Why It’s Time to Think About Copying Chinese Innovators

TikTok and Facebook application on screen Apple iPhone XR

While much of the Western world focuses on things about China that threaten other nations, or at least appear to threaten them, we should not ignore the lessons that can be found in China’s remarkable evolution as a marketplace innovator.

A lot of newspaper column inches went into covering former U.S. president Trump’s campaign to label TikTok—the video clip sharing app developed by China’s ByteDance—as a national security threat. But that move was widely seen as part publicity stunt and part revenge over the app’s role in embarrassing the former president last June (when TikTok users manufactured fake interest in a campaign rally that was supposed to demonstrate Trump’s strength, but instead produced headlines about empty seats). And the Trump sabre rattling that followed was only newsworthy because the Chinese company has over 100 million active users in the United States.

When it comes to penetrating the U.S. market, ByteDance’s accomplishment should not be written off as luck. Tencent’s WeChat—a social networking platform that also enables payments and e-commerce, besides hosting games, such as League of Legends and Honor of Kings—has a long way to go before it matches TikTok’s U.S. numbers, but it already has several million American users. CamScanner (a document-scanning app), QQMail (a file transfer and e-mail service), and Weibo (a micro-blogging app similar to Twitter) also have substantial followings in the world’s largest economy.

For years, Chinese digital companies were dismissed as mere copycats. Baidu was dubbed “China’s Google,” while Taobao was “China’s eBay” and Renren was “China’s Facebook.” In 2016, former Hewlett-Packard CEO Carly Fiorina insisted: “The Chinese can take a test, but what they can’t do is innovate. They’re not terribly imaginative. They’re not entrepreneurial. They don’t innovate. That’s why they’re stealing our intellectual property.” But by then, the digital innovation coming out of China had already attracted Facebook’s Mark Zuckerberg, who visited the nation in 2010 to meet with the CEOs of leading Chinese web service companies like Sina and Baidu, aiming to better understand the new services they were launching. By 2019, Facebook was emulating WeChat by building more ways for people to interact. And last year, Facebook launched a “TikTok clone” branded Reels, which along with other U.S. ventures like Los Angeles-based Triller, started to aggressively try to convert TikTok users and high-profile influencers, aiming to capitalize on TikTok’s geopolitical woes.

So, who are the copycats now? And more importantly, what can Western executives learn from China’s digital innovators?

One relatively obvious lesson is about scaling up, which Chinese digital innovators certainly know how to do. Even before the COVID-19 pandemic pushed more activities online, China’s mobile payments business was over 11 times the size by value of that in the United States. Today, mobile payments make up almost 60 per cent of all non-cash retail transactions in China, overshadowing debit and credit cards. This is partly because Chinese payment systems prior to the digital revolution were underdeveloped and inefficient, with a heavy reliance on banknotes and coins. Instead of following the same technology lifecycle as citizens in the United States and Europe, Chinese consumers leapfrogged straight to a world where mobile phones became their wallets and purses. But if we look more closely at the underlying drivers of this success, there are more fundamental lessons to be learned.

User-Driven Innovation

The first fundamental lesson the West can learn from Chinese digital innovation involves having an entrepreneurial mindset and approach. Most Silicon Valley-based ventures are inspired by visions of developing path-breaking technologies and products with the potential to change the world. They are obsessed with creating things that are novel, cool, and revolutionary through technological ingenuity and perfection. When this works, the results can be seismic, as the achievements of Steve Jobs testify. But the danger with “mission-driven” innovation is an excessive focus on technology and product functionality. And it is important to note that because of this high-risk approach, there are many more failures than success stories like Apple. Remember the QR code scanner product that former Powa CEO Dan Wagner insisted would produce “the greatest technology company of all time,” until the company folded due to technical difficulties, not to mention what Vanity Fair called, Wagner’s own hubris?

“Instead of transformative new technologies and world-changing visions, Chinese success stories usually start with insights into unmet customer needs or user frustrations. Sometimes they simply let users drive innovation rather than pushing the latest and greatest offering.”

China’s digital innovators have adopted a different approach, one that might be termed “user-driven” innovation. Instead of transformative new technologies and world-changing visions, Chinese success stories usually start with insights into unmet customer needs or user frustrations. Sometimes they simply let users drive innovation rather than pushing the latest and greatest offering.

According to consulting firm PwC, some 86 per cent of China’s population uses QR-based payments—the highest mobile payments penetration rate of any country in the world. This success stems from the ability of local innovators to identify the pain points of consumers and retailers, and then address them using technology. Alibaba and Tencent—two of China’s digital giants—built online payment capabilities into their systems early in their corporate development. In the case of Alibaba, the main objective was facilitating e-commerce, while Tencent was focused on online gaming. But they then turned their attention to the problem of offline payments in “bricks and mortar” outlets. The innovation that emerged was Quick Response (QR) code-based mobile payments. Prior to this development, cash was king in China because credit and debit cards were never as widely issued as in the West. But most Chinese were smartphone users, and suddenly being able to make payments using their phones was not just convenient—it was liberating, freeing them from having to carry cash and worry about counterfeit banknotes, while reducing the risk of theft.

For retailers, QR code mobile payments was a boon because, unlike payment cards, no dedicated point-of-sale device was necessary. Thanks to QR-enabled mobile payments, even street hawkers and noodle stands could get in on the convenience. So, QR code-based mobile payments significantly improved the experience of both Chinese consumers and retailers. But it is important to note that QR technology had existed for decades when Alibaba’s Alipay and Tencent’s WeChat Pay adopted it to enable quicker and easier payments in 2011. The two companies simply discovered that they could use it in their mobile phone-based payment services, and as a result, they pioneered the use of QR technology in mobile payments.

Establishing Platforms for User Innovation

In the case of QR mobile payments, Alibaba and Tencent recognized the unmet needs of consumers and retailers. But Chinese digital innovators have also become skilled at going one step further and harnessing the potential of users to come up with innovative ideas themselves.

When Tencent launched the first version of its QQ reminder application, it was geared toward appointments, birthdays, and anniversaries. But Tencent encouraged users to make comments and suggestions about what else they would like to see, and they quickly pointed out that the product had a missing feature: reminders for when their favourite sporting events were about to begin. Tencent developers were also flooded with input from gaming enthusiasts who wanted reminders about the schedules of computer-game tournaments. Within weeks, the company released a new version of its application that incorporated these functions. This rapid cycle of “launch–engage–innovate” has now become core to Tencent’s innovation process. Rather than nailing down a full-fledged product before launch, company developers routinely launch ready-to-use new platforms with limited functionality and harness user feedback to improve the final product. To achieve this, Tencent has created channels to encourage user feedback, to rapidly communicate this feedback to the R&D team, and to ensure that the product architecture and design process is sufficiently flexible to incorporate new functionality quickly.

The launch–engage–innovate approach is also used at Xiaomi, the world’s fourth-largest smartphone brand. Active in 90 countries, it regularly polls its online forums, asking its users to vote on new features and functions that could be added in the future. Xiaomi has also established the world’s leading Internet of Things (IoT) platform in the consumer space, continually seeking users’ input about other devices they would like to see connected. In addition to smartphones and laptops, it now has more than 235 million other smart devices connect to its IoT ecosystem, ranging from thermostats, smart lights, and appliances to drones, neck massagers, and smart dog tags.

Creating a Digital Lifestyle

The second major fundamental lesson that Chinese digital innovators can teach us is to go beyond digital functionality and offer users an all-embracing digital lifestyle.

Most digital innovators in the West have focused on moving a specific activity from the offline world to the online universe by digitizing existing products, services, and experiences. For example, food delivery apps like Uber Eats, SkipTheDishes, DoorDash, Grubhub, and Deliveroo offer customers a convenient way to order and receive takeaway food using a mobile phone app. But in China, leading food delivery platform Meituan, along with arch-rival Eleme (which literally asks, “Are you hungry?” in Chinese), have morphed into expansive online-to-offline (O2O) service providers. Following a relatively recent overhaul of its business, Eleme rebranded as a “digital life services” platform. In addition to ordering food, users can access scores of other services—ranging from car wash and home decoration to wedding planning and pet care—with a few simple clicks on the app. Eleme’s services used to be delivered by its three million “food-delivery brothers” (waimai xiaoge), who are now romantically promoted as “Blue Knights” standing by to rescue urban residents from daily tasks (blue is Eleme’s trademark colour).

Put simply, the boundary between the physical and digital worlds is being dissolved in China as local innovators build ecosystems with diverse partners to meet multiple consumer lifestyle needs. The aim is to create a new world for users—a new ecology where human actions and emotions are fused with online and offline technologies. The boundary started to break down almost a decade ago with the emergence of so-called “super-apps.” Alipay and WeChat differ from each other in significant ways after evolving from different starting points. Alipay started as a PC-based payment product similar to PayPal in its early days, while WeChat’s roots are in social networking. But both now support the digital lifestyle of consumers after dramatically expanding the narrow functionality of their original product and service offerings.

By aggregating a selection of single apps into one system, Alipay offers consumers quick and easy access to over 60 functions grouped into 11 clusters on its homepage. The Convenient Life cluster offers services such as mobile phone top-ups, utilities payments, mobile payments, package tracking, car rentals, and sports bookings. Using their Alipay account, Chinese consumers can access their banks, receive money, order foreign exchange, and transfer funds to children, other relatives, or anyone in the ecosystem. Using the Shopping and Entertainment section, they can access online and offline shops, collect coupons or bonus points, purchase lottery tickets, etc. Wealth Management serves as Alipay’s fintech hub, providing anyone with a linked bank account quick access to savings, investments, insurance, credit cards, and loans. The Campus Life section provides services to college students. Alipay Love serves other demands, while Ant Forest allows consumers to help the environment. Without leaving Alipay, users can also access third-party mini-apps that open the way to a myriad of other services.

WeChat doesn’t offer as many functions as Alipay, but despite its social networking roots, it has a much richer ecosystem than comparable Western counterparts such as WhatsApp. In addition to connecting with contacts (which is pretty much the only function of WhatsApp), WeChat users can do things like access news, conduct mobile payments, and search for nearby friends. WeChat also provides a portal to third-party apps that meet various other user needs and preferences.

Chinese super-apps are now entrenched in the daily lives of local consumers. Alipay alone is regularly used by 700 million people—half of China’s population—serving 80 million merchants. As a result of being so pervasive, China’s super-apps have attracted the attention of local anti-trust authorities and banking regulators, which creates certain challenges. Late last year, for example, Alibaba unexpectedly cancelled a planned floatation of its US$37 billion fintech subsidiary, reportedly over founder Jack Ma’s criticism of Chinese regulators. Since then, Ma appears to have been able to recover from the political backlash his criticisms created, but industry watchers expect his company will move forward facing tighter scrutiny than in the past, especially its fintech operations. But few expect Alibaba’s super-app to be broken up, given that it is now key to managing the lifestyles of hundreds of millions of Chinese consumers.

Another powerful driver of digital lifestyle innovation in China has been the rise of livestream retailing, which has brought together e-commerce, entertainment, and social media networking. Smartphone apps provide the required functionality, with the most popular ones being Alibaba’s Taobao, WeChat, Toutiao, and the short video apps Douyin (TikTok’s Chinese twin) and Kuaishou. Each has a heritage in either e-commerce, social media networking, or entertainment, and has evolved to deliver a broader digital lifestyle service to its users. In that sense, livestream retailing in China is a child of these three distinct digital businesses.

The objective of livestream retailing is to virtually replicate the sensory experience of buying in the bricks-and-mortar world by providing surrogate look, feel, and taste sensations. While doing this, often for hours, hosts encourage followers to buy goods in real time online, often with showtime glitz and banter, or by incorporating tutorials and usage tips and tricks. The most popular livestream retailing categories are clothes, makeup, phone accessories, and foods, but pandemic-related lockdowns in early 2020 expanded the multibillion-dollar industry into everything from real estate to farm produce.

Price advantage is a key economic factor underlying the success of livestream retailing in China, where viewers can instantly lock down special offers available only during livestream sessions. This is particularly attractive to shoppers of products with a fixed price tag. Top live-streamer Li Jiaqi—known as “lipstick brother”—started by offering viewers discounted prices on branded makeup.

Word-of-mouth marketing is also harnessed to boost sales. Popular hosts can have tens of millions of followers, and the public trust that they develop can drive viewers to vouch for the host reviews. Developing trust in hosts is key to marketing products online, compensating for the inability of viewers to physically inspect the merchandise. This is particularly important in China’s “wild East,” where counterfeiting and low-quality products are all too common. In the early days, this trust deficit was a key impediment to the growth of e-commerce in China. Alibaba tackled this head-on when it introduced Alipay by incorporating an escrow payment feature that only releases money to sellers after customers indicate they are satisfied with transactions made. Despite being a virtual shopfront, Alibaba also requires sellers to display their physical address on their webpage to reinforce customer trust in the provenance of goods. The failure of eBay when it tried to enter the Chinese market is attributed to an unwillingness to add these features.

Livestreaming is effective at building trust because it can be done almost everywhere, making it possible to demonstrate products from locations ranging from studios to the factories where they are manufactured. This freedom has led to the recent innovation of cunbo, or rural livestreaming, which took off last year following a string of food adulteration scandals and a widespread swine flu outbreak. Rural livestreaming gives viewers a glimpse into the farming life, helping market products by conveying an authentic and rustic feel. Huang Wensheng from the mountains of Lichuan in Hunan Province has become a star known as “Uncle Farmer” for selling tea through his channel, which features videos of his work and shares stories and songs from his village. He now has 20 million viewers per month, increasing his income by over US$1,500 monthly.

Consumers can derive a sense of sincerity and community from watching their favourite livestream hosts. Like any good salesperson, successful hosts have excellent interpersonal communication skills. They chat informally with viewers, providing information and answering questions, often while telling entertaining jokes or adding mini theatrical routines. But they are also disciplined. Many hosts livestream every day at a fixed time (7 p.m. to midnight is the prime time) to attract and retain viewers. Li Jiaqi, an A-list celebrity in terms of income and influence, still shows up punctually almost every day at 8 p.m. in his livestreaming booth to chat with his tens of millions of followers while selling them makeup and a wide variety of other goods. He once sold 15,000 tubes of lipstick in five minutes. During one of Alibaba’s Singles Day sales in 2019, Li and a small group of other livestream hosts sold over US$14.16 million worth of goods in 24 hours.

Different Business Models

Western companies like Google and Facebook derive the lion’s share of their revenues from online advertising. Over 98 per cent of Facebook’s revenues, for example, came from online advertising in 2019. As a result, the business models of these enterprises rely heavily on the huge volume of data they collect and the ability to precisely target advertising via clever algorithms and artificial intelligence at consumers most likely to become willing buyers.

In other words, these companies make money primarily from huge revenue streams that arise as by-products of customers using their core services such as searches or social media chatting. Revenue and profit growth is basically driven by attracting additional users and encouraging them to engage more frequently.

“Chinese digital innovators sidestep the treadmill of sustaining growth via never ending new user acquisition. By focusing on continually expanding the portfolio of services designed to meet unmet consumer demand, they have found a more sustainable way to keep growing revenues.”

But for Tencent and Alibaba, online advertising accounts for a fraction of their revenues, because embracing user-driven innovation, along with the focus on creating a digital lifestyle for users, has led to a different business model, which is the third fundamental lesson that the West can learn from China’s digital innovators.

While Western companies fret about growing user bases to grow advertising, most Chinese digital innovators focus on generating profits by selling an ever-increasing portfolio of products and services designed to satisfy unmet customer needs or contribute to a more complete digital lifestyle. Since this approach focuses directly on developing products and services that consumers are willing to pay for, it is arguably less risky than relying on models that offer users a service for free in the hope of generating spill-over revenue and profit streams.

Customers wrapped in a multi-faceted digital lifestyle though an app that meets a significant proportion of consumer needs are also more likely to be “sticky” than users of an app that provides only a narrow range of services. Chinese digital innovators also sidestep the treadmill of sustaining growth via never ending new user acquisition. By focusing on continually expanding the portfolio of services designed to meet unmet consumer demand, they have found a more sustainable way to keep growing revenues. They also avoid high fixed-cost investments in ongoing customer acquisition, growing instead through increased wallet share of existing users. ByteDance recently acquired its first credit licence, which demonstrates its ambition to compete with Alipay in borrowing and fintech.

Basing a digital strategy on the concept of offering easy access to a broad (but tightly integrated) portfolio of digital lifestyle services also delivers the potential for much greater scale than moving a narrow set of activities such as food delivery or ride hailing online. Starting out as a meal-delivery app, China’s Meituan is now more than four times the size of the recently merged European and U.S. operations of Just Eat Takeaway/Grubhub and nearly seven times larger than the Berlin-based international operations of Delivery Hero in terms of gross merchandise value.

Copying China

The huge and diverse Chinese market plays a role in making digital lifestyle strategies viable for local innovators. It includes numerous submarkets divided geographically, socio-economically, socio-culturally, and generationally, many of which have not been well understood and exploited despite being large. And while the mainstream e-commerce market has long been dominated by Alibaba and JD.com, there is room for start-ups to become unicorns. A group e-commence platform called Pinduoduo—where consumers form “teams” to get a lower price—was worth US$54 billion just three years after being founded. The NASDAQ-listed company has since expanded its portfolio of services to include “consumer to manufacturer,” which facilitates for users the development of tailor-made products from a variety of industries; “livestreaming fairs,” which bring together a range of manufacturers in key production centres such as Guangdong; and “social e-commerce,” which enables users to easily share what they have purchased with their social network and enjoy even lower prices if other people in their network also join their team purchase.

But while the Chinese market has some unique characteristics, the potential for innovating offerings specifically targeted at submarkets where dispersed customers can be brought together using digital technologies isn’t limited to China. This kind of innovation demonstrates interesting possibilities for digital businesses in other large domestic and global markets with diverse needs.

As noted above, the first key fundamental lesson to take away from China’s digital innovators is the benefits of fully embracing user-driven innovation, starting with unmet customer needs, rather than transformational technology embodied in what you are sure will be a killer product. Chinese digital innovators rely much more heavily on studying the behaviour of potential users to discover their pain points and on launching basic services or digital platforms that can act as a proverbial “honeypot” to attract innovative ideas for new services from their user base.

The second lesson involves moving beyond simply shifting offline activities to an online environment and focusing instead on creating new services that help users embrace a comprehensive digital lifestyle. Chinese digital innovators are breaking down the boundary between the physical and digital worlds, creating new services that combine shopping, social networking, and entertainment. They are mixing offline and online services in new ways. Many of these innovations start from the goal of humanizing new technologies and infusing them into people’s daily routines.

Finally, think about rejigging your business model to sell an expanded portfolio of profitable services that become part of users’ everyday lives, rather than relying on derivative revenues, such as online advertising. Among Chinese companies, there has been much less reliance on the model of giving a service away to users for free and then monetizing the by-products of user activity, such as the potential to stimulate purchases through online advertising that is core to the profit engines of companies such as Facebook or Google. Instead, Chinese digital innovators are more likely to look to grow their profits by adding new lifestyle services that expand and enhance users’ overall digital experience, generating their own revenues.

In the digital sphere, China has moved from copycat to innovator. When compared to Silicon Valley’s supply-side innovation, China’s approach to innovation can look mundane, especially when new technologies are not involved. But the results that have been achieved speak for themselves, and this fundamentally different way of thinking can be augmented by establishing an effective platform for user-generated innovation.

By relying less on developing the next “killer app” and breaking free of the user growth treadmill on which many Western digital businesses are caught, Chinese innovators have developed what could prove to be a more effective way to capture the holy grail: a business that generates a sustainable stream of profits by locking in otherwise fickle users and becoming an integral part of their daily lives. And that possibility, if for no other reason, makes copying the Chinese approach to innovation something to seriously consider.

About the Research

This paper is the product of a study of digital entrepreneurship in China and the United States. Starting in early 2019, we began with an intensive program of desk research drawing on both global and Chinese sources, including information only published in Chinese, with the aim of creating a comprehensive picture of the development of digital industries in China. This included pure digital sectors such as online gaming, music and video streaming, and social media, along with sectors that connected offline and online activities such as e-commerce, ride hailing, and food delivery. This first stage of our research program led us to identify numerous Chinese companies that appeared to be innovating in novel ways. Having identified a sample of more than a dozen Chinese digital innovators of interest, spanning the main types of pure digital and online–offline services, we then conducted more than 50 semi-structured interviews with senior executives and business development teams with these companies (some of which we fortunately were able to gain rare access to because one of the authors had acted as a consultant to them on business expansion). Probing their innovation mindsets and the business development processes they described led us to build a picture of the way Chinese companies seemed to be approaching the launch of new digital businesses as well as the extension of their existing services. While different companies described their innovation thinking and processes in different ways, a number of common patterns began to emerge, which formed the basis of the propositions we present in this paper. Intrigued that these might differ from the mindsets and approaches to innovation prominent in the West, we then compared our findings with descriptions of the innovation, launch, and growth strategies of a corresponding sample of a dozen successful digital innovators from the United States (the majority from Silicon Valley). Analyzing the similarities and differences between the strategies of these Chinese and American digital innovators led to the findings presented here.

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