China is the growth story of the century, and despite worrying growth statistics in the past months, remains a key focal point of the global economy. The country has reached a turning point where it is attempting to maneuver a transition from an economy based on manufacturing and construction, to one driven by consumption and high-tech industries. This is exemplified by the expansion of homegrown phone maker Xiaomi in Asia and the listing of internet company Alibaba in New York. Dubbed the “Silicon Valley of the East”, the southern Chinese city of Shenzhen is a hub for technology companies and venture capital firms, with close to 10% in market capitalization (as of Feb 2015) of the Shenzhen Stock Exchange, one of the five largest exchanges in Asia, composed of tech firms. Where is the Chinese tech scene going and how does it plan to get there?
Trend of tech conglomeration
The start of Chinese tech companies can be pinpointed to the proliferation of online marketplaces with the advent of the internet. In the past, a high import tax and lack of product quality guarantee forced many Chinese consumers to travel to nearby Asian destinations like Hong Kong or Japan for their shopping. However, the creation of e-commerce allowed Chinese consumers to effortlessly browse catalogs online and purchase foreign products to be delivered to their doorstep. This gave rise to internet e-commerce exporters like Alibaba and JD.com and importers like Taobao and Tmall. Gradually these companies expanded their services to cover almost every aspect of a typical Chinese netizen’s life, including messaging apps, social networks, multiplayer online games and smartphones.
In the same manner by which Mark Zuckerberg started Facebook from his Harvard dorm room, or Steve Jobs started Apple from his parents’ garage, modern tech giants generally come from humble beginnings as small startups. However, a trend of conglomeration amongst existing tech giants is creating a monopolized market and setting up barriers to further entry from Chinese tech startups. This trend can be exemplified by the two largest Chinese internet companies, Alibaba and Tencent. While they compete in the same sector of e-commerce and social networking for the same user base, their subsidiaries and portfolio companies have found ample opportunities for co-operation. For instance, Kuaidi Dache and Didi Taxi, portfolio companies of Alibaba and Tencent respectively, used to be keen competitors in the taxi app space. However, the entrance of Uber into the Chinese market led Kuadi and Didi to merge in February this year to achieve cost synergies and consolidate market share. Another example is the merger of Meituan and Dianping early this month to create a consolidated online-to-offline platform for entertainment services such as booking cinema tickets or restaurant tables.
Bringing financial expertise into the tech scene
It has been a recurring theme in the West where tech companies lure away senior bankers with the promise of a different working environment with more freedom for the individual to grow with the firm. On the other hand, senior bankers bring deep sector expertise and a valuable network of contacts to their new firm. For instance, Morgan Stanley ex-CFO Ruth Porat left the global investment bank in March this year to join Google as its CFO. As in other facets of corporate strategy, Chinese tech companies have learned and adopted the Western model – of poaching investment bankers to fill their roles.
This comes at a time when venture capital funds have flooded Chinese tech companies with cash and buoyed their valuations, which has fueled their appetite to deploy the excess capital in mergers and acquisitions. Such transactions call for the skills and expertise possessed by senior investment bankers in the Asia-Pacific region. The plethora of such job opportunities, coupled with increasing regulation putting pressure on internal cost cutting and limits on compensations at investment banks, has led many Chinese bankers to join Chinese tech companies. Recent examples include Catherine Liu, ex-head of China technology at Credit Suisse and now chief strategy officer at Qihoo 360, and Winston Cheng, ex-head of Asia TMT at Bank of America Merrill Lynch who joined Leshi.
The recent Chinese delegation accompanying President Xi to America was composed of mostly tech firm executives, showing the country’s determination to abandon its historical role as the world’s factory and diversify into high-tech industries. As China continues to move towards a more technology-driven, knowledge-based economy and attract a steady flow of expertise from its established financial sector into homegrown tech companies, we can expect to see a steady expansion of the technology segment as a proportion of the Chinese economy in the near future. The impending Shenzhen-Hong Kong Stock Connect could also open up domestic firms to foreign capital and further boost the Chinese tech scene. However, existing tech giants dominate the domestic scene, and their trend of conglomeration makes it increasingly unlikely for Chinese tech startups to thrive and compete effectively with these giants, without being acquired by them first.