State support has a downside for China’s tech titans

Are China’s internet titans about to conquer the world? Listen to the talk in Beijing and in some circles in the west and the triumph of Chinese tech is all but certain. At the very least it will compete on an equal footing with the world-beating incumbents headquartered in Silicon Valley.

Take Richard Liu. The founder and chief executive of JD.com, China’s second-largest e-commerce company and the world’s third-largest internet company by revenue, believes his business and competitors such as Alibaba, Tencent and Baidu will one day pose a serious challenge to the likes of Google, Facebook and Amazon — but not for at least another decade.

Instrumental in this is the support of the Chinese state. To a greater or lesser extent, all of China’s big and successful internet companies have benefited from the communist party’s efforts to exclude Silicon Valley’s finest. Facebook, Google, Twitter, Instagram and YouTube are all blocked in China.

On top of that, the government has announced plans to shut down all non-official virtual private network services that allow paying customers to circumvent the “great firewall” censorship system and access overseas websites.

Beijing claims foreign websites must be blocked under censorship and “national security” laws but the bans are effectively non-tariff trade barriers that potentially violate World Trade Organisation rules.

The results in commercial terms for the companies have been outstanding, as shown until recently by the performance of Baidu, China’s most protected internet champion. The company, often referred to as the “Google of China”, was the direct and immediate beneficiary of Beijing’s decision to block Google in 2010 after the US group refused to censor its search results.

In the absence of serious international competition, China’s internet companies have been left to capitalise on the emergence of the world’s largest online market. The number of internet users in China has doubled since 2010 to reach 750m today, according to official government figures. The growth of e-commerce has been especially impressive — China is by far the largest online retail market in the world, accounting for nearly 40 per cent of all online sales globally.

Transactions through Alibaba’s online platforms alone totalled $500bn last year, equal to the gross domestic product of Argentina and more than the combined transactions of Amazon and eBay.

Yet state protection brings downsides that may end up harming the companies it seeks to help.

In a recent interview Mr Liu said the fact that the Beijing government blocks most major US internet companies from its enormous market stops Chinese enterprises from being truly competitive. “It’s like people — if you are put into a big sterile box on the day you are born and not exposed to any microbes or diseases and only given purified air and water then when you come out you will get sick very soon,” he noted morbidly. “You will die very soon out in nature.”

Baidu is a case in point. Despite, or perhaps because of, its privileged position as the dominant search engine in China since the decision to block Google, it is flailing. Its market capitalisation is just one-fifth that of Alibaba and Tencent and its growth has been subdued. It appears to be ailing even before it is let out of the sterile box.

Success within the state-censored “intranet” of China has also made some of the sector’s champions arrogant, complacent and liable to hugely overspend on acquisitions abroad.

Yes, some of the services they provide within China are impressive. Tencent’s WeChat messenger app is better than most similar services, widespread adoption of online payment systems are moving China towards a cashless society and e-commerce delivery services are exceptionally reliable and fast. But none of these services are unique or “game-changers” and there is no way the Chinese companies can replicate their domestic prowess or scale outside the walled garden of China’s internet.

At home their services are grafted on to the state-owned banking and logistics industries. They also receive preferential regulatory treatment in the form of cheap loans and land from a party-state that relies heavily on them for tax revenues, employment growth and online surveillance of citizens.

Even in Hong Kong, which maintains a largely separate political and legal system from the rest of China, these companies have failed to make real inroads even though several of their founders and top executives live in the city most of the time.

Residents overwhelmingly prefer WhatsApp to WeChat and almost nobody does their shopping through Alibaba or JD.com. An international advertising campaign for WeChat featuring star footballer Lionel Messi a few years ago turned out to be an expensive flop. Today, Tencent and its competitors are expanding into markets in Southeast Asia and eastern Europe that they think will be easier to crack.

There are sure to be many more embarrassing failures as the Chinese internet titans attempt to emerge from their sterile, state-protected box.

jamil.anderlini@ft.com

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