Li Yuan
China's tech-industry titans can look back at 2016 with pride,
having reached significant milestones. They might have to go far,
including beyond their home market, to find growth in 2017.
In 2016, the market capitalizations of Tencent Holdings and
Alibaba Group Holding swelled to the level of China's biggest state
companies, Industrial and Commercial Bank of China and PetroChina.
Tencent and Alibaba also rank as the fifth and sixth most valuable
publicly listed technology companies in the world, respectively,
after Apple, Alphabet, Microsoft and Facebook.
Another marker of ascendancy: Ride-hailing firm Didi Chuxing
Technology bested U.S.-based Uber Technologies in the China market.
After a bitter and expensive battle, Uber sold its China operations
to Didi. Many in China hailed the outcome as evidence that the
domestic tech industry has caught up with Silicon Valley.
These were no small feats for an industry that started less than
20 years ago, when a landline phone was a luxury for most Chinese
families and the government and public viewed private enterprises
with suspicion.
Sustaining its success, however, is leading the industry into
unfamiliar territory. After years of breakneck expansion and
ferociously tweaking Silicon Valley technologies and business
models for the China market, the Chinese tech world is scrounging
for new customers and doesn't know what the next big thing is.
"There's no obvious forerunner to guide us, no road sign or
direction to follow," Tencent's research department writes in a
newly released internet-industry forecast report. Based on
interviews with 63 tech leaders, including Didi Chief Executive
Cheng Wei and venture investor Kai-Fu Lee, the report says the
pathway ahead "is full of unknown possibilities as well as
pitfalls."
Huawei Technologies, the telecommunications company and
smartphone maker with the largest global footprint among Chinese
tech firms, is also feeling adrift. "Huawei is at a loss of its
direction," company founder Ren Zhengfei said in a speech this
summer. The fast growth the company experienced by following others
is slowing down, he said, now that there isn't anyone to catch up
with.
Behind the uncertainty is the diminishing growth in the number
of mobile internet users. With half of China's 1.4 billion people
online and 92% of those accessing the internet on their
smartphones, the market is looking saturated. Tech companies will
have to look beyond China's bigger cities for growth: to overseas
markets and rural China, as well as servicing enterprises.
Unlike Apple and Facebook, which have extensive global
operations, Tencent and Alibaba have limited profiles outside
China. International expansion is a priority for both. Tencent is
pushing its social-messaging app, WeChat, and Alibaba its Tmall
shopping platform.
Both have turned to India and Southeast Asia in the past few
years, investing in the region's e-commerce, social-messaging and
mobile-payment startups. Industry observers say the companies will
be more aggressive in trying to reap gains in those markets.
Smaller companies such as Cheetah Mobile acquired hundreds of
millions of users in developing markets by offering mobile internet
tools that are popular in China. But despite the growth in users,
these markets generate limited revenues, and that's unlikely to
change soon.
China's hinterlands present similar challenges. Disposable
incomes in the countryside are about one-third of those in big
cities. The companies look at the bright side: Less than one-third
of the rural population uses the internet, compared with two-thirds
in urban areas, according to China Internet Network Information
Center. They hope that as more people get online, more will adopt
their services.
The potential is there. Local smartphone brands Oppo and Vivo
built extensive sales channels that include the small towns and
villages where people are buying their first smartphones. In the
third quarter of 2016, while smartphone sales of Xiaomi and Apple
slowed, Oppo's and Vivo's shipments more than doubled, making the
latter two companies China's largest smartphone makers by
shipments, according to research firm IDC.
Another less-tapped market in China is for software and
information-technology services aimed at enterprises. Since 1995,
over half of the value generated by venture-backed tech companies
in Silicon Valley came from enterprise-facing startups, according
to Sapphire Ventures in Palo Alto, Calif. In China, only 10% of
venture investment went to enterprise startups this year, according
to ITjuzi, a data company.
In the past, Chinese tech firms found easier pickings among
consumers, rather than enterprises, which counted on an abundant
supply of skilled workers. Investors say that will change in the
next few years as labor costs rise further, driving up demand for
tech-driven business solutions.
While waiting for these other opportunities to materialize,
Tencent is courting a demographic that China's tech world generally
overlooks: senior citizens. At its WeChat annual conference on
Wednesday, the messaging app's product team highlighted the
potential of users 55 years old and older, who currently comprise
only 1% of WeChat's 846 million monthly active users. A
four-minute-long video presentation about senior WeChat users ends
with a 50-something woman saying: "Right now it's the information
age. We seniors also need to move forward. Or else we'll get left
behind."
--Follow Li Yuan on Twitter @LiYuan6 or write to
li.yuan@wsj.com.
Write to Li Yuan at li.yuan@wsj.com
(END) Dow Jones Newswires
December 28, 2016 12:42 ET (17:42 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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