Misunderstood and Underestimated by Western Observers: Chinese Companies Emerge Victorious
The United States and Western observers in general have a long history of misunderstanding and underestimating China. This includes perception errors related to the CCP, the Chinese business culture, industry-government relations in China, and perhaps above all else the ability of Chinese people to innovate and create new products and services.
This article includes stories taken directly from my book, The Future is Autonomous, about Jack Ma and his company Alibaba, with the innovative mobile payment system AliPay. I will also discuss how Robin Li and Baidu beat the international search engine juggernaut Google to achieve search engine dominance in China with his comoany Baidu. I conclude with a story that I tried to add in different parts of my book but could not find a place for it about Wang Xing. Wang Xing was mocked by western commentators and called, “the cloner,” because he would make direct copies of popular websites such as Facebook but later won the “War of 5,000 Groupons” in China, surprising everyone.
“Twenty-four people went for that job. Twenty-three were accepted. I was the one guy who was not,” Jack Ma said after applying for a job at KFC after he graduated from college. In 1999, Ma returned to his hometown of Hangzhou with a team of people to found Alibaba, a business-to-business marketplace.
In September 2014, Alibaba raised over twenty-five billion dollars in its Initial Public Offering (IPO) on the New York Stock Exchange. This was the largest IPO in the Stock Exchange’s financial history, and Ma is now one of the richest people in the world.
Like many figures in the Chinese technology, and autonomous vehicle industry, Ma represents a true rags-to-riches story. He grew up in Hangzhou and learned English by talking to English-speaking foreigners at Hangzhou International Hotel. He also rode his bicycle seventeen miles every day to give tourists tours of the area for free in order to continue to practice his English.
However, he soon met with a series of disappointments. Chinese high school students take one test, the 高考 (Big Test). This test determines which university they will attend, or even whether they qualify to attend a university at all. Ma failed the test two times before he finally passed it and attended Hangzhou Teacher’s Institute. This university is now Hangzhou Normal University. He graduated in 1988 with a BA in English.
Ma’s next difficulties came when he applied for jobs after he graduated. He applied for thirty jobs, including one at KFC, and no one hired him. He also applied to Harvard Business School ten times and was rejected each time.
Ma travelled to the US for the first time in 1995 and was exposed to the internet for the first time. When he returned to China, he built his first what he called “ugly” website simply named “The Internet.”
One of the keys to Alibaba’s success was Jack Ma’s decision to create an app called Alipay. This app, under Alibaba’s financial company Ant Financial, gave consumers a fast and secure way to pay for goods and services for the Alibaba startup Taobao.
I interviewed Chris Miller from the US-China Business Council’s Shanghai office and asked him about the importance of Alipay for the Chinese technology sector. He said, “Well, when the company was in its early years, Alibaba wanted people to make online purchases, but there was a lack of trust in payment security.” He said, “Whether that meant exposure of bank card data (to other people) or trust that merchants would actually send goods following payment (which wasn’t always the case at the time).”
He continued, referencing the risk of making purchases online in China, saying, “Without escrow, scams can become a serious problem. The best way to solve this was to come up with our own payment system, so they pioneered a secure way of facilitating that.” He concluded by saying, “Although it is now ubiquitous due to other factors, security has been a core from day one.” Essentially, they created Alipay because they had no other choice if they wanted people to trust their payments would be safe and secure.
Today, everything can be purchased or sold using Alipay or the similar app, WeChat Pay. This app is from popular Chinese social media app WeChat. It can be used to pay for a wide variety of goods and services, from coffee at a local Starbucks, to a soda from a vending machine, to taxi fare, and even a person’s gas or electric bill. This has opened the door to businesses in all fields to sell goods and services directly to consumers.
Mobile payment can also be used by autonomous vehicle companies to create an easy way for passengers to pay their taxi fares in an autonomous “robotaxi.” AutoX, mentioned in the last chapter with their new “robotaxi” base in Shanghai, has Alibaba as one of its main financial backers. Therefore they have a proven, successful model, and support from Alibaba, in their effort to create a mobile app for passengers to pay their taxi fares.
This chapter analyzes the controversy which has emerged over China’s mobile payment system. This system could represent a new financial framework for countries, but questions arise about governments tracking people’s purchase history. The chapter also discusses the revolutionary benefits of 5G technology, as well as the controversy it generates. As China attempts to export this technology to the US and its allies, it has caused controversy because of security concerns related to espionage. China’s efforts to work toward technological self-sufficiency in response to the trade dilemma show China’s weakness in some technologies. This weakness could cause delays in China’s efforts to achieve Xi’s China Dream.
Controversy Emerges for This Innovative Payment Method
Mobile payment systems, such as Alipay and WeChat Pay, have existed largely without government regulation and control. However, this has changed in recent years. The lack of regulation was probably due to the fact it was initially a relatively insignificant part of the Chinese economy.
However, in 2016 China saw nine trillion dollars in mobile payments. This dwarfs the one hundred twelve billion dollars of mobile payments in the US. The People’s Bank of China (PBOC) implemented a new regulatory provision on June 30, 2018 which stated the government must clear all mobile payments through the PBOC.
These mobile payment systems represent an alternative method for countries seeking to escape from the credit system dominated by the West, particularly the US. The mobile payment system also raises concerns for human rights advocates for its potential role in creating the “social credit system” in China.
Monitoring a person’s purchases is not unique to China. For example, having a poor credit score in the US could prevent a person from getting a mortgage on a house, or applying for a loan to start a business.
What could be potentially worrying is how the Chinese government has adopted the QR code payment system as an identification system to monitor its citizens’ payment history. The video cameras described in the last chapter are not just for tracking traffic trends. Millions of cameras are in cities all over China. These cameras are equipped with facial recognition technology to monitor even petty infractions like jaywalking. While the mobile payment system makes it easier for customers to pay for items, it also gives the government a much easier way to fine people.
Scanning QR codes for mobile payment apps has its advantages for monitoring people during the current COVID-19 pandemic. This would give the government information about people’s location and what they were spending their money on. This would allow for things like contact tracing to avoid spreading the coronavirus.
Alipay and WeChat Pay cannot be entirely to blame for this perceived government invasion into people’s privacy. They had no intention of using QR codes as an identification tool to track people’s spending history.
My business consultant friend in Beijing described the effect it has on his daily life. He divuleged, “Wherever you go, you have to scan a QR code…whether you’re going to your apartment, your office building, and a shopping mall, etcetera.” He continued to describe how this is impacting tech firms in China. He said, “I think for tech firms, it’s never been a good time, especially if your business model is directly connecting to consumers.”
He pointed out that the online gaming industry is doing very well and Tencent has experienced record stock increases for its online gaming platforms. However, autonomous vehicles would clearly fall into the category of a technology which directly connects to consumers. There could be a slower start to the “robotaxi” fleet services in China. This is true even with favorable regulations because of the pandemic.
With its mobile payment system, China makes it easier for companies to start and run businesses with a secure and easy way to buy and sell products and services. This system also provides an alternative to the US credit system. Human rights organizations have cause for concern about the spread of this technology. China’s push for another revolutionary technology with 5G could be a substantial benefit to their technology sector. However, this technology has become a central piece of the trade conflict between China and the US because of fears of CCP espionage.
Misunderstood and Underestimated, the Prophet Emerges in Robin Li
A closer examination of Robin Li’s life history is necessary to gain a full picture of his vision for the Apollo Project. Yanhong (Robin) Li was the fourth of five children, and the only boy. His parents both worked in a factory in Shanxi Province, China.
As the only boy of the family’s five children, Li was under pressure to succeed and provide for his sisters and parents. He strived to achieve success academically. His first success came when he was admitted to Peking University in 1987. At Peking University, he studied information sciences and received his BS in 1991.
Li then travelled to the United States to pursue a PhD in computer science at the State University of New York (SUNY) in Buffalo in 1992. Unlike his fellow countryman, Jianxiong Xiao (Professor X), Li decided not to continue to earn a doctorate. Instead, he received his master’s degree in computer science in 1994.
Li began his professional career shortly after he graduated from SUNY Buffalo at IDD Information Services in 1994. IDD was the New Jersey division of Dow Jones and Company. In this job, he helped develop a software program for the online edition of The Wall Street Journal.
It was at this job Li began to develop the expertise for search engines which would serve him well as CEO of Baidu. He created a program which was awarded a patent by the US government called Rankdex in 1996. Rakdex was a site-ranking search algorithm for search engine rankings. This program was the first to use hyperlinks to measure the quality of the websites it was indexing. This program predated a similar program from Google by two years. Google founder Larry Page referenced Li’s work several times in his patent applications.
Fresh off his initial success in the burgeoning search engine development world, Li then decided to move to the mecca of the high-tech industry, Silicon Valley, in July 1997. In Silicon Valley, Li worked as a staff software engineer for pioneering search engine site Infoseek.
At Infoseek, Li added to his stellar reputation as an innovator by developing the picture search function used by Go.com. Li then left Infoseek to form his own company with his friend Eric Xu. They called the new company Baidu.
When Li returned to China after founding Baidu, he began the battle for the internet search engine market. In this battle, he would be competing against many different Chinese startups and international challengers from Yahoo and Google.
The Chinese education system emphasizes rote memorization over creativity and developing problem-solving skills. This has led to criticism by Western observers that the education system does not foster a spirit of innovation to create new goods and services in China. However, Li was both educated and began his career in the US. He received his postgrad education in the US. He also gained valuable experience and excelled in Silicon Valley. He decided to move Baidu to a region where he knew the customer base and could use the education and skills gained in the US to succeed.
I had a discussion with Dr. Matthew Johnson, founder and principal of business consulting firm AltiSilva LLC. In his work, Johnson directs and conducts research related to supporting China-focused advisory, due diligence, and risk management. He pointed to some of the US advantages in developing new technology. He said, “The US has invested in a system which produces the best technology in the world. It doesn’t mean this technology is produced by SOEs.”
This is another common critique of new technology development in China. The Chinese government supports corrupt and inefficient SOEs. Dr. Johnson continued, saying, “The United States has the deepest capital markets. It means the United States has the most business-friendly environment. It means the United States is the most welcoming to entrepreneurs of all nationalities.” While this is all true, the potential consumer base for new products and services in China is enormous.
The lack of established companies in the tech sector also makes it easier for new companies to enter and succeed. Li returned, armed for battle against whatever competition he would face from both Chinese startups and foreign companies. The fight would be for the ultimate prize of winning the Chinese search engine market.
Foreign companies often fail to understand that Chinese consumers want different products and services than those which were successful in Western countries. No one thought the internet titan Google would fail when it entered China in 2006. Robin Li recognized the significant differences between the people in China, their habits and consumer culture, and the need to establish relationships with the government. All of this would be essential to succeed in China.
Li succeeded, in part, by recognizing the distinct internet search patterns of Chinese people. This distinction was noted by Lee Kai-fu in his book AI Superpowers: China, Silicon Valley, and the New World Order. These search patterns differ greatly from the top-to-bottom approach people in the US and Europe prefer.
Lee Kai-fu tracked search patterns for Chinese people when he was working at Google China. He did this by monitoring their eye movements to determine how long they looked at one part of the screen. He also looked at where they clicked a link. The results appeared as red dots on the screen. For Chinese people, the screen appears to have chicken pox, with people looking at and clicking on links all over the screen. Baidu employed a condensed layout which made it much easier to use this approach.
As any child or adult learner can tell you, Mandarin Chinese is an extremely complex language. The word order is different from English, and words can have many different meanings depending on the context in which they are used. There are also many abbreviations of words which could cause frustration for people if the search engine does not account for them.
Baidu’s search engine algorithm was geared specifically for the complexities of Mandarin Chinese. Google, by contrast, could not create a similar search engine algorithm. Lee Kai-fu mentioned he pleaded with Google executives in Silicon Valley to alter its search engine layout and language algorithms, but he was ignored.
Robin Li also recognized the political reality of doing business in China. He allowed the CCP access to Baidu’s search engine algorithms to censor information. Baidu also allowed the Chinese government to block certain key words from producing search results. Google, however, refused to allow the CCP to access its search engine algorithms. This was because of its belief in information openness. It also faced legal pressure and public relations backlash in the US if it did censor data. Recognizing defeat, Google left China in 2010. Now, Baidu has between a seventy to eighty percent market share in China, compared to a paltry 3.7 percent by Google.
There are some key points from this example. Li was underestimated by foreign competitors, particularly those from Silicon Valley. Li beat Google by eschewing their site layout and business strategy in favor of strategies matching the specific preferences of Chinese people. Finally, Li developed a strong relationship with the CCP, which is essential for doing business in China.
The next challenge for Robin Li and Baidu would be to transition away from focusing on perfecting its search engine. It would need to move to the extremely complicated task of developing and producing autonomous vehicles.
“The Cloner” Wins the War of 1,000 Groupons
Robin Li was not the only misunderstood Chinese tech entrepreneur. Lee Kai-fu portrays Wang Xing in his book, AI Superpowers: China, Silicon Valley, and the new world order. Lee believes that Wang represents the new dynamics of the Chinese tech sector and western misconceptions about it is Wang Xing.
Wang has been derisively referred to as “the cloner” because he founded Xiaonei (on campus), a blatant Facebook clone with the same shade of blue, a similar logo, and virtually the same layout. The Facebook tagline that it was, “brought to you by Mark Zuckerberg” even appeared on every page for a brief time. Due to financial troubles, Wang was forced to sell this site not long after it was launched and in August 2009 the site was renamed as Renren (everyone).
After the failure of Xiaonei, Wang’s next project was a briefly popular blatant Twitter clone called Fanfou. This site failed because of government apprehension about creating social unrest due to the government’s lack of an ability to effectively censor the content posted on Fanfou.
Wang Xing was a seasoned veteran of the hyper competitive win at all cost startup world in China, which Lee Kai-fu referred to as Gladiators fighting for survival. This allowed Wang to succeed for his next venture, Meituan (Beautiful Group), which he formed in 2010.
Wang was competing against Groupon, which had teamed with Tencent to form a hybrid juggernaut in 2011. He was also competing against a total of 5,000 similar Chinese group buying startups in what Lee called the “War of 1,000 Groupons.”
Lee claimed that, “The concept seem tailor made for China, where people obsess over discounts and bargaining is an art form.” Wang did not copy Groupon’s website, but rather created a more condensed user interface that Chinese consumers prefer. While other companies burned through money on advertisements, Wang kept costs as low as possible and focused on iterating his website and optimizing a back end. This back end was capable, according to Lee, of “Processing millions of payments to tens of thousands of sellers.”
Most importantly, particularly during the early days of the competition, Wang formed relationships with sellers by creating an automatic payment system, similar to Alibaba’s AliPay. Using this system, payments went directly to the seller. Otherwise, sellers became frustrated by group buying startups dying before they saw any money.
This improved payment system allowed Meituan to form exclusive business agreements with more and more businesses. Meituan eventually emerged from the battle in the “War of 1,000 Groupons” victorious because of Wang’s ceaseless iteration of the website and constant pivoting to adopt every new market trend in China into his company’s site.
He merged with one of the few remaining rival companies, Yanping in late 2015. By 2017, according to Lee, Meituan-Yanping is responsible for, “Filing 20 million orders from a pool of 280 million active users.” Today, it is the 4thmost valuable startup in the world, ahead of AirBnB and Elon Musk’s SpaceX.
There are two notable concepts to take from Wang’s story. The first is the fact that Wang had been ridiculed from the West for blatantly copying their designs. However, in the process of this theft, he learned the business practices and models that were key to their success. He represents the ideal lean startup, constantly iterating his product while always looking for new markets to pivot towards to gain more customers. Autonomous vehicle companies’ leaders in China also look for new business models and have the same voracious work ethic, demonstrated by Wang, to make their vehicles competitive globally.
The second is the buying system. This mobile payment system makes it much easier for companies to sell products and services to consumers in China. Autonomous vehicle companies can use established mobile payment systems to make it easier for people to pay for things like their fare in autonomous “robotaxis,” or create their own using a similar formula, once the fleets are on the road.
In my next article, I will describe the ceaseless determination of a true rags to riches story with Jianxiong Xiao, AKA Professor X. Xiao is the CEO of AutoX who aims to make autonomous driving “affordable for everyone” because his family was very poor growing up in a small former fishing village in Guangdong Province, China. Perhaps recognizing the similar relentless work ethic that led to Xiao’s success at AutoX, one of AutoX’s main financial partners is Jack Ma’s Alibaba.
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