China Means Business February 2017
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Chinese companies are taking center stage in many areas of technological development and dominating entire industries, making entering those industries very difficult for companies from other countries.
In the financial-technology (FinTech) industry, the Bitcoin (http://bitcoin.org) cryptocurrency has attracted widespread attention. Although many people believe that Bitcoin could decentralize the control of money, Chinese companies are beginning to gain significant influence over the Bitcoin economy. For example, in April 2016, "70 percent of the transactions on the Bitcoin network were going through just four Chinese companies" ("How China Took Center Stage in Bitcoin's Civil War," New York Times, 29 June 2016; online). These Chinese companies now have de facto veto power over changes to Bitcoin's underlying technology and therefore wield a significant amount of control over the future of the digital currency. In addition, Chinese companies are beginning to dominate the FinTech industry. For example, KPMG (Amstelveen, Netherlands) and H2 Ventures (Sydney, Australia) published a report in which they highlight that five of the top ten FinTech companies of 2016 are Chinese. Ant Financial Services Group (Hangzhou, China)—an affiliate of Alibaba Group Holding (Hangzhou, China)—ranked first on that list. In China, providers of social-networking services are diversifying into mobile-payment services. For example, Tencent Holdings' (Shenzhen, China) WeChat instant-messaging service features a mobile-payment service that enables users to conduct peer-to-peer transactions. WeChat's success in this area has not gone unnoticed in the West. In March 2016, Facebook's (Menlo Park, California) instant-messaging platform also debuted a payments feature that enables users to send one another money. Despite such efforts by companies in the United States, companies in China possess a competitive advantage because of the nation's rapid development and high adoption rate of mobile-payment services. As Chinese companies and consumers gain experience and expertise in the use of new internet-based payment solutions that could find widespread use in the future, players from other countries will need to pay close attention to developments in China.
China is rapidly building up technological, business, and political capabilities.
Western companies—particularly those in the electronics industry—are facing China's increasingly problematic regulations, and many technology firms in the United States are discovering that the best way to pursue opportunities in China is to strengthen joint ventures that enable them to conduct a greater amount of business through Chinese partners. In 2015, Unisplendour Corporation—a subsidiary of state-owned Tsinghua Holdings (Beijing, China)—acquired 51% of newly created New H3C Group (Hangzhou, China), which is a joint venture between Hewlett-Packard Enterprise Company (Palo Alto, California) and H3C Technologies Co. (Hangzhou, China). New H3C Group CEO Tony Yu highlights, "Once we became Chinese, some hurdles were gone" ("China's Tech Rules Make It Hard for U.S. Firms to Take Control," Wall Street Journal, 2 June 2016; online). Other companies—including Cisco Systems (San Jose, California), Microsoft Corporation (Redmond, Washington), and Qualcomm (San Diego, California)—have formed joint ventures with Chinese organizations to address antitrust and espionage concerns that China's government had.
In addition, information control by the Chinese government can create problematic ethical considerations that Western companies will have to address when they attempt to conduct business in China. For example, new regulations in China require app-store providers to keep records of their users' activities for 60 days. Companies must either accept the possibility that they will become accomplices in the Chinese government's surveillance and censorship efforts or exit the market.
A wide range of Chinese technology companies are attempting to enter the automotive industry. Internet company Baidu (Beijing, China) teamed up with chipmaker Nvidia Corporation (Santa Clara, California) to develop solutions for self-driving cars. And Tencent and Hon Hai Precision Industry Co./Foxconn Technology Group (New Taipei City, Taiwan) are investing in electric-vehicle (EV) ventures by supporting automotive start-up Future Mobility Corporation (Shenzhen, China). Future Mobility "seeks eventually to sell several hundred thousand fully electric, highly automated, China-built vehicles a year" ("Tencent-Backed Company Aims to Launch Smart-Electric Cars Before 2020," Wall Street Journal, 12 July 2016; online). The start-up is even poaching talent from the West and has already hired 50 engineers from BMW (Munich, Germany), Google (Alphabet; Mountain View, California), Mercedes-Benz (Daimler; Stuttgart, Germany), and Tesla Motors (Palo Alto, California). Tencent is also investing in EV manufacturer NextEV (Shanghai, China), which plans to sell premium EVs globally and aims to compete with large players in the United States and Europe. Also, LeEco (Beijing, China) is backing EV start-up Faraday Future (Los Angeles, California), and Beijing Automotive Industry Holding Co. (BAIC Group; Beijing, China) is backing automobile manufacturer Borgward (Bremen, Germany). Even in China, concerns about the number of companies in the EV industry exist. Shanghai Jiao Tong University (Shanghai, China) Institute of Automotive Engineering professor Yin Chengliang argues that "there are too many entrants in the sector, and some of them are just speculators.... The government has to raise the threshold. It's bad to see irrational investments in projects with low technology levels" ("95% of China's Electric Vehicle Startups Face Wipeout," Bloomberg, 28 August 2016; online). Nevertheless, according to the China Association of Automobile Manufacturers (Beijing, China), 2015 saw China become the world's largest market for new-energy vehicles—a vehicle category that includes EVs, fuel-cell vehicles, and plug-in hybrids.
China's ambitions are affecting supply chains and creating concerns about matters such as resource availability. For instance, increasing competition in the EV industry is creating global competition for raw materials—in particular, the lithium that is necessary for the manufacture of EV batteries. Securing the volumes of raw materials necessary for battery production will be a challenge for EV companies. According to Benchmark Mineral Intelligence (London, England), China will be responsible for 70% of the expected demand for lithium-ion batteries. Increasing global demand for lithium will likely result in a race among EV suppliers to overcome the complex challenges that the battery-metal supply chain presents.
China is rapidly building up technological, business, and political capabilities that will have a substantial effect on a wide range of industries in the coming years. Western companies will have to find ways to secure resources, build up competitive strength, and try to find partnership potential with their Chinese counterparts. Chinese companies will need to ensure that they do not alienate Western policy makers, consumers, and business partners. Fruitful cooperation between China and the West will require governments and organizations from both sides to find mutually agreeable strategic pathways.