How are tech-driven companies contributing to China’s economic outlook?

I had always been under the impression that China’s economy was mainly focused on exports. However, upon arriving in Beijing during an MBA trek this January, I had a closer look at a burgeoning tech industry whose primary short-term objective seems to be serving the 1.3 billion-person Chinese market.

by Laura Simion, MBA ’16, EMI Fellow

The insights I gained into the Chinese economy were eye opening. They allowed me to understand the importance of the changing product and service demand from the Chinese population and how it’s shaping these businesses’ growth strategies.

Many of the companies we visited during the trek have business models that appeal primarily to the evolving Chinese customer needs. An example is Didi Kuaidi, a ridesharing company that successfully gained market dominance after beating Uber. Didi was able to engage with customers by partnering with WeChat, China’s primary social media outlet, allowing it to offer a better customer experience. Didi’s advantage was also in part due to its local employee base who were able to engage Beijing taxi drivers at the railway station by describing the value proposition of taking customers through their app. There’s no doubt that ride sharing has been a success in China’s congested cities. However, both Didi and Uber are still struggling to reach profitability.[i] “People’s Uber”, the Chinese version of UberX, charges fares that only cover the driver’s cost.[ii] While the subsidies offered by the two firms keep them highly competitive in the market, they’re aware of the need to phase out this incentive in order to have sustainable business models in the longer term, which will cause friction with the drivers.

Didi’s partnership with GrabTaxi, Lyft and Ola[iii] shows the app is determined to push Uber out of the Chinese market and to ensure that the other ridesharing players are its partners rather than its competitors. Thinking long term, the partner companies will jointly have accumulated customer data, which may prove extremely powerful, and help them create new global service offerings. Competition seems fierce among Chinese businesses; once a startup identifies market potential, more follow lead. An example is Yidao Yongche, a smaller ridesharing app that recently received a $700M investment.[iv] During our visit, the venture capital fund Matrix Partners described its hands-off model upon making an investment, which in turn requires extremely careful up-front diligence. Matrix shared insight into their decision to invest in Kuaidi and not in Didi pre-merger based on their better match with Kuaidi’s company culture.

As a result of our trek’s business visits and networking receptions, I took note of a recurring theme: the Chinese startup market is filled with great ideas and more Chinese are returning from overseas to join this energetic environment. While many of the concepts Chinese startups are implementing aren’t necessarily new, they’ve succeeded at tailoring these ideas to target their customers’ needs. The combination of Chinese government’s push for growth in the tech industry and access to local data through partnerships with social media outlet WeChat has enabled tech-focused startups to expand at a rapid speed. The coming years will tell how the eventual profitability of these high-potential tech startups will impact China’s economy.

I would like to thank the Emerging Markets Institute and the Cunningham Fund for providing me a travel stipend for the China trek. This trip represented one of my most memorable global business experiences.

[i] http://www.forbes.com/sites/liyanchen/2015/09/23/meet-ubers-mortal-enemy-how-didi-kuaidi-defends-chinas-home-turf/#71dfb6b2fec9

[ii] http://www.businessinsider.com/ubers-plan-to-conquer-china-as-next-big-market-2015-6

[iii] http://www.forbes.com/sites/ywang/2015/12/03/the-counter-uber-move-didi-kuaidi-grabtaxi-lyft-and-ola-form-ride-sharing-partnership/#3ecf6da03e19

[iv] http://mashable.com/2015/10/20/yidao-yongche-letv/#E___oN3LXkqT