billion or more) are following a similar strategy: get scale first, worry about revenues and profits later. Facebook and Google have spectacularly shown how this business approach can work. But, these are the exceptions. Companies such as Snapchat, Twitter, and LinkedIn have gained scale, but are still struggling to build solid business cases. Many others have failed, or will fail.

Indeed, failure is on the minds of Western digital firms. Many remember the dot.com bubble of the late nineties and its subsequent collapse. Even if their memories do not stretch that far, the financial crisis of 2007-2009 is hard to overlook. Western tech investors are (thankfully) starting to look much more closely at business model sustainability today.

By contrast, Chinese companies have only known growth and success. There was no dot.com collapse in China, and the financial crisis was barely a blip on the Western horizon. Chinese growth continued unabated. Chinese businesses do not fear failure, because they have never felt its sting. This is great for innovation, and make no mistake, there is massive innovation happening in China today, but it can lead to economic recklessness.

The role models do not help. In China, successful digital giants cast a long shadow. Alibaba and its founder Jack Ma, for instance, are revered in China, which was clearly evident when I visited the company’s headquarters in Hangzhou – a city half a step behind Shanghai, Beijing and Shenzhen in the Chinese urban hierarchy.

Alibaba is impressive to be sure. It embodies both the speed and scale that Chinese businesses aspire to reach. The company grew by providing great services at no cost. It vanquished eBay in China by not charging the buyer or the seller to conduct business on its Taobao marketplace. Free services are hard to compete against. Even today, Alibaba makes relatively little revenue ($3.7B in the most recent quarter vs $29B for Amazon and $18B for Google), considering the gross merchandise volumes of goods and services sold across its various marketplaces ($113B in the most recent quarter).