Alibaba’s rise is about more than simple technology.
By Ron Leung | November 14, 2016
“One hundred years from now, when we look back on the 21st century, the dominant story won’t be one of the emerging world graciously serving as the West’s inexhaustible source of low-cost labour and growing middle classes hungry for new goods and services. It’ll be the story of the formation of new, raw superpowers violently and chaotically bursting through the world’s floorboard.” – Sarah Lacy
How much innovation is coming from China? What about the rest? Who are these innovators, and, finally, what comes next? Of the $20trn in additional global income that is expected by 2020, what are the goods and services on which this will be spent?
How a fairy tale became reality
In the summer of 2002, eBay’s acquisition of PayPal quietly opened a new chapter in Silicon Valley history, creating a breed of startup millionaires who would revolutionise the scene with their experience, money, and global ambition. They would become venture capitalists and serial entrepreneurs, founding YouTube, Palantir, LinkedIn, SpaceX, and Tesla Motors. They would revolutionise the venture capital model (for example, 500 Startups and the Founder’s Fund), and they would be early investors in Facebook, Uber, Airbnb, and many other of the world’s biggest technology brands. In time, this constellation of friends, colleagues, and rivals would become known as the PayPal mafia.
In this way, Alibaba’s initial public offering (IPO) in September 2014 marked an inflexion point in the acceleration of China’s startup ecosystem. The IPO produced hundreds of millionaires who had first-hand experience of the struggles and failures involved in creating enough innovations to build a tech giant from the ground up. Moreover, it created a community of engineers and entrepreneurs with the capital and talent to build the next generation of tech companies. In the past decade alone, Alibaba’s alumni have started more than 130 internet companies.
Shenzhen is growing into China’s startup tech hub, challenging the dominance of Shanghai and Beijing. While foreign giants such as Microsoft and IBM based their headquarters in these established financial centres, the new generation of startups is looking to Shenzhen, the opportunities available in China simply too large for one hub.
Shenzhen had the characteristics Silicon Valley observers believed were required to ‘create’ a tech startup ecosystem, and the circumstances were right: Solid infrastructure, an abundance of skilled workers, and great universities. It also had the secret ingredient: An entrepreneurial spirit that drove the country up the value chain from an army of cheap labour making plastic consumer goods to the biggest exporter of mobile phones and laptops worldwide. The city led China to the frontier of manufacturing and technology before some of its innovators took the next logical step – to create the next transformative technologies.
Three more stories for the next generation
One of the most promising characteristics of the current generation of emerging market startups is their global aspiration – especially those from China. Eventually, they aim to compete in all markets and languages. Given the size and demographics (young, mobile friendly) of the Chinese market, the consumer market has been a wonderful incubator for startups already buttressed by a language that acts as a natural barrier to foreign entrants. While the previous generation of Chinese startups such as Baidu may have cloned existing technologies and businesses, the current generation is creating them. Three such startups across different sectors demonstrate this innovative wherewithal and global ambition.
Emerging Market Startups
DJI, the world’s largest manufacturer of consumer drones, symbolises Shenzhen’s journey from low-cost manufacturer to startup hub. The privately held company dominates both the consumer and commercial markets with an estimated market share of 70% and was valued at $10bn in 2015. According to a report by PwC, the market for commercial drones is estimated at about $2bn and is predicted to balloon to as much as $127bn by 2020. As new entrants (e.g. GoPro, the US action camera maker) aim to enter the consumer segment of the drone market, DJI has invested massively in its commercial applications.
The market in package delivery has been well reported, with Amazon revealing its ambitions to use drones after outbound delivery costs hit $10bn in 2015. However, the application set is much larger. DJI’s commercial drones are already pushing innovations in agriculture and half a dozen smaller sectors. In the former, crop inspection for stress and disease has been slow and costly. Drones could noticeably lower the costs and complexity of inspection systems, expanding access to small-scale farmers. Similarly, the use of drones for search and rescue operations would dramatically lower costs and expand access to such technologies for lower-income countries. DJI’s target market is global. So are its offices and partnerships.
Tencent could not have been founded in the US or Europe. It is a result of circumstances characteristic of developing countries: Low incomes, high mobile phone penetration, large numbers of unbanked persons, and a young ‘greenfield’ population with a near-endless appetite for online connections and entertainment. Tencent is a collection of internet assets (including social networks, web portals, e-commerce, and multi-player online games) centred around its messaging service. Just as Google found a way to make money while providing quality Internet searching, Tencent figured out how to make money from messaging – a puzzle that telecom operators, Apple, Google, and Facebook are still trying to solve in many OECD countries.
Founded in 1998, Tencent has transitioned from old mobile technologies (with feature phones) to smartphones, its main rival now being Facebook. Its 2004 IPO on the Hong Kong stock exchange saw it valued at just under $1bn, with 300m users. In 2016, its 800m active users (100m of who are outside China) number roughly half Facebook’s active users. Its valuation exceeded $200bn in 2015, making it one of the largest tech companies in the world and placing it in the league of Facebook, Google, and Amazon. Tencent is also pushing its global ambitions beyond products. It has funded a number of US startups (such as Snapchat, a messaging app, and Cyanogen, a mobile operating system) and has acquired or taken stakes in big gaming companies.
Tencent Value and User Growth, 2004-16
Ant Financial and Alipay
A spin-off from Alibaba, Ant Financial became the world’s most valuable privately held company in April 2016 when it was valued at $60bn. Originally incubated as part of Alibaba’ financial ecosystem, its key product, Alipay, is an online payments solution that covers the entire payment procedure. Ant Financial grew out of Alibaba’s core financial services, which targeted China’s millions of consumers and small businesses, the likes of which have traditionally been underserved by state-owned banks. For this target audience, it provided financial products unavailable in the established banking sector or improved on those already available but which provided poor customer service and user experience.
Its user base has grown alongside Internet penetration in China, reaching a high of 450m active monthly users in June 2016. International partnerships have been sealed with banks, two payment providers (Visa and Mastercard), and telecom operators. The company has also partnered with Paytm, an Indian technology company, to extend its payment services using data science and machine learning. This will strengthen Alipay’s real-time fraud detection and transaction authentication for a growing customer base that includes more than 100m people without a traditional credit profile.
With the anticipated inflow of liquid capital and talent resulting from the Alibaba IPO, we have a good idea where and how that additional $20trn will be spent, including on drones and new consumer goods for the middle class in Europe, the US, and emerging markets, as well as new forms of financial, communication, and entertainment services for the emerging middle class.