«China can’t afford not to open up»

Mark Greeven, Professor of Innovation and Strategy at IMD, sees Chinese technology globally on the rise. Europe should react with an industrial policy.

Professor Greeven, what are the biggest differences between the Chinese and Western digital ecosystems?
One of the biggest differences is the large scale and rapid speed of development of Chinese platforms. The Chinese ecosystems grew rapidly in a very short time to have a large number of users. In China it is easier to share data and to connect people with other people and services than in other places in the world. There are very few limitations of crossing boundaries of companies and in regard to data privacy. There is a qualitative difference between Alibaba (BABA 207.39 3.96%) or Tencent (Tencent 54.32 3.96%) with Google or Facebook (FB 225.09 -0.16%).

What is the difference?
An ecosystem in China is not a platform where you as service provider just plug in and make use of their infrastructure. But what you see is that they are more like platform of platforms. The different members of the broader ecosystem are all interacting with each other. Service providers use the offers of Google or Facebook, but there is not much interaction between the different actors. In China all the different businesses are connected through services such as online payment systems like Alipay. Or the cloud service Alicloud or the logistic services. Some of the businesses in these ecosystems are platforms other provide services or technologies, but they are all interdependent. Payment, cloud, or logistic systems are like the glue between the different parties. Google, Facebook, or Amazon (AMZN 2442.37 1.72%) do not have this. They just facilitate the exchange, but not more than that.

But then it is even more difficult for a business to do get out of such an ecosystem, right?
Right, there are advantages, because the ecosystem is doing more than just facilitating your interaction with clients. It gives you opportunities to evolve and enhance your business. You are part of a bigger organism. The good news is that ecosystems from China are not zero-sum games.

What do you mean with that?
Alibaba or Tencent are competitors, but they also collaborate – investing in the same businesses and work together on some initiatives. What we see is that their ecosystems are in fact very open. And it challenges the assumption that a company only competes with another company. We see multiple ecosystems that in some areas compete and in other areas collaborate. The boundaries between the different businesses are therefore fluid. This is not so much visible in Western business ecosystems.

How would you describe the Western ecosystems then?
They are much more about protecting their turfs showing closed boundaries of their platforms, they are clearly more focused on competition. The biggest difference is that Chinese ecosystems are heavily locally embedded. They are deeply rooted in the Chinese business world. The global ecosystems do not have this link to one region’s specific business characteristics. That means that the Chinese ecosystems are locally far more powerful and deeper connected, but it is of course only a limitation. For instance, if Alibaba or Tencent would like to build an ecosystem in Switzerland, it is much more difficult. They wouldn’t have any advantages to other players.

It is often said that the Chinese internet companies could only become so large as they were protected by the government. What is your opinion on that?
There is no way to say with certainty what would have happened without government support. But if today the Chinese government opened up the Internet for Google, Facebook, WhatsApp, Instagram, and Twitter (TWTR 30.97 -1.99%) – these Western companies would massively fail. They would not be able to compete with the Chinese internet landscape.

Why is that?
The Chinese internet platforms are deeply locally embedded, but they also achieved a speed of development which made their tools and interfaces superior. If I would need to choose between WhatsApp and WeChat, the choice is clearly WeChat. Facebook’s user interface is horrible. I have much better user interfaces in Chinese social media. Today the Western platforms would not succeed in China. But ten or twenty years ago, the situation was different. Google and Facebook would have been in a much better position to compete. The Chinese players were not as strong yet.

Under such a scenario, what do you think would have been the situation today?
The Chinese platforms would have been strong competitors, maybe the strongest. They would not have been killed by the competition from US companies. There are some points of evidence for that. In 2013 when Google was blocked in China, the competitor Baidu (BIDU 106.55 0.22%) had a much larger market share. Google was operating in China for ten years, but achieved as a search engine only a market share of around 20 per cent. And eBay (EBAY 45.54 3.34%) or Amazon had a level playing field when they entered China, but they were out-competed without being blocked by the government. The US companies underestimated the competitors and didn’t invest enough.

Another point of controversy is about the protection of intellectual property in China. How important is this topic?
It is very important. Even just a few years back, intellectual property was not a priority, because it didn’t matter for Chinese firms. Twenty years ago, the competitive advantage of Chinese companies did not rely on intellectual property (IP). But nowadays many firms depend on the protection of their own-developed technology. It is very clear that the advantage of companies such as Alibaba, Huawei, and Haier stems from technology. These companies focus on research and development to build IP. This has created a strong grass-root demand for better protection of IP.

And there is now improved IP protection in China?
Yes, looking at evidence such as number of court cases regarding IP and number of cases won by foreign companies shows that protection is improving. It is not yet at the same standard like in Switzerland or the US, but it will certainly increase as there is a need by Chinese companies to have a solid IP protection system. The government in Beijing doesn’t care very much about foreign companies or foreign governments, but they care a lot about what the local business community needs.

But can foreign companies expect to be fairly treated by courts and the government?
We need to understand that China is a very large country. If you are in Beijing or Shanghai, where most of foreign companies are based, the courts are very professional and transparent. They will be soon up to a Western standard. But if you go to the less developed provinces, you will face obviously a much less competent judicial system. Overall the system is improving. That is why we see foreign companies building up research capabilities in China. Some of the biggest players like BASF (BAS 48.645 -3.75%) from Germany have large R&D facilities in China.

How could pressure from the US help? Conditions for IP protection are to be included in the “Phase 1” trade agreement.
To have IP protection is not only a decision on the top. You need capable officials and expertise, you need to train people and enforce rules. It is a whole system and needs decades to develop. At best you can have an intention to work on it.

Would European countries need a stronger industrial policy to answer to the success of Asia?
In Europe we had a very solid industrial policy for a long time. We need to get that back by coordinating the efforts of ministries, universities, companies, and research institutions. We need to provide a clear framework with a vision where we want to go, what we want to specialize in, and what our capabilities are. This is important: Industrial policy is about collaborating and doing things better together than doing it independently and non-coordinated. It is more effective and efficient by wasting fewer resources. This is not about ideology.

What is your opinion on the spectre of a decoupling between China and the US?
I clearly see a risk of decoupling. I am afraid that if the current developments continue, the inevitable outcome will be two different kinds of technology systems and standards, as well as two different Internets. There will be a Chinese versus an American version. These will create big challenges to multinationals. They have to build up different value chains, fulfill different technology standards, and operate on different internet platforms to operate on a global level.

Would that also mean that China would lose any incentive to open up to the world, and maybe more liberalize their governance system?
China will always have an incentive to connect to the rest of the world as it cannot depend on itself. China needs the world as much as the world needs China. In the end of the day, a decoupling and creating islands is not good for anybody. China has a lot to lose if they become to inward-looking. Let’s not forget that the country is deeply embedded in Asia which is a very complex system. If you look at foreign investments and trade, there are large inter-dependencies with Asia. The country can’t afford not to collaborate and be open.

Do you see signs that China is not closing up?
Yes, there are many such developments. Many industries are becoming more open to foreign involvement than ever before. However, some industries are more restricted. It is not black and white. The big picture if we look at Huawei and security technology, this industry becomes more controlled. But there is an opening up in the chemical, pharmaceutical or financial industries which creates large opportunities. Companies will always find ways to operate on a global level.

Huawei is a prime example for a Chinese brand getting large market shares abroad, especially in emerging markets. Will that be more commonplace in the future?
Absolutely, particular in South-East Asia and Latin America we see massive interest working with Chinese companies and using Chinese technology. If you go to countries like Pakistan, they are very open to work with the Chinese and do not show any bias. Their products are good and cheaper than Western technology. This is supported by the policy of the Chinese government with the Belt and Road Initiative to go into these countries. It is a trend for the years to come that more and more countries will adopt technologies and standards from China.

What do you think about security concerns regarding Chinese technology providers such as Huawei?
It is always good to screen companies you are working with. But regarding backdoors you could have the same concern regarding US companies – why do we not block Microsoft (MSFT 183.25 1.02%) and Facebook? And it is no secret that Microsoft is one of the largest suppliers to the US military. I am concerned when using Amazon’s Alexa that my data could end up at the NSA. As well as there is the possibility that Huawei may collect data for the Chinese security apparatus. The question is if there is a fundamental difference if the Chinese would do something different with our data than the US.

And what is your position?
I think it is in all cases not a good idea. But I do not see the reason why as a consumer I should not have the choice to use Facebook or a Huawei phone. Let the consumer chose.

Will we use more Chinese Apps or technologies also in the West? One of the prime examples is maybe TikTok which became hugely popular.
I think so. If the consumer has a choice and there is a good product or service, the consumer will eventually choose this product. I do not think it will be a Tsunami of new things, but there will be new options in the market. The world is bigger than Western Europe and the US, we will see these development in other places of the world earlier. In Switzerland we first need to make the cultural switch from cash and the offline world to the online services which are already ubiquitous in China.

One argument by Facebook executives for their digital currency project Libra is the possible competition by Chinese payment systems like Alipay. Is that a valid argument?
I’m not sure. Chinese financial services will play a role in international transactions, but I don’t think the reason for developing own payment systems should be the fear of a competitive threat only. Alipay and Wepay are not so big yet globally, they are not global players. And there is a lot of competition from many different companies. The question should be what benefits a new system could bring us. The driver should be to have a more convenient, faster, and reliable system.