Meituan officially launched its own ride-hailing APP Meituan Dache (美团打车Meituan ride-hailing) for Shanghai and Nanjing’s markets.

Meituan Dianping is a Chinese website and APP for food delivery services, consumer products and retail services. As a very typical representative of mobility in China, Meituan Dianping was originally called Meituan. After merging with Dazhong Dianping it changed its name to Meituan Dianping.

As a leading food delivery APP, Meituan also started to develop its ride-hailing service in China, which is a significant step of its business strategy to improve the system of mobility in China. Meituan Dache, Meituan’s ride-hailing app in China, ranked third in the App Store Free download list after its official launch in Shanghai for a week in February, 2017.

On March 21, 2018, Meituan officially announced its first batch of expansion cities of new ride-hailing business, including Beijing, Shanghai, Hangzhou, Xiamen, Chengdu, Fuzhou and Wenzhou. Also, Meituan began to recruit drivers in these cities. However, the plan was not implemented after a year-long period of stagnation.

Challenges for Meituan: Competition and regulations

After entering Nanjing, Meituan heavily subsidized the drivers to grasp more opportunities to compete with Didi. Also, Meituan divided the drivers into three levels and gave different subsidies accordingly. For instance, at the beginning, the standard earning for new drivers was 2,200 yuan per week. After reaching the standard, the drivers can get 800 yuan extra bonus per week.

Hence, the cost associated with its ride-hailing drivers increased exponentially, from 290 million RMB in 2017 to 4.46 billion RMB in 2018, with an average monthly investment of 370 million RMB in 2018.

Date Source: Meituan Dianping 2019 annual report – Meituan’s ride-hailing driver related costs (million RMB)

In order to expand the market share quickly, Meituan launched a price war against Didi through subsidies in Shanghai and Nanjing. But the war did not last long since Meituan cut its subsidies shortly after. To maintain its market share in Nanjing and Shanghai, Meituan lost 50 million dollars per month. Additionally, the transportation sector intervened and warned Meituan against disturbing social order by starting price wars.

The Meituan Dache APP drained Meituan’s finances

According to the Q1 2019 financial report released by Meituan, the new Meituan business, including the travel business, spent 31.3% of the sales cost but only contributed 20.8% of the revenue. This added to a total loss of 439 million RMB in Q1 of 2019.

The cost of sales of Meituan new business decreased from 5.2 billion RMB in Q4 2018 to 4.4 billion RMB in Q1 2019 and the revenue also decreased from 4.2 billion RMB in Q4 last year to 3.9 billion RMB in Q1 2019.

As for the two financial figures, the report explained that it was mainly due to the significant reduction of subsidies for ride-hailing services in China in Q1 2019 and improved profit margins of new businesses and other divisions. Meanwhile, Meituan will continue to restructure mobike’s overseas business in order to reduce the loss of the bike-sharing business.

Merged to Meituan APP from Meituan Dache APP

Since late April 2019, although Meituan’s ride-hailing endeavor has once again been launched in Nanjing, Shanghai and other 17 cities, it is no longer the former Meituan ride-hailing APP. Meituan Dache was transformed from the self-management team to an aggregation platform.

The new Meituan ride-hailing APP in China provides travel services for users by accessing travel service providers such as Caocao travel service, Shouqi car-hailing service and Shenzhou special car service. This means that Meituan no longer did its own business, but instead became an aggregation platform.

Users can go directly to ‘ride hailing’ from the restaurant booking page, which allows them to call a car in real time or for reservation. Meanwhile, users can choose from a menu of car types including taxi, economy, comfort, business and luxury by Shouqi Taxi, Caocao Taxi and Shenzhou Private Car.

Source: Meituan App open interface

If the users of Meituan ride-hailing want to call a cab to a restaurant, they can also directly click the ‘ride-hailing’ button on any restaurant business page in the Meituan APP. The system will identify the location of the user and the address information of the restaurant, automatically fill in the starting and ending address. As a result, Meituan created a ‘one click’ solution to call a car directly to the restaurant, all within the same app.      

Didi Chuxing started its food delivery business in China

Source: losborgia.com – Didi launched the food delivery business in China

Didi Chuxing Technology Co., formerly named Didi Dache, is a Chinese transportation company. As the leading company in ride-hailing in China, Didi Chuxing (滴滴出行) launched its food delivery service locally. On March 6, 2018, the first 9 cities to launch Didi Takeaway (滴滴外卖) were Wuxi, Nanjing, Changsha, Fuzhou, Jinan, Ningbo, Wenzhou, Chengdu and Xiamen. Didi Takeaway wanted to win the first batch of merchants and users by reducing commission and issuing rewards. Wuxi city was the first target city for Didi, in June 2018, and then Didi entered Nanjing, Taizhou, Chengdu and Zhengzhou in July. Didi Takeaway has posted their discounted information on the platform, such as 1 RMB ice cream, 2 RMB tofu pudding and 2.5 RMB barbecue. These discounts have helped Didi attract many users in a short time. However, Didi failed to enter the sixth target city, Ji’nan, due to the low profitability in previous five cities.

So far, Didi has not entered a sixth city and the previous five cities are still operating normally. Nevertheless, according to consumers, because the subsidies lasted only a short time and there were only a few merchants in the app. Additionally, some said Didi poorly designed the interface of the takeaway platform, hence Didi delivery was largely forgotten in the market.

Didi has invested 1 billion rmb in food delivery service in China in 10 months

In December 2017, Didi launched their food delivery business in China. Some people think that as Meituan entered the ride-hailing market in China, Didi fought back by entering the food delivery Chinese market.

There have also been media reports that profitability of UberEats, a food delivery business run by its international rival Uber,  inspired Didi.

However, although Didi invested more than 10 billion rmb in food delivery business in China, the result wasn’t as good as expected. On 15^th February 2019, Cheng Wei, founder and CEO of Didi Chuxing, announced that Didi will focus on its most significant ride-hailing business in China, continue to increase investment in safety and compliance while improve efficiency, so the non-core business may be closed.

Didi will shift the market for its food delivery business abroad

Mobility in China is becoming more mature and competitive. As a result, companies try to develop into overseas markets. Didi launched its food delivery service ‘Didi food’ service in Osaka, Japan in April 2020.

Source: Twitter.com – Commercial of Activities by Didi post on twitter in Japan (Summer delicacies for you to eat! Activities in progress)

Meanwhile, DiDi Food announced its expansion to Aguascalientes, Toluca, Chihuahua, Torreón, and Saltillo in Mexico on 22th April, 2020. So far, the company has already been operating in Mexico City, Guadalajara, and Monterrey. The mobility in Mexico is still in its infancy compared to the mobility in China.

Additionally, Didi has expanded restaurant delivery service from convenience stores and pharmacies to encourage people to stay at home during the COVID-19 epidemic.

87% of restaurants in the Didi app are small and medium-sized enterprises. Sales of these partner restaurants have risen 45% since the lockdown began. So far, restaurant enrollments have increased to 75% per week, while delivery partner enrollments have increased to 250% per week.

Source: kr-asia.com – Didi wants to challenge Uber by bringing Didi Food delivery service to Mexico City

The challenges that Meituan and Didi are facing

Didi and Meituan are definitely the giants of mobility in China. However, there are still big challenges as they try to overlap the ride-hailing business and food delivery business in China.

As an instrumental APP, the simple platform of Didi is far from being a life-oriented aggregation platform, as it focuses primarily on ride-hailing. At present, users have not yet cultivated the habit of ordering food from Didi, since users are used to the aggregation platform like Meituan or Ele.me (an online food delivery service).

Different from the ride-hailing business in China, which basically needs only online operation and maintenance, Didi needs a large offline business develop team to expand its food takeaway market.

Also, it’s not easy for Meituan. The transportation bureau intervened and warned Meituan against disturbing social order by starting price wars on the day Meituan launched in Shanghai. They announced that all registered cars and drivers of Meituan ride-hailing business in China must obtain the relevant business license for online ride-hailing in Shanghai and the relevant data need be connected to the regulatory platform.

In addition, the Shanghai Municipal Commission of Communications, Municipal Public Security Bureau, Market Price Bureau also warned Meituan that they shall not disrupt the normal market order for the purpose of crowding out competitors or monopolizing the market by operating at a price lower than the cost. Meituan’s should change its advertising slogans such as “starting with one yuan”.

Wang Gang, CEO of Didi analyzed that the competition between Meituan and Didi is not just about ride-hailing business and food delivery business, but “a battle for access to secondary traffic”. Whether Meituan is involved in ride-hailing service in China or Didi is involved in food delivery service in China, both parties can take good use of their users’ consumption scenarios as the basis and form a data circulation system about their users’ consumption preferences for ‘basic necessities of life’. If successful, it will greatly enhance the development of mobility in China.

Author: Qing Zheng

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This article Mobility in China: Opportunities and challenges of when ride-hailing meets delivery is the first one to appear on Daxue Consulting - Market Research China.

How is tech development in China different from the rest of the world? How is 5G revolutionizing the user experience in China? In this episode, Aurelien Rigart, an expert in helping brands with digital transformation initiatives, tells us all about the software development landscape in China.

Jump to questions:

• 0:54: Have clients ever asked you to develop on the Huawei OS?
• 1:46: How is the development of 5G so far in China? What do you expect as an impact of 2020?
• 3:53: What are the differences in developing software in China and the rest of the world? Are the languages of programming different?

Daxue Talks is a show powered by daxue consulting, a china-based strategic market research company founded in 2010! With Daxue Talks, you will stay up to date with all the latest business updates in China.

This article Daxue Talks 73: China as a tech powerhouse: 5G, software development, and programming languages is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Hello everyone, I’m Aurelien Rigart I’m the co-founder and Vice President of IT Consultis, I’m from France. I’ve been in China and started this adventure nine years ago. So, IT Consultis is a digital transformation company. It’s a team of 80 people in three countries, which are China, Singapore, and Vietnam. So, we’re helping Fortune 500 and fast scaling start-ups to work on their digital transformation. It can range from eCommerce, from building mini-programs, from building websites, App, integrating systems together, or overall work as a consultant on their digital transformation initiatives.

What are the different components of private traffic? What is used to create private traffic in China besides your own website and WeChat?

So, I would say that the Chinese ecosystem is very particular. As we know it’s very different than all the other ecosystems. We have a market dominance here from Alibaba that is having about 90% of the market share when it comes to eCommerce and we also have Baidu that is way less used than Google is used in the rest of the world. So overall – brands nowadays they’re trying to create their own ecosystem which is going to be outside Alibaba because they’re really struggling to get enough data. So, private traffic here we’re talking about like the entire WeChat ecosystem, so we’re talking about the subscription account, we’re talking about the official account, but as well we’re talking about the H5 – the mini sign that can be displayed inside or the mini program.

So those are the things that we’re talking about, when we’re talking about private traffic, because when we’re talking about Red, Xiaohongshu or even like sometimes Douyin, they’re not really considered as private traffic because those software’s, those apps, they do not necessarily have an API that can be leveraged in order to afterward get the data and get the analytics to do what you want as a marketer, to do marketing automation and to aggregate this interest – so this is like really the beginning but those are – WeChat has been the core of the private traffic, and of course we have everything that is like SMS – we have as well – like, there’s a real burr now between the physical and of course the digital. So, a thing like retail and the physical store is like a magic aspect of that private traffic, and like digitalizing those stores is what enabled brands to really connect.

What frameworks exist to develop mini-programs and WeChat? Is there something like WordPress for mini-programs? Are there some building blocks that you can assemble or do you have to code from scratch?

So, it’s like there’s WordPress of course, so the way mini-programs work, it’s like built-in heedlessly. That means that there’s a mini-program, so there’s a backend and then there is a front end and both of them are connected through API’s and of course in China, you get the – the Shopify of China, that are going to be the companies that are publicly listed that are making a huge amount of revenue and having new shops open every day, every week and they have like a subscription model so it’s kind of like semi-private traffic where they keep the ownership of the data for good parts and it’s kind of like in-between where on weeks you have the opportunity to choose specific templates and kind of like plug and play them – they’re coming with a lot of functionalities but it depends where you stand as a brand.

So, if you’re a brand like Swatch or Decathlon or Porsche, you want to have your own ecosystem, you want your own infrastructure to be hosted in your own cloud, whereas here everything is going to be hosted in a cloud that belongs to basically everybody, where your data protection and your data ownership is going to be a little bit different where you cannot fully customize your user journey.

So of course, those solutions – like the SaaS solution, pre-existing kind of like plug and play – they exist but they don’t allow the full flexibility. So, coming back to your question – WordPress does exist in China and if you use it in a proper way you can have your website as a front end and a mini-program as a second front end that can be a mini-program for both, for instance, WeChat but as well as for Alipay and maybe in the future for Weibo or Douyin other platforms, because all the other platforms are launching their own mini program.

How do you drive traffic to your own channels like WeChat, websites, shops, or how do you get a phone number to create a direct connection with consumers through SMS?

Well, that’s something that is highly complicated, and what we tell all the clients is that – first of all, have a look at your asset. What are the assets that you have in hand? Are they like your retail? Your TMall presence? Is there like notoriety that you have globally that you can leverage? If you’re a brand that is abroad and wants to come to China, how you can leverage the Chinese tourists – not many at the moment but in the future when things are reopening, how you can leverage the inbound tourists to start engaging whenever they are in the US or in Europe and start having specific interactions by scanning your QR code, becoming a follower of the service account, interacting with the mini pogrom and then onboarding them through can be like a loyalty program or referral program and continue to understand where they were, how they got in touch with you at the first step and how you can build a very strong user journey to continue with targeting them when they’re in China. And if you do this well then that means you can leverage already that part and really step by step creating a quality database and building marketing automation.

So, you can build your revenue really step by step if you’re using good practices. But only if you’re using good practices. So, this is for the case of brand that is like performing the WeChat marketing and marketing automation in a proper way, leveraging their retail traffic, whether it’s outside of China.

So that could be one of them. Something that has been of course very hot – influencer, KOL, KOC – a lot of people are talking about this, so KOL – KOC there is like an entire industry whether it’s on TMall or JD and now that has been made ever stronger using the live stream function on WeChat and on the mini program where we see brands that are now directly hiring influencers through some platforms. For example like we’re talking about Park Lu which is a start-up that really helps brands or agencies selecting their KOL and so that’s something that we have seen more and more, so driving the traffic first time here in order to afterwards have repeated behaviour, of course the old fashioned way – like ensuring that basically you’re pay advertisement on your WeChat, then you’re going to have a conversion and then of course step by step you’re going to create content of interest to generate views or to generate purchases. So, this is as well possible. Of course, all the systems are isolated but if done properly you need to leverage each of the touch points and each of the asset that you have in order to drive conversion.

So, no magic bond, here again, its step by step and its very strong work that is required to not only drive traffic – because driving traffic is easy but the most important is driving traffic that’s going to bring a return on investment and that’s really the challenge here. How you’re going to build the technology stack, how you’re going to build your marketing automation and how you’re going to hire the KOL that you’re going to have the right deal that is going to enable you to generate like revenue that is basically going to favor your bottom-line? Like your top line and your bottom line together and I think a lot of brands they have been working on their top line, but they have been relying on struggling with their bottom-line. So, especially now they have to manage very specific inventory, you know like with the season-ending, they have to heavily discount in order to move to the next season when you’re talking about fashion or even specific products. So, now I think it is the challenge for brands to survive and it’s been the case in China for a long time where the top line has been more important than the bottom line but at some point – in this economy, we need to focus as well on the bottom line.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.

This article Daxue Talks transcript #70: Key components of private traffic in building a brand’s ecosystem in China is the first one to appear on Daxue Consulting - Market Research China.

Educational technology is an often overlooked global phenomenon. In 2015, global EdTech companies took in more than $2.98 billion across 442 deals, and global EdTech funding jumped a whopping 58% in 2015 from the previous year. The global market is projected to grow at 17.0% per annum, to $252 billion by the year 2020. Asia is seeing the fastest growth in investment into the sector; China, in particular, is the largest EdTech market.

According to the Statistical Report on Internet Development in China, the number of online educational users in China reached 423 million as of March 2020, an increase of 110.2% from the end of 2018. The EdTech sector in China is estimated to reach RMB 453.8 billion in 2020, a 12.3% increase from the previous year, according to a report by iiMedia Research. As a response to the coronavirus outbreak, many EdTech start-ups have captured the opportunity to increase its presence in China and competed to gain popularity among students with attractive course offerings and discounts.

With over 400 million students, China is the world’s largest market for educational technology. While the education market in China still has much room to improve, especially in terms of formal integration of technology into classroom settings, many companies have successfully taken advantage of opportunities for digitizing education in China. EdTech landscape in China focuses on virtual tutoring, but there are a number of other EdTech start-ups that have successfully penetrated the EdTech landscape in China.

These are a few of the most innovative start-ups of the Chinese EdTech landscape –  from robotics to tutoring, to innovative educational technologies. We also explore which of these start-ups have gained a competitive edge during the coronavirus outbreak.

EdTech platforms in the Chinese education market

Yuanfudao (Yuantiku)

The platform focuses on K-12 learning and its products include AI-enabled virtual classes, live tutoring, and apps for homework support. A start-up founded in 2012, Yuanfudao has raised US$1 billion in a new round of funding in April as a response to the coronavirus outbreak led by Hillhouse Capital and its previous investor Tencent Holdings. This puts its valuation at around US$7.5 billion, making it one of the most valuable ed-tech start-ups in China.

In 2015, it launched Yuantiku, an online question bank. This app strategically takes advantage of the test-taking focus of the education system in China. Yuantiku is an online education product that provides material of previous years examinations for students and an exercise database that also provides tailored exercises to improve testing efficiency.  Some tests available include: National College Entrance Exam, post-grad entrance exams, tests for civil servants, first-level constructor exams, law counselor of enterprise exams, securities qualification exams, and more. More than 13 million Chinese junior high and high school students utilize the app, where hundreds and thousands of apps are aggregated to prepare students for the college entrance exam.

With such a huge database like this, its no surprise that two-thirds of Yuantiku’s staff is dedicated to research and development. Leading engineers and researchers are also hired for the application’s “little ape” search and “ape teaching” assistance to further develop its artificial intelligence methods in more effective learning methods. However, since its release, there have been public debates regarding its promotion of the heavy test-centric culture that has already been criticized in China. Questions of whether this kind of application is positive for the social health for Chinese educational society is still something to keep in mind with Yuantiku.

17zuoye

17zuoye, translating to “yi-qi-zuo-ye” or “homework together” widely recognized as the largest online educational platform in China. It is a three-party intelligent education platform for students, parents, and teachers. As of February 2018, 17zuoye has served over 60 million users and 120,000 schools by offering homework solutions to instructors, students, and parents. The platform aims to improve learning efficiency and efficacy and transform student homework from offline to online.  In the same year, the company also raised over $250 million, and intends to expand into the middle school and high school sectors, and continue to lead the the educational technology market in China.

Their mission, state on their website, is to “make education a more beautiful experience” by “utilizing advanced education technology, quality educational content, and continuous educational enthusiasm” in order to “provide more efficient and beautiful products and experiences for K12 stage schools, families and social education scenes, opening a new era of intelligent education.”

VIPKid

Valued at $3 Billion in 2018, VIPKid is one of the hottest applications for online English tutoring in China. The company pairs English tutors from the United States or Canada with Chinese students for one-on-one English tutoring geared for children 4 to 15. Through a live video tutoring platform, parents can book a session for their children with tutors, who can upload videos of their lessons. The English teachers are considered hourly-paid independent contractors.  Currently, VIPKid claims to have over 700,000 paying students and more than 80,000 registered teachers based in North America on the platform.  The company also raised $500 in 2018, suggesting a wave of growth in the Chinese EdTech industry, and across Asia more broadly. 

The app released followed their launch of the desktop version, and the app is a handy tool that lets students see previous feedback from teachers, upcoming schedules, and personal profile. Teachers can review their student sessions, a number of classes taught, and how minutes teaching completed. It also comes with a messaging area and notifications that can alert teachers and students of their upcoming tutoring sessions.

The platform rapidly took actions to support education in response to China’s school closures in late January due to the coronavirus outbreak. VIPKid’s first step was a launching 1.5 million free online math and English classes for children aged 4 to 12, and they prioritized students in Wuhan, the epicenter of the outbreak. They also launched free live-stream and recorded classes on eight major streaming platforms in China.

DaDaABC

DaDaABC has become one of the most successful intelligent English learning platforms for children in China. Founded in 2013, the company had earned over 15 awards and recognition in 2016. They’ve also collaborated with a number of top media companies in China, including Baidu, People’s Daily, and Tencent.

DaDaABC developed an English training system focused on one-and-one online tutoring while encouraging kids to have with their instructors during their practice. As an English tutoring platform, DaDaABC is often compared to VIPKid, but the company does not require their native English teachers to have a North American accent like VIPKid.  As a partner of the American TESOL Institute (ATI), they also offer online training courses for aspiring English instructors worldwide.

Makeblock

Makeblock is one of the most creative companies on our list. Founded just 6 years ago in 2013, the start-up uses Robotics as its primary educational tool, teaching kids coding, engineering, and other basic AI technologies. The package includes do-it-yourself robotic kits that will be manually assembled by students, who then also write simple lines of code to control their robots.

Makeblock is a global leader in STEAM education solutions (Science, Technology, Education, Arts, and Mathematics). The company provides hardware, software, content solutions, and even top-notch robotics competitions. Their products have over 8 million users worldwide, in over 140 countries, by over 1,600 channel providers. Makeblock has been the recipient of seven international awards, including the International Design and Excellence Award, the Reddot Design award, and the CES Innovation Awards in 2018.

As part of its global STEAM on Board Initiative for K-12 educators, Makeblock launched their “at-home resources” in March to adapt to online education with the pandemic. Initially designed to support local professional learning needs of STEAM and computer science teachers, the program now allows all educators and parents around the globe to teach and learn STEAM concepts with their free software, mBlock.  

CCtalk

CCtalk is the multifaceted online learning platform for Hujiang EdTech, another leading company in the Chinese education market. Hujiang was founded in 2001, as a BBS (bulletin board service) community offering online courses, but has since then expanded to offering a wide range of online educational programs, including international and domestic exam prep, foreign language instruction, professional skills training, and even more. CCtalk is a real-time interactive education platform that provides independent knowledge educators and sharers with comprehensive online education tools and platform capabilities, providing informative content and a community environment for learning.

Contrary to popular thought, not every EdTech platform in China is solely based on English tutoring. CCtalk provides a variety of educational tools and abilities both in live, recorded, and group formats. The platform allows teachers to utilize and create educational widgets, including a two-way digital whiteboard, digital hand raising, a multiplayer video that guaranteed teacher-student synchronization, desktop sharing, live PPT-like courseware, and playback functions. CCtalk university provides training for their iteachers, and the CC talk platform itself serves as a great platform in helping teachers attract more new users, and increase revenue from their courses.  The platform has been widely highlighted as a leader in educational innovation, allowing teachers to develop and utilize their own widgets and share them with others on the platform.

Changing Edu

Changing Edu is an O2O (online to offline) educational service app-maker connecting students, parents, and teachers to facilitate after-school learning services. Parents can post inquiries regarding tutoring services, and the mobile service app helps connect tutors to students. The Chinese EdTech company uses an online platform to make offline matches for one-on-one, at-home tutoring services. The company also plans to launch virtual, remote educational services, and other live streaming and expert Q&A services this year on their platform. The platform currently operates in 11 cities, including the larger cities of Shanghai, Beijing, Shenzhen, and Wuhan.

To accommodate for at-home learning during the coronavirus, Changing Edu launched a “Six-week learning contract” initiative for personalized one-on-one teaching. After the six-week learning period, students can apply for a full refund if they are dissatisfied. They also provided a free online teaching platform for self-employed teachers and smaller educational institutions in the industry. Among Chinese society, it seems that this platform has gained popularity among users after the outbreak.

Huikedu Group

Founded in 2010, the Huikedu Group includes the “Huike Education Group” and the “Huike Science Research Institute.” They are the largest partner with higher institutions in China, offering cutting-edge educational technology and products to higher education and vocational education services. The group also cooperates with national goals to develop mobile internet, cloud computing, big data, internet marketing, and other innovative information technology into educational services.

Huideku has reached a unicorn valuation of $1billion. Its focuses are in partnering with enterprises to provide customized educational products. It has developed online courses and R&D labs on tops such as AI and robotics. Additionally, the group also partners with overseas schools to provide overseas educational programs such as exchange programs, language training, and career development.

Supporting at-home learning during the coronavirus pandemic, but what happens next?

The coronavirus outbreak has hampered the supply chain of many industries such as tourism, retail and much more. It could be said that the EdTech sector has been one of the “winners,” seeking opportunities to gain popularity in China in support of local education. Yuanfudao, VIPKid, Makebloc, and Changing Edu have made noticeable initiatives in response to enhance students’ at-home learning. Yuanfudao is one of the top online education apps with a weekly active user YOY growth of 21 times from February 2019 to February 2020. The education app leading the industry is Xuuersi, with a 50 times YOY growth. Its daily active users exceeded 10 million, with many new users from second, third, and fourth tier cities.

With the future uncertain, the most popular educational functions are short commitments, such as one-month subscriptions for a couple lessons or short interactive videos. However, doubt remains as to whether surge demand for EdTech fueled by quarantine measures will last. Schools will eventually reopen, and users are not guaranteed to stay permanently. Indeed, how people value and view the online education market has been revolutionized, yet the question of the longevity of these platforms remains.

Educational technology in China: Takeaways

Educational technology in China has not only seen tremendous growth in recent years but also shows no sign of slowing down in the booming education market in China. With these 8 being amongst the hundreds of EdTech start-ups across China, global markets should realize the innovative ways in which China utilizes digital tools to enhance students’ education in China. This phenomenon also stems from cultural factors, as Chinese society has always vigorously upheld education as one of its core cultural and social values. It is important to make a note of how China has integrated this value with the realm of technology and innovation, While tutoring applications remain the bulk of EdTech companies in China, our list has noted a number of creative EdTech start-ups that utilize a variety of online tools and out-of-the-box educational services. Western markets should be highly alert to the EdTech landscape in China, especially due to the large demand for foreign language tutors. This market is sure to see extended global communication, as language teaching and cross-border education become increasingly in demand with the enhancement of EdTech.

Author: Julia Qi

Make the new economic China Paradigm positive leverage for your business

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This article 8 Chinese EdTech start-ups leading the global educational technology industry is the first one to appear on Daxue Consulting - Market Research China.

Full transcript below:

Hello everyone, this is China Paradigm, where we, Daxue Consulting, interview seasoned entrepreneurs in China.

Matthieu David: Hello everyone, I’m Matthieu David the founder of Daxue Consulting and its podcast China Paradigm, and today I am with Yingzi Yuan. You are the executive Director of Europe China Foundation and you have a very strong interest – I can see that with all your different positions from your LinkedIn profile and from the information we got – in innovation between Europe and China and in connecting Europe and Chinese leaders. Thanks for being with us, Yingzi. My first question is: what do you sell with the  Europe-China Foundation? Who are your clients?

Yingzi Yuan: Yes, actually maybe it’s a little bit different from the other podcast guests from this show because the Europe-China Foundation is actually a non-profit organization. Our main goal is to connect Europe with China, connect Europe and Chinese leaders in terms of culture and innovation. So, currently, we are not selling anything. We do have this membership program that is either for individuals or companies. So, people who want to participate in our event, in our program, can support us with sponsorship and the whole amount will be used to implement and to optimize those programs in order to promote Europe-China business relationships. So, it’s not a for-profit business model, it is a non-profit organization.

Matthieu David: I see. So, in some ways, people will make you – help you run the business with resources. Our companies will sponsor your programs and your programs– I learned on your website – are supporting initiatives for young leaders for instance. Exchange, entrepreneurship, connecting Europe and Chinese leaders and from – you used the word Trans-Asian – I think I saw that on your documentation. Is it correct?

Yingzi Yuan: Yes, exactly. So, we have two focuses. One is culture, one is innovation. But around those two topics, we have different initiatives to not only talk about leveraging Chinese tech sceneor talk about cinema or theatre, but we have a very large scope to create Europe-China business relationships. So, we have different initiatives like connecting Europe and Chinese leaders. We encourage exchange between young people in Europe and China. So, we initiated this young leader program that is connecting Europe and Chinese leaders and  2020 will be the first year where we have this program. We have different other initiatives such as a research program in collaboration with Sciences Po (learn more about the project in collaboration with Sciences Po)!  which is a university, a very famous university, in France. We are doing research around the initiative and entrepreneurship ecosystem in China, because everybody is curious about how things can grow so rapidly in China and a lot of European companies or individuals, they want to learn from it. So, we are doing this research and we are going to publish a reference book. Actually, it’s kind of a guide book, for all those people who are interested in the innovation and entrepreneurship ecosystem in China, either they are VC’s in Europe or they are, for example, start-ups, entrepreneurs or government officials in Europe. Also, we have these different events where we invite those leaders in different industries to talk about the Europe-China business relationships or talk about their experiences and share their stories in order to connect Europe and Chinese leaders. So, that is why we have this very regular breakfast conference and annual Europe-Asia forum to promote Europe-China business relationships.

Matthieu David: I see, Sciences Po. For people who are not familiar with France, it’s a very famous university, one of the oldest ones actually amongst the Grand Colleges as we say in France. Going back to what you organize, it is linked a lot to innovation as you said before, and you’re working with Sciences Po on innovation between China and Europe. My first question is; how China is different regarding innovation compared to the rest of the world? It seems that – we are in a podcast called China Paradigm – that there is a China Paradigm and if I can share a little bit more about what I understand so far, China has developed its ecosystem, innovation hubs in a bit of a closed environment because of what we know – censorship and the big players who are not present anymore, those who have failed in China such as Google, Facebook, and Amazon in some way. So, they have created their own ecosystem, their own innovation (listen to another podcast to learn about the innovation ecosystem in China) and of course because of the size of the country and the resources, they have the tools to make it. Besides that, why do we need to extract China and compare it to Europe? Why is it so different?

Yingzi Yuan: Yeah so, the research that we are doing, the definition of innovation we are using is actually around entrepreneurship (learn more about challenges for entrepreneurs in China). Meaning that we are doing research around other stakeholders around innovation and entrepreneurship in China. I think that this part is the most special part about innovation in China, because the government, for instance, plays a very important role in either pushing or restricting the development of innovation. Of course, during the last 10 years, either the central government in China or local governments in China are using every resource they can, to push initiatives such as start-ups and to leverage the Chinese tech scene. So, that is one point that I want to highlight, that is government policy. It is one part of our research as well. We have a group of two students who are doing research only on government policies in China for the last 6 months. Also, I think, the other stakeholders are interesting and as very special as well in this ecosystem. They are VC’s, venture capitalists and also incubators. So why are they different from, for example, their peers in Europe? Because in China those incubators are active and they leverage the Chinese tech scene. They are very active and also in Europe, we can see a lot of private incubators that are pretty independent but in China, a lot of incubators are supported either by local government or supported by Chinese internet giants such as Alibaba, Tencent, etc.

So, there are a lot of other specificities offered by China’s makerspaces opportunities that we don’t find in Europe but we find it in China.

Matthieu David: So what you’re saying that incubators – more specifically, VC’s maybe a different case, but incubators get the support of government and big firms, where in Europe or in the US it maybe has never been the case to get support from the government but also very recently only from big firms because we see as well in Europe and in the US – big firms creating their own incubators in the space. But you feel – what you’re finding here is to say that, it has been actually at the beginning of the incubator’s growth in China, it wasn’t linked with the government and big companies.

Yingzi Yuan: Yeah in China it’s largely linked with government and supported by the companies and also because of the internet landscape in China, a lot of start-ups they will be invested or they will be acquired by big internet companies in the end, at least during the last two years. So, that is also the reason behind the current landscape of incubators (learn more about the role of incubators for multinational in China).

Matthieu David: I see, so one of the first specificity you are telling us, which is differentiating innovation in China from innovation in the West, is the role of the government. Supporting at the start incubators – and we interviewed some entrepreneurs in the past, as far as I understand, the way the government is supporting is by offering free spaces and sometimes even grants in order to grow your business and you have to commit to hire people and to do specific investments in a specific locality. What else besides the role of the government – you were mentioning maker space, would you mind telling us a bit more about why maker space seems to be more advanced in China than in the West?

Yingzi Yuan: Actually, this is a very Chinese notion, because if you want to find a maker space in Europe or in the US – you wouldn’t find a lot compared to China’s makerspaces opportunities. Maybe you can find some coworking spaces, maybe you can find incubators but maker spaces are kind of a notion that is in between. So, it is meaning that people are kind of like geeky hackers, kind of cool people who want to create things but who are also incubated and supported by this space. So, because of the policies towards incubators, you have to – the barrier of entry to becoming incubators is pretty high. So, a lot of other individuals or companies can do maker space to not – to do a complete service as an incubator but are supporting the creators as well. So that is why the notion of makerspace is so special in China and that there are a lot of China’s makerspaces opportunities.

Matthieu David: Very interesting notion, would you mind we go a bit deeper into the concept of maker space. My understandings so far are that makerspace is to create products and that China because of the links with factories – biggest factories over the world, especially let’s say Shenzhen and Guangzhou have very good space for makers and my understanding was that it’s linked to 3D printing and to this ecosystem of being able to build hardware. Am I correct to say so or I am narrowing down to something too specific?

Yingzi Yuan: I think notion actually shifted as well, in the beginning – because it’s called makerspaces and it’s like people who are doing hardware, making prototypes, but as the time changes the notion of makerspace also changes. I think it enlarged into kinds of an incubator of not only hardware but also software and because the notion of incubators is just to give the start-uppers, entrepreneurs some support around administration, accounting and to link them with different resources, that is kind of the services that were added into maker space as well.

Matthieu David: So, we’re talking about the government – we talked about the notion of maker space as specificities of China innovation compared to the West. What else would you add if any?

Yingzi Yuan: Yeah of course, so maybe people already know that the venture capitalists in China, they’re very special as well – because during one period they were – there has been a lot of US or foreign venture capitalists that were investing in China. But recently, pretty recently –

Matthieu David: Yeah, like Sequoia, right? Sequoia and Plug and Play right which are of the US.

Yingzi Yuan: Exactly, but now China also has some local venture capitalists, but it’s a very recent phenomenon and they are still trying to find the right Chinese model of investment instead of copying the whole US model.

Matthieu David: My question could be naïve, but I don’t feel we talk about a European model. I feel we talk about a US standard for VC, and you are talking about Chinese standard, but I don’t feel we are talking about really European standards and your foundation is specifically about Europe China – is my perception correct?

Yingzi Yuan: We all know that currently there is a US-China trade war, we can’t avoid it – but I think it’s actually an opportunity for everyone, and also we observe that in the meantime, European start-ups they want to enter into the Chinese market and they want maybe more Europe-China business relationships – China investors to maybe invest in the as well, but they don’t have the resources or let’s say the impact to the resources in China. And also, Chinese companies, especially internet giants and big companies are trying to enter into a foreign market, especially the European market to boost Europe-China business relationships. But they don’t know how to do that, that is why we are initiating this global incubation program, it’s exactly between Europe and China to let Chinese start-ups be incubated in Europe and also European start-ups to be incubated in China so that they can get into the market, they can get in touch with the local venture capitalists and they can also work with each other among them – such as for example if we have a European start-up that can be the supplier of our Chinese start-up, and thus leverage Chinese tech scene that will be a perfect match and then they can be a global start-up – from the beginning. That is the whole point of our initiative and why we are connecting Europe and Chinese leaders.

Matthieu David: Okay. To end the conversation on the specificities of innovation in China, or maybe to go further – you mentioned the role of VC’s and they are different from the US – you said specifically the US, the West – how different they are? As far as I understand, VC’s have become big in the US, compared to Europe because of a lot of tax incentive , because you can put your loss into their accounting and you deduct from taxes and so on –and that had made VC’s big and VC’s take more and more risk and worthy people take risks because they could deduct from taxes. And, I understood that in Europe they wouldn’t take off as much because this tax incentive wasn’t that strong. What about China – I’m not specifically talking about taxes, but what makes VC’s in China different besides the fact that they are based in China?

Yingzi Yuan: I think VC’s in China they are as I talk about – they are still growing (learn more about the recent trends in the VC industry in China). They are trying to find their own model, but there are a lot of individuals that are in the Chinese VC firms, they were actually in foreign VC firms, especially Japanese or American VC firms. So currently we haven’t been observing a lot of differentiation of Chinese VC’s in comparison with foreign VC’s but I do think that in the upcoming years we’re going to observe more and more booming VC’s like super VC’s that are going to be investing in a lot of emerging start-ups in China.

Matthieu David: A report which is dating back I think now it’s a bit older than 8 years or something like this, from McKinsey. While saying that innovation in China is more social, basically the go-to-market is quicker, the markets are faster, where innovation in Europe and the West is seen as more fundamental innovation where the research took longer and the go-to-market would maybe not be considered in total initially and would be at least delayed. Do you think this is the case now, or do you think China is also investing in fundamental innovation and is taking the time to perfect a product before going to market?

Yingzi Yuan: I think China is definitely also investing a lot in R&D and various scientific researches. In comparison to Europe, things are going very – even faster in china because the whole ecosystem is more eager to achieve a certain goal quickly in comparison with Europe. In Europe, we observe that a lot of initiatives are either governmental or they are being done by bigger companies and historical companies such as energy company ETF or Airbus, this kind of company. That is why I think you were talking about fundamental research in Europe – because of those sectors, isn’t it? In China, it’s more B2C sectors and that is because we have a bigger market of course. That is why the go-to-market is faster as well and why it is easy to leverage the Chinese tech scene.

Matthieu David: Yeah, I keep being surprised by the fact that we talk about Europe as – actually I said as well, like more fundamental innovation with big firms, wherein China you have very big state-owned firms but still the private sectors and innovators of the private sectors have been very dynamic. That kind of paradox I have a hard time explaining. Do you have any explanation for that?

Yingzi Yuan: Yeah, I think the nature of the big firms is different. In China, we are mostly talking about tech giants like Alibaba, Tencent or even today Byte Dance (learn more on Chinese Tech giants) , but when we’re talking about big firms who are investing in innovation in France, for instance, we are talking about energy companies, we are talking about Total, we are talking about EDF – those are more historical companies, they are changing slower than the tech companies, that is pretty normal. So maybe that is also one of the reasons why things are going slower but more steadily in Europe, and things are going faster in when it comes to leverage the Chinese tech scene.

Matthieu David: I’ve been in China for 10 years and what I’ve seen is that Chinese innovative products are not succeeded only in China, which was the case till five or six years ago, but not world-wide. Xiaomi is present worldwide, Huawei, of course, is present worldwide, longer, higher yield as well – but what I feel is very new is that China is also successful for cultural products like TikTok, and TikTok (learn more about the strategy behind TikTok) is a cultural product. It’s a product where you feed with content that could actually be very different from one country to another, from one culture to another. What are the next frontiers for China innovation in your mind, or the Europe-China business relationships? I have in mind the fact that I feel that Europe is not leveraging all the innovation in China but besides this one, what are the next frontiers for you?

Yingzi Yuan: Yeah from my point of view, as you talk about a lot of hardware’s – we’re going overseas let’s say because in Chinese we say ‘chuhai’ so a lot of companies and brands they are going overseas to search for the international market during the last let’s say 20 years already. But a pretty recent trend is that a lot of software companies or let’s say – services and apps are going overseas as well. In terms of the next frontier, I will say cultural and entertainment applications are definitely going abroad. They are already trying to enter and already entered into the Indian and South East Asia market and I think in the near future they will be in the European and the US market.

As you mentioned, TikTok is definitely the best example to illustrate this, because Byte Dance has been deploying this international strategy and its working very well. But I think byte dance is not the only one and will not be the only one that will succeed in international markets.

In southeast Asia market, we also see a Chinese giant called Waiwai – is localizing a lot of its services and apps and are succeeding in Indonesia, in Malaysia and in India- such as a gaming and social app called Huggle and also some other different apps for different kind of segments.

So, to answer your question I think – you’re right, it’s definitely the next big thing that we have to observe, an opportunity that we have to seize. Europe-China business relationships and the relationship between China and the world in general will be closer and closer in this sense. So definitely we have to look into it.

Matthieu David: As your project, where do you feel through your research and the meetings you had in this sector – where did you feel Europe is strong to watch China? When Chinese think about innovation in Europe – where they should look at?

Yingzi Yuan: Yeah, I think Chinese companies are definitely very interested in European R&D, research, and development. A lot of European universities have very, very advanced laboratories around research such as biological or medical research. And also, for example, air flights – how do you call it in English – aeronautic research, in France it’s very advanced as well. I think those kinds of sectors are definitely the strongest sector that is attracting the most attention from Chinese companies and investors and in recent years we can also see a lot of Chinese companies, they are either acquiring or investing in a lot of technology firms (learn more about China’s tech acquisition during the Covid-19 crisis in Europe), especially in Germany.

Matthieu David: So, with the patterns, you are seeing with Chinese investment in Europe is more fundamental R&D and would you say hardware world because you’re talking about airplanes, you’re talking about I guess robotic with Germany and factories. Have you found out some patterns in what China is doing in Europe in terms of investment integration?

Yingzi Yuan: I can give a quick example, very recently Chinese internet giants Tencent invested in French start-up called Lydia. This is not one of those companies who are doing hardware, who are doing research and development but very go to the market app which is used by a lot of people for peer to peer payment. So, this actually is part of the going overseas strategy of Tencent, of WeChat pay to have a part of the cake in payment – international payment as well. So, it’s definitely great news for at the same time the start-up, because they’re receiving a huge amount of investment but it’s good news for Tencent as well. So, we can say that other than the examples that we are giving regarding those sectors that are more traditional medical sector, biological sector, robotics, we can also see emerging trends of the other kind of start-ups that are being invested in by Chinese companies thus creating Europe-China business relationships.

Matthieu David: What kind of deal was it with Linda – sorry Lydia, Linda is an online learning software bought by LinkedIn? What was the deal between Tencent and Lydia? It was a full acquisition, investment partnership?

Yingzi Yuan: Yeah, I think recently, In January this year – last month, Tencent invested in fintech company Lydia, so Lydia currently has three million users in France, which is a huge number for the population of France, so that is why it attracted the attention of Tencent and WeChat pay. So, we all know that WeChat pays already tried to enter into the Indian market and South East Asia by acquiring or investing in local companies and this definitely is part of the international acquisition as well. It is an investment of 40 million euro’s so it is a pretty high price for the investment.

Matthieu David: On the other hand, so we talked about the Chinese companies investing in Europe when we look at Europe investing in China – you mentioned before through your incubator and your surveys as an incubator, that it’s hard for European companies to enter the Chinese market and to catch the Chinese innovation. There are many difficulties, barrier language, and ecosystem and so on – but how do you analyze the fact that a company like Amazon, for instance, failed. We understand that Google, Facebook failed because of regulations on censorship, but amazon is different. There was no censorship issue (read our latest article on internet censorship in China). Similarly, for Uber. It’s not a censorship issue, it’s a business. Its operations. How do you see the fact that so many tech companies have failed in China and not only because of regulations?

Yingzi Yuan: Yeah, those examples that you’re giving were actually very interesting, but there is also another example of European company Carrefour – Carrefour exited China last year in October as well, because Carrefour was kind of the first supermarket in China that was succeeding, so it was a surprising fact that is actually failing in China and it chose to leave the Chinese market. So, the answer for your questions would be that – a lot of companies they have a hard time adapting their pace to Chinese market because when – I talk with people in Carrefour as well, but maybe it’s not an official answer – so basically when we have to do a lot of decision making in the headquarter in Europe and we have to adapt it to the Chinese market, it will take a long time for the decision making and for local adaptation and sometimes it’s very hard to stay in Europe and to understand how things work in China – how things are changing fast in China. So that is why a lot of decision making – they are not adapted to the Chinese local situation, to the Chinese market and that is why a lot of the companies are failing in China. It is the pace maybe for Carrefour and for other traditional sectors because they didn’t adapt e-commerce and offline delivery fast enough. For Uber and for amazon it’s kind of like a calculation right – they are making less money in China as they wanted and it’s better to be bought out or to exit the Chinese market, it’s more the return of investment is better for them if they do so. So, it’s a choice – it’s a mathematical choice.

Matthieu David: Does it make sense and would you agree with the saying that – when you go to China, whatever the size of your business, even if you’re a macho business in the West, you have to start again. You have to reconsider your product. You have to reconsider your distribution channels. You have to reconsider how you acquire clients – for instance, businesses which build their dominance on search, on Google, would not be able to do the same on Baidu because actually, people in China don’t look for the same information on search engines, they would not look for a product to buy – they would go directly on TMall or Taobao. Does it make sense for you or you think difficulties are more structural than this?

Yingzi Yuan: I think it’s definitely right what you said and that is why I think Daxue Consulting is doing a great job, by introducing people to the Chinese market by actually localizing all the services and adapt things to Chinese consumer’s demands and thus also creating Europe-China business relationships.

Matthieu David: Thanks for the mention – our guests are sponsored now. Thank you. But what’s your view on it – does it mean that on the opposite, is it worth going into a market if you have to reconsider everything you do? I remember Harmony coming to China and they painted doors in red, looking Chinese and actually Chinese didn’t want to buy Chinese. They wanted to buy Harmony and they actually didn’t go to this shop. So, on the opposite changing all your product can basically make you worthless, worth nothing and – if the products were changed for China, they wouldn’t be successful in China – what’s your analysis on this aspect that what needs to be changed – adapted, and what doesn’t need to be?

Yingzi Yuan: Depends on the factors of course, in terms of services I think your distribution channels, your marketing definitely have to change, have to adapt to Chinese users habits, that is pretty normal and if you have to change or not your product, that really depends on the product itself. Sometimes you have to, of course, localize your product, especially when it comes to culture and entertainment products, but sometimes you can just stay the way you are, especially for European brands (learn more about how  to introduce a brand in China with Daxue Consulting), they always have this heritage and the brand image behind it and sometimes Chinese consumers they are buying the things for this kind of heritage and brand image, they don’t want a thing that is totally adapted to the Chinese style – Chinese market – such as for luxury brands, I think a lot of them have to do market research before implementing their product into Chinese market some brands actually failed because they were kind of doing a mixture of Eastern and Western style that wasn’t a very nice – even either for the European market or for the Chinese market, so it was a failure.

So, I think in terms of a product we also have to consider case by case.

Matthieu David: I think there is a keyword we have not used, its open innovation (get more information on open innovation in China). Have you looked into this topic through your research?

Yingzi Yuan: Yeah in our research with Science Po Paris, we haven’t been looking into open innovation, but I personally I’m very interested in this topic as well. It’s not in the scope of Europe China foundation yet but it will be a future topic that is interesting to look into. So, in terms of open innovation, I think a lot of European companies are making a great effort in doing so. Because as we mentioned, European companies they are – especially those historical industrial companies, they are very huge and they’re pace of innovation – doesn’t catch up with the evolution of innovation in terms of technology. So that is why they are trying to work more and more with different start-ups, to try to inspire their internal teams and also to learn from the start-ups, and also – that is also why we have this Europe China Incubation program so that big companies who are interested in the innovation in the incubated start-ups, can help the start-ups and can collaborate with the start-ups to get not only into the other part of the world or into the market, but also have the technology.

Matthieu David: For people who are listening to us and may not be familiar with the word Open Innovation – open innovation is for bigger companies to catch the innovation through smaller companies by opening up their door in one way or another, could be competition, could be investment, could be ascending people from this bigger company to the smaller company to interact with them in the office and see what kind of synergy they can have. That’s a very trendy topic ad actually we have been asked to work on this a few times and I feel that it’s getting bigger and bigger, especially foreign companies, not only Europe. Going through China and entering through open innovation by partnering with others, in the past we would call that joint venture, but here we are talking about more open innovation.

Now we are moving to the last questions I always ask –

Yingzi Yuan: What book do I like the most, right?

Matthieu David: Yeah, inspired you the most in your work, in your life?

Yingzi Yuan: Well I think a recent book that I really liked is the book written by Kai-Fu Lee which is about AI competition between US and China – it doesn’t mention directly Europe, I don’t think in the current trade war and AI competition between Europe and China, it’s definitely interesting for everyone in China and in Europe to read it. The book is called AI Super Power, China Silicon Valley, and New World Order. So, he mentioned not only historically how China advanced from a copycat to an innovation hub, but also mentioned the future, how China and the US will evaluate, in the AI sector.

Matthieu David: Yeah, the book has been mentioned by other interviewees. It has become a best seller. What do you read to be up to date on China?

Yingzi Yuan: In terms of websites, in terms of news, right?

Matthieu David: Yes, anything that could be useful for the audience to know, specifically in English, could be Chinese but more specifically in English.

Yingzi Yuan: Yeah, I think the website called 36KR is definitely very interesting. They have a lot of updated information every day about China and recently they have this going oversea special section, meaning that they are listing other news of Chinese companies or start-ups, the product who are trying to penetrate into a foreign market, either in South East Asia or in the world. So, for Chinese companies and foreign companies, it’s very important to read about those sectors because they are actually competitors or they are offers in the market.

Matthieu David: 36KR is in Chinese right?

Yingzi Yuan: Yes.

Matthieu David: Do you have other sources that the audience who may be English speaking could use?

Yingzi Yuan: Yeah, exactly this 36KR they have recently English version, the English version is called 36KR-Global, so it is the English version of the Chinese media.

Matthieu David: Yeah, the same as Taishin has Taishin Global. Do you know why they use 36KR by the way – why the name?

Yingzi Yuan: Actually, I don’t know, it’s a very good question, it sounds very geeky. It’s a technological medium.

Matthieu David: What book on China would you recommend for the audience?

Yingzi Yuan: For the audience – recently I was reading a book around the business ecosystem in China and another book about Four Types of different companies in China, both books have the same author – so, the author is Professor in a business school in Zhejiang – let me search for the book to see the author, so the book – Business Ecosystem in China talks about four companies – Alibaba, Tencent, Xiaomi, and LeEco – we all know that LeEco is not working anymore but it gives a very deep analysis, especially to Alibaba. So, this book I think it’s a great book that was written in 2017 for others who are interested in China. However, there is another book written by the same author called Mark J. Greeven that is around four types of innovators in China. It’s pretty recent, it was published in 2019 and the name of the book is Pioneers, Hidden Champions, Change Makers and Underdogs and it is about lessons from Chinese innovators and it’s written by the same author Mark and also George Yip and Wei Wei.

Matthieu David: If you had some extra time besides all you do, what would you work on?

Yingzi Yuan: Yeah so after helping other start-ups, after starting other start-ups, I’m very eager to actually create my own start-up as well, because I see others opportunities, I see others patterns, I think everybody who has a dream has to seize this opportunity to go global, to not only be a local start-up in Europe or in China but be a global start-up that is serving everyone. So, I think my next goal will be to do a global start-up from the beginning of the business.

Matthieu David: I see. What success in China you have witnessed and you wouldn’t have expected to be a success? I always ask this question – Peter Drucker the thinker of strategy says we can assess innovation and change through a success we were not expecting and similarly through a failure we were not expecting, which is actually assessing the best with a change in society.

Yingzi Yuan: Yeah, a success that I didn’t expect, I think many successes had their reason, but I’ve been witnessing a lot of young people, they are creating start-ups, they are setting up a business at a very young age and they are succeeding in the international market. I will just give a very quick example – but a very interesting example about a company in Shenzhen – it’s called Insta3060 – so they are doing this kind of 3060 camera, you can actually shoot a scene and then it can be shown in VR headsets for instance. It is let’s say a niche market and they are the leader – the top three let’s say in this market. And, a lot of video makers or amateurs or fans are using their different products and next year they might do IPO. So, they are a group of young people currently who are 27 years old or 28 years old, they created their company right after university, after a bachelor’s degree so around 22 years old. So, it’s a very tiny story, young people are collaborating, are creating and they’re growing very fast in the international market, and I think that is very surprising but well – no surprise either.

Matthieu David: So, what’s surprising to you is the fact that young people create start-ups or is it the fact that they go international very quickly?

Yingzi Yuan: I think both, are very young but they are growing very quickly internationally. At the same time, they have this support from investors in China, but also, they are benefiting from the fact that China is very strong in manufacturing so they have great suppliers and a very quick supply chain. Yeah.

Matthieu David: And the opposite, what failure in the Chinese market you have witnessed and you were not expecting?

Yingzi Yuan: Yeah, so I have a friend who actually has a traveling company, a tourism company in China and recently because of the coronavirus, the business was very well but it’s surprisingly failing because of the – irresistible factors. So that is one very sad story that I heard recently. Hopefully, everything will go better in China after this crisis.

Matthieu David: Yeah hopefully, we are recording on February 20th and it’s still going on. So, about failure, would you mind sharing a failure which is witnessing maybe something more long term – you mentioned one which is interesting is Carrefour, 10 years ago nobody would have thought that Carrefour would sell for such a cheap price, that all the hypermarkets and supermarkets in China and that the deterioration would actually come so fast. Do you have other failures that surprised you?

Yingzi Yuan: Well, in China I think as we say, 99% of the start-ups fail and we don’t remember those failure stories. I think not a very recent example but one example is Dong Dong website, so they were succeeding, they were supposed to be amazon of China, but because – they would have been Amazon in general by selling everything, but they kind of didn’t have the right strategy and now they are not the top ones when people are searching for books when people are searching for e-commerce, they are not looking at Dong Dong anymore. So that is one failure, and recently we also had the scandal between the founders so yeah – it’s a very interesting story that we don’t have time to dig into.

Matthieu David: Yeah, yeah interesting to see that JD.com which was not existing when Dong Dong was created, I think JD came later, took much more space and market share than Dong Dong at that time where it was the place to go to buy books, more than Taobao and TMall at that time. Thanks for being with us, it was very instructive on innovation and indeed we could do 2 or 3 hours on that.

Yingzi Yuan: Yeah thank you, Matthieu, for having me.

Matthieu David: Thanks and a few words for the virus, which is still actually heavy in China and we hope that things are going to back to normal very quickly and extend our support to people who suffer from it. Bye-bye, everyone.

Yingzi Yuan: Yeah, all the best to friends in China. Bye.

China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.

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This article China paradigm transcript #94: Connecting Europe and Chinese leaders in 2020 is the first one to appear on Daxue Consulting - Market Research China.

According to statistics released in early 2020 by the People’s Bank of China (PBOC) the number of electronic payments processed by country’s banks increased by 6.3% compared to the same period in 2018. 62.1 billion electronic payments have been registered, including 30.7 billion of mobile transactions, representing a year-on-year increase of 73.6%. In March 2020, 776.08 million persons were using mobile payment in China.

COVID-19 boosted online and mobile payments in China

After the COVID-19 epidemic in China, the Payment & Clearing Association of China (PCAC) launched an action on February 28, 2020 to encourage people to use mobile payment, online payment and QR payment to avoid the risk of infection.

Just after the Labor Day holiday in May, payment giants released their payment data. According to Zhuanlan, compared with Qingming Festival in April, the average daily transaction amount of UnionPay increased by 7.7%. Perhaps COVID-19 is the driving force on online transactions in China. The online platform handles 1.354 billion capital online payment businesses on a daily basis, an increase of 54.59% year-on-year. At the same time, the number of offline barcode payment (mobile payment) transactions on a daily basis increased by 48.5% year-on-year. In terms of Alipay, the payment frequency of sightseeing spots has increased by 120%; the amount of payment Wechat paid for restaurants under the line has increased by 447% compared with that in March.

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In 2018, around 83% of all payments were made via mobile payment modes

China has developed differently in terms of payment methods: while all countries have switched from cash to credit cards and are now switching to mobile phones, China has skipped a step. The use of the credit card in China is sporadic, if not non-existent.

And even though mobile payment is overgrowing across the continent, Chinese people are using phone payments more often than their neighbors in Asia.

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Why and how do mobile payments in China work?

This increase in the use of smartphone payments in China is linked to the growth of e-commerce and m-commerce. Indeed, if the share of online sales may still seem relatively low, it is increasing very quickly.

Experts even estimate that mobile commerce in China will reach about $1.5 trillion in sales in 2019, representing a quarter of the country’s overall retail market.

Also, mobile payments have been so successful in China because they are fast and straightforward. And this speed is possible thanks to the QR codes. In China QR Codes are everywhere; even street musicians have a QR Code to collect money.

• There are two ways to pay via QR Codes in China: The customer scans the seller’s QR code, which is very often printed and visible at the checkout, on restaurant tables and even on products in some stores. The customer then chooses the amount and can send the money directly to the seller.
• The customer shows the QR code displayed on his smartphone, and the seller scans it. This method is even simpler and faster because the customer has nothing to do; it is up to the seller to select the amount that will then be deducted from his mobile wallet.

China has therefore quickly adopted mobile payment, and this is mainly because it is very easy for sellers. Unlike Apple Pay, where sellers have to buy technology to receive a payment, in China, a simple piece of paper printed with the QR code is enough.

Mobile payment methods in China in 2019

Tenpay (including WeChat Pay and QQ Wallet)

Tenpay has the biggest market share by penetration rate in China, with 84,3% in 2018. Enveloped by Tencent Company, which owns the most popular social media in China, Wechat (Weixin), Tenpay has developed the most used mobile payment solution in China: WeChat Pay.

WeChat, the Chinese giant, sees 1.08 billion monthly active users in 2018 and more than 900 million users on a monthly basis. We could barely compare this to Apple Pay which has only reached 127 million monthly active users in the world.

Today Wechat pay strategy in China is to extend its services to various financial products – from investment funds to insurance, allowing users to pay for it directly within the app.

Wechat pay transaction fees of 0.1% start at withdrawals over 10,000 RMB as well as overseas transactions such as in case of cross border commerce. The app currently supports 9 currencies, against 18 for AliPay. Cross-border transactions can still be complicated, but WeChat has recently partnered with Adyen, an international payment technology company to facilitate access to China for foreign companies.

Alipay

Alipay is the only online payment system used on Taobao, which is the leading shopping website in China, owned by Alibaba.

Alipay has the second biggest market share in China with over 900 million users worldwide at the end of 2018 and 700 million active users. Many major websites use Alipay as an e-commerce payment method, such as Taobao, Amazon, JD.com and AirAsia, and other 40 million small shops and sellers in China.

Considering low trust in China’s online payment system, they introduced escrow (the payment is made by the buyer before the product is shipped and the payment is released when the product is received) and immediate payment (used to pay for hotel room bookings, flight bookings or other items that do not need to be shipped) to solve the trust issue and to expand the market.

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As a foreign company to set up on this platform, you need to pay USD 1,000. Transaction fees are 2.5 – 3.0% depending on your annual transaction volume.

For Chinese companies there is no setup fee, they need only pay 0.7-1.2% as transaction fees. You can communicate with Nanjing Marketing Group for the information on setting up your account. Alipay has arrangements with over 60 Chinese banks, Visa and Mastercard.

China Union Pay

Union Pay is the world’s largest payment card issuer with approximately 30% of cards worldwide being a China UnionPay card (CUP). China Union Pay is the only domestic bank card organization in China, linking the ATMs of 14 major banks and many smaller banks throughout mainland China. It is also an Electronic Funds Transfer at Point of Sale (EFTPOS).

With China Payment Services, international merchants do not need a physical presence in China, nor do they need a Chinese bank account.

The “push payment” principle is a different process that Westerners may not be accustomed to, whereby users are directed to their personal bank account to authorize the payment.

Many sizeable international eCommerce merchants in China are choosing to offer liberal return policies for card payments, rather than provide a Cash on Delivery option, making UnionPay card payments an excellent China online payment method for any international merchant. In 2019, Union Pay is planning to enter the European market in a move that could cause serious competition for Visa and Mastercard.

Paypal

Paypal entered into China in 2005 with services specifically designed for the Chinese population, including Chinese entrepreneurs.

But the Chinese market of mobile payment methods is very difficult to conquer for Paypal, especially against the competition.  In 2017, an agreement was reached with Baidu Wallet that allows Chinese companies to have better access to the international market and vice versa. PayPal and China UnionPay have also agreed to work together.

How do consumers pay in China?

Cash on Delivery (COD)

Cash on delivery makes up the largest percentage of online payment methods in China. Famous websites such as Dangdang, Amazon, JD.com are conducting methods like this as one option. COD is a payment method in which it is the carrier who ensures the collection of the payment in return for part of the goods and who takes care of the return of the amount to the seller.

There are many reasons for the preference for this payment method in China. Firstly, goods can be quality assured by the receiver before payment. Secondly, if people don’t have an account for online payment (for example a senior or someone from a rural area who is not good at using a computer), they tend to choose this method. COD payment can be made by cash (uncommon) certified check or money order.

Credit Cards in China (China UnionPay cards)

Online credit card usage in China is less than 5%, not as popular as in Western countries. International cards such as Visa and MasterCard are not common online payment methods due to the low-trust associated with them in China.

Debit Cards (China UnionPay cards)

Debit cards are widely used by Chinese consumers for Internet purchases. The funds paid using a debit card are transferred immediately from the bearer’s account through use of a “push payment“ principle. During the online payment process, users are directed to their personal bank account where they physically log in and authorize the transaction.

Although COD makes up the most significant percentage of China online payment methods, the trend towards using debit/credit cards (China UnionPay cards) is continually increasing as more domestic and international online merchants integrate the option of online card payments on their website.

Shipping methods in China

Major shipping companies in China

1. SF Express (Shunfeng Express) 深圳顺丰速运

It has built an extensive business unit covering research and development, logistics, pickup & delivery network, etc. which spans the nation (including Hong Kong, Macau, and Taiwan). At the same time, its international network has been actively expanding to South Korea, Singapore, Malaysia, Japan, the United States, and Europe.

2. STO Express 上海申通快递

Covering Mainland China and Hong Kong, Macau and Taiwan,  this shipping company is in service 365 days all year round.

3. Shanghai YTO Express 上海圆通速递

Yto express is a large famous private shipping company in China. They have set up 4800 branches and have covered more than 1380 cities and 76 airports all over China.

4. TTK Express 上海天天快递

They have weixin service as a method to track the package. Their business is mainly in Mainland China and Taiwan.

5. Yundaex 上海韵达快运

Their business is mainly in Mainland China and Taiwan. For international packages, they work with DHL, UPS, TNT, EMS.

6. EMS (Worldwide express mail service) 邮政特快

EMS is one of the major shipping companies in China which owns China Postal Airlines and China Post Logistics. The company has nearly 100,000 employees and 45,000 sales outlets in more than 200 countries and regions. The company possesses the world-acclaimed brand “EMS” and the leading domestic logistics brand “CNPL.”

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How can foreign businesses use new mobile payment methods to boost their business in China?

Create official accounts to provide special offers

The Alipay and WeChat Pay mobile payment methods offer the possibility to set up individual marketing campaigns. They are not only payment tools, it goes further. For example, you can attract your customers’ attention by directly offering coupons and promotions that can be used via Wechat Pay or Alipay. These coupons can be placed in applications during critical events such as the Golden Week, Singles Day, the Chinese New Year, etc.  For Wechat, it is called the WeChat Voucher solution.

You can also offer your customers a Wechat membership card which is a virtual discount card with the cumulative discount at several levels. Then, you will need to measure these actions, the ROI, to determine the impact on your business but it can attract new consumers and simplify your customer journey.

Allow mobile payments for your Chinese clients, out of China

According to a 2018 survey by Nielsen and Alipay, 91% of Chinese tourists would shop more if overseas merchants had mobile payment options. So if you want to increase your customer base of Chinese tourists, you can develop your payment options.

Allowing mobile payments for Chinese customers is what many countries are doing. According to Alipay’s statistics, in 2018, the number of mobile payment transactions has increased 75 times in Russia, 12 times in Canada and eight times in Malaysia. The same phenomenon has been observed in New Zealand, Australia, and Finland.

Recently, the Galeries Lafayette group in France, whose Chinese customers represent approximately 25% of its €2 billion turnovers, also chose to that implement this strategy.

After opening a store dedicated to Asian customers, the Galeries Lafayette group now accepts payments with Wechat. For the company, this is a logical step in its strategy to conquer the Chinese tourism market.

Want to know more about how you could leverage online payment platforms in China? Daxue Consulting’s Online market research service provides you with in-house service for every step of your research project and can help you to draw a comprehensive digital mapping of your sales funnels in China.

Do not hesitate to reach out our project managers at dx@daxue-consulting.com to get all answers to your questions.

This article Payment methods in China: How China became a mobile-first nation | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.

Cloud computing is the storage and processing of data on remote data centers. Cloud storage reduces the burden on computers which makes possible more work flexibility. A large tech savvy population and need for data security drive the development of cloud computing in China.

China has the largest online population in the world, with over 800 million internet users. Therefore it is no surprise that China generates an enormous amount of data that must be stored securely. Cloud-based servers are more scalable, affordable, and secure than on-site servers, so they perfectly satisfy China’s huge demand for flexible data storage.

The technology is being rapidly developed in various sectors and is already generating over five billion dollars in revenue annually. Generally the three main types of business delivery models available for cloud computing are Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). Meanwhile, data can be stored from the public cloud, private cloud and hybrid cloud.

Sizing the Chinese cloud computing market

In 2018, the Chinese cloud computing market was second in terms of overall size. It accrued approximately $13.4 billion dollars in annual revenue compared to $53.4 billion of the US. Despite this, the Chinese government is dedicated to pushing the market to approximately $64 billion by 2020, creating major business opportunities for cloud computing providers. At any rate, China’s cloud computing industry is projected to exceed 300 billion yuan ($42.3 billion dollars) by 2023, by which time an estimated 60% of domestic companies and government agencies will be using cloud computing services.

[Source(s): Statista, IDC, China’s cloud computing market size]

According to the Chinese Ministry of Industry and Information Technology (MIIT), from 2015 to 2019 officials have been working to more than double the scale of China’s cloud computing industry. Many analysts predict that public cloud usage rates could grow more than 20% annually to 2023.

Large enterprises, government agencies and financial institutions accelerate the pace of cloud application

Furthermore, according to an interpretation of the MIIT’s Action Plan, China’s cloud computing industrial structure continues to optimize. Key technologies such as large-scale concurrent processing, mass data storage and data center energy-saving have achieved great breakthroughs in standards. Also, backbone enterprises are working to develop more strategies to improve their business categories. With many large bodies like enterprises and government institutions relying on cloud computing in China, the technology is applied into an increasingly wide range of industries.

According to data from market research firm IDC, cloud computing and artificial intelligence will more than double the rates of innovation and productivity at Chinese companies and organizations by 2021. For these reasons, cloud computing is considered a crucial infrastructural force in China’s push for an industrial upgrade as it moves to embrace new technologies like artificial intelligence, internet of things, and big data.

The graph below portrays IaaS as the segment with the biggest market share in cloud computing in China. The forecasted market size of software-as-a-service (SaaS) will continue to be the largest among the three with CRM and Mail management as the most widely used application types.

[Source: Statista, Cloud Computing in China – Statistics & Facts]

Chinese Government’s Cloud Computing Industry Development Mandate

As part of a larger development strategy for advancing Chinese software and information technology services, the Chinese government plans to continue to make large investments over the next few years to drive domestic cloud computing development.

Through the ‘Internet Plus’ strategy, introduced in 2015, the Chinese government is pushing for the development of the domestic cloud computing industry to modernize manufacturing and other domestic industries. In short, this strategy promotes the integration of cloud computing with big data and IoT.

China’s cloud computing market is still at the nascent stage; however, it is likely to witness tremendous growth across all the industry verticals with public sector, manufacturing, retail, and healthcare sectors among major adopters of cloud computing services. Also, fast pace deployment of 4G LTE mobile network across China is anticipated to support further penetration of cloud computing services among end user organizations. The cloud market has particularly strong growth potential, underpinned by government initiatives and major investment by vendors in infrastructure and human capital. A new cybersecurity law will protect local cloud and hosting players from growing international competition.

Government support for the Chinese cloud computing market will see strong growth continue. Domestic firms have been set the target by China’s Ministry of Industry and Information Technology’s goal of increasing cloud revenues by at least 50% annually over the next few years, including a focus on generating revenues for cloud services from international sources and building China’s presence in the global cloud computing market. There is also an eight-point initiative that includes the creation of a national industry data recovery center and a national safety control service center for China’s data security.

Trends in the Cloud Computing Space

The future of cloud computing looks vast, connected and increasingly fast. While the concept and initial design of cloud computing began in the United States as a way to store data, networks, intelligence and more over the Internet, the refinement of cloud-based platforms and services are spreading widely in China. From individual consumer cloud services for storing photos, to multibillion-dollar corporations that need to house intelligent data, this technology has become internationally ubiquitous in the last ten years.

Globally, the cloud computing industry is dominated by American companies such as Amazon, Microsoft, and Google, which controlled a combined 57% of the overall market in 2018. According to Wikibon Research, the global cloud market hit $237 billion in 2018 and is estimated to reach $814 billion by 2027. With mega corporations like Google, IBM and Amazon mostly running cloud systems in the U.S., it’s easy to overlook China’s market for now. Data shows, however, that companies like Alibaba (which currently ranks fifth in the global cloud computing market), Tencent and Huawei have worked their way up the ranks and are growing rapidly.

[Source: Statista, Synergy Research Group, Global market share of leading cloud providers]

China’s cloud computing market will be the largest in the world

China’s cloud market is set to become the largest in the world by 2023. But right now, it remains nascent and insubstantial compared with its respective sectors in mature economies. The Chinese market is roughly one-tenth the size of the US equivalent. The market is expanding but remains fragmented, which means that much of it is up for grabs. Domestic tech heavyweights Alibaba and Tencent, along with international players like Amazon and Microsoft, all want a piece of what will eventually become a very large pie.

Despite the challenges presented by the Chinese market, several large, well-resourced U.S. cloud providers have established operations in China through joint partnerships with local companies. For example, Microsoft has partnered with 21Vianet, a Chinese data services firm, to roll out public cloud. Other U.S. companies are also operating in China. Amazon is partnering with ChinaNetCenter to offer cloud services and IBM is teaming with 21Vianet to offer its hybrid cloud platform.

Tense domestic competition drives growth

Furthermore, in the decade since e-commerce giant Alibaba became one of the first domestic players to tap into the market in 2009, China’s internet giants have been pouring resources into building up their cloud infrastructure services. Companies like Huawei, Tencent, and Baidu are now working feverishly to deploy their own cloud computing-based services. Among Chinese tech players, the excitement surrounding cloud computing’s potential as a growth driver is real.

Thus, local competition is another significant factor to take into consideration. Several Chinese companies are well-positioned in their domestic market. E-commerce giant Alibaba’s Aliyun is already a notable competitor, servicing 1.4 million customers directly and indirectly. China Mobile, China Unicom, China Telecom, Baidu, Tencent and ZTE among others, are also well-positioned in the market.

The Chinese cloud computing market is dominated by local players

China’s cloud market is dominated by local players, with IDC figures showing Alibaba Cloud as holding 42% of the public cloud marketplace in 2018, followed by Tencent Cloud at 12%, China Telecom with 9%, and Amazon Web Services (AWS) close behind with 6%. The total market for cloud infrastructure and software in the world’s second-largest economy reached $5.4 billion in the first half of 2019.

As you can see below, they are leading in each of the four key market segments: data center hardware/software, cloud computing services, colocation and CDN.

[Source: Synergy Research Group, This graph shows the market size (greater to the right) and annualized growth rate (high growth will place at the top of the chart) for the Chinese Cloud and Data Center Market]

Where is the growth and opportunities in the Chinese cloud computing market?

China has been a frontrunner in many different tech industry verticals, from AI and the Internet of Things (IoT), to smart cars and virtual reality (VR) services. As a direct result, the Chinese government and businesses have worked to also strengthen cloud computing technologies to support the data infrastructure of many of these emerging technologies.

According to Zhang Feng, chief engineer with China’s Ministry of Industry and Information Technology, China’s overall cloud industry reached a scale of $48 billion, and the IoT industry surpassed $174 billion in 2018. In other words, there are many businesses in many industries looking to implement cutting edge cloud computing technologies. Thus, increased development by Chinese companies on their cloud services offerings will continue to support the domestic market’s growth.

Along with this, the SME market in particular continues to offer strong growth potential and will be an important driver of demand for cloud computing in China. With security being a key hurdle, Chinese SMEs will likely continue to favor Chinese cloud providers for their IT services expansion. The SME cloud market was a key area of growth over the previous years and the fastest growth rates were for hosted communication and collaboration services, but in terms of total demand, it is Infrastructure-as-a-service (IaaS) and business applications that dominated.

Chinese companies are sensitive about their data

In the past, concerns over cost, security and logistics meant many Chinese businesses were reluctant to migrate to the cloud. Chinese companies are extremely sensitive when it comes to their data, with the vast majority still preferring it to be stored in-country.

However, encouraged by decreasing costs and Chinese government policy, a growing number of Chinese firms, unhampered by decades of outdated IT infrastructure, are now adopting cloud-based alternatives to on-site enterprise hardware and software. This is especially the case with China’s burgeoning number of SMEs, which typically have smaller budgets and therefore prefer the lean business models supported by SaaS. Customer relationship management software (CRM), office automation software (OA), intelligent manufacturing software (IM) and office collaboration software top their shopping lists.

Alibaba Cloud Leads China’s Cloud Computing Market

It opened up to third-party customers in 2009 and offers a comprehensive suite of cloud services, including web hosting, elastic computing, data migration, database, storage and content delivery networks, large-scale computing, security, and management and application serves.

Alibaba Cloud is China’s largest public cloud service provider with the most advanced cloud network, including 11 data centers and more than 2,300 CDN nodes in mainland China. Although being the world’s fifth biggest player in having just 5% of the global cloud market, it holds a 40% share of China’s domestic market and provides international companies with seamless access to China through Alibaba Cloud’s

China Gateway solution. Alibaba Cloud’s ongoing focus on innovation and internationalization has allowed it to outperform major Cloud vendors in the Asia Pacific market.

[Source: Deloitte, Overview of Alibaba’s Cloud Products and Solutions]

Alibaba Cloud’s Recent Performance

In its December 2019 4Q earnings, Alibaba maintained its leadership position in the Chinese cloud computing market by developing technology and business solutions that enable the digital transformation of businesses across industries in both the public and private sectors. During the quarter Alibaba Cloud reached two important financial and technological milestones.

62% YOY growth

First, their cloud computing business generated, for the first time, over 10 billion RMB in revenue, growing 62% year-over-year. This was driven by increased revenue in its public cloud and hybrid cloud businesses.

Applying public cloud infrastructure

Second, ahead of last year’s 11.11 Shopping Festival, Alibaba Cloud enabled the migration of the core systems of their e-commerce businesses onto their public cloud. During the festival, Alibaba Cloud provided a highly scalable, reliable and secure public cloud infrastructure that handled a single day GMV of RMB 268.4 billion (US$38.4 billion). Its public cloud infrastructure and technologies enabled Alibaba to process over 544,000 orders per second at peak and 970 petabytes of data without disruption for the full 24 hour period during the festival.

The company believes that the migration of the core systems of Alibaba’s e-commerce businesses onto the public cloud is a major milestone that not only will generate greater operating efficiencies for Alibaba but also will encourage more customers to adopt their public cloud infrastructure.

Cloud computing now represents more than 7% of all of the company’s revenues as Alibaba continues to cement its cloud position in China and in the Asia Pacific region.

A Promising Future for the Chinese Cloud Computing Industry

China still has a complex regulatory environment with intense local competition. However, the market opportunity is attractive to a point where foreign firms are willing to invest heavily in the cloud sector and take necessary measures to be compliant. Massive investments from both public and private actors also support this trend as it enables higher speed connections in remote areas and better wireless connectivity in the whole country.

Huge private sector investment, strong government backing and young talent are together rallying behind the growth of China’s cloud computing industry. The thirst for big data and information on consumer trends from corporate marketing departments will likewise drive demand for cloud-based database technology.

The other primary driving force will be market demand. Given the growing appetite for on-demand video, short-videos and live-streaming, mobile gaming and online content in China, content providers will need to invest in elastic computing services, auto-scaling, content delivery networks and server load balancers in order to provide uninterrupted service and fast download speeds. Demand for cloud products will also increase as companies invest in new technologies such as O2O services, IoT integration and online payments, or expand into overseas markets.

Mobile security will be another priority for the industry. As the world’s largest smartphone market, China is regarded as a mobile-centric market, and different to PC-centric markets found in the West. China’s tech savvy population is leading the way in adopting mobile payments, O2O services, mobile gaming and designing their lives around their smartphone. While Android is the leader in powering mobile applications for the China market, its operating system also remains highly susceptible to external attacks. To address data security and the concerns of Chinese mobile users, foreign companies will need to invest in mobile security, while still offering fast load speed and high availability to users.

Public vs. Private Cloud

[Source: Technode, Mckinsey, Spending on public and private cloud computing in China]

Although Chinese businesses are beginning to ramp up investment in cloud computing, they use cloud computing services at a lower rate than companies in the United States and other developed markets. While Chinese companies generally prefer the private cloud (i.e., data is stored on a company’s intranet), rather than the public cloud (i.e., data is stored by the provider), China’s public cloud market is set to grow over 20% by 2020 as more Chinese companies adopt public cloud services.

For foreign cloud firms, the local ecosystem features several peculiarities that have so far restricted them from securing significant market share on a global level. In addition to standard regulations that prohibit foreign cloud providers, they also face a market unready for widespread public cloud adoption. Unlike more mature cloud markets, firms still prefer private cloud solutions, which allow them to maintain full ownership and control of physical resources. However, the public cloud model is slowly waking up in China and in the future hybrid cloud models will likely become mainstream as more businesses choose both solutions for different ends.

What are the opportunities and concerns for foreign businesses?

Given the growing importance of data in business operations, cloud computing is a must for MNCs operating in China. However, setting up cloud computing solutions in China presents unique challenges including legislative and technical aspects of MNC cloud options. Despite the uncertainties and challenges, global cloud providers cannot afford to ignore China’s large and growing market. Increasingly competitive domestic players are finding their niche, but multinationals still have an opportunity to shape the market. As a market player it is time to identify target segments and invest in solutions for this customer base, as China’s IT buyers decide how they will take advantage of what the cloud has to offer.

Current regulations stipulate that foreign cloud providers must partner with local Chinese companies to serve customers in China, and the cloud computing industry is still regulated. The main challenges facing cloud computing within, from or to China stem from the information security aspect. This involves issues such as data cross-border transfer, personal information protection, data processing and mining among others.

While its tech market is growing, China still needs to enhance its core cloud technologies and encourage its adoption across markets. According to a recent report by Alibaba, areas that Chinese businesses require the most cloud assistance include IoT integration, mobile security and expansion into overseas markets. However, the convergence of emerging cloud technology trends and China’s increasing demands for the use of cloud services will open cross-border business opportunities. The tech sector will benefit tremendously from collaboration and partnership initiatives between firms in China and the rest of the world.

Mastering the Cloud Economy

How to navigate your approach?

Two characteristics of China’s cloud market may help enterprise vendors navigate their approach.

• Technology providers selling cloud software, services and hardware can strengthen their value proposition by developing a better understanding of cloud economics, customer preferences, and the impact of the cloud’s ascendance in legacy and disruptive technologies.

• State-owned enterprises account for a large share of total IT spending and are highly concentrated in government, banking and financial services. In these sectors, most IT spending focuses on large, complex, highly integrated legacy systems that cannot easily move to the cloud. A large and dynamic start-up scene has emerged in China, and is spending on the cloud. However, that still represents only a small fraction of total IT spending. In the U.S., cloud providers are addressing mainstream companies across industries, but that’s more difficult to do in an economy dominated by state-owned enterprises.

Choosing a Provider

When entering the Chinese cloud market, Alibaba maintains that website load speed is crucial anywhere, but particularly important in the mobile-centric market like China. Thus, the best option to minimize latency, improve SEO visibility, and provide high availability is to host in Mainland China.

The clear local market leader, Alibaba has earned the title of trusted partner for Chinese firms expanding into European availability zones. And with the growth of China’s cloud industry and now with China Gateway, it’s looking to do the same for companies moving in the other direction. Selina Yuan, president of international business of Alibaba Cloud Intelligence says that the “primary challenges foreign organizations face are “security, connectivity and demanding cross-border digital infrastructure setup issues.”

Therefore, for any multinational vendors or business it is important to assess how your business can fit into the proper Chinese ecosystem from both a technology and business perspective.

Author: Jeffrey Craig

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This article Cloud computing in China is the first one to appear on Daxue Consulting - Market Research China.

The unexpected coronavirus epidemic has subverted the way many Chinese people work. On the first day of resumption of work on February 3rd, 200 million people used DingTalk (钉钉)  to work remotely from home. Due to the excessive number of instantaneous visits, remote conference tools in China such as DingTalk, Tencent Meeting (腾讯会议) and Feishu (飞书) had a surge in growth. The video conferencing market in China was put on the map due to the Coronavirus outbreak when white collar workers had no choice but to work remote for two month’s time

Remote conference tools in China were not always popular. Chinese people prefer to discuss business face to face, as it is important in developing business relationships. However, the epidemic has become a catalyst of the boom of telecommuting market. In the past month, hundreds of millions of workers passively participated in a large-scale social experiment of remote conferencing in China. This experiment had not been strictly planned, but rather hastily entered the battlefield on an unprecedented scale. The participants of the experiment included company managers, white-collar employees and a large number of online office product providers. Now that China’s economy is recovering after COVID-19, the phenomenon also raises a question: how the video conferencing market in China will develop after business returns to normal

Source: qimai, Chinese Apple Store Rankings for Chinese remote work tools

The concerns of remote conferencing in China

The greatest convenience of remote conference tools is to save time and expenses of commuting and travel. In the past, the average commute time for people work in Beijing and Shanghai was almost one hour. In addition to getting up early to get prepared, they had to get up two hours in advance. After working from home for an extended period of time, most people found that they woke up later, and their working hours were longer.

As business owners or managers are most concerned about efficiency issues, they may wonder if employees still work hard from home.  They may ask themselves, do employees oversleep or get easily distracted, and can the progress keep up with the company needs? Therefore, it is important to improve online office efficiency and deliver remote office iteration rules once a week. On the first day of “Cloud Office”, most people felt that work efficiency was low because they all measured the efficiency of remote office based on the thinking of on-site office.

In the traditional Chinese office environment, employees are on-site, punching in at 9 a.m. and leaving at 6 p.m. More so than in western offices, it is important to the manager that employees show their dedication by clocking in long hours. The manager was more able to verify whether the employee has worked at least 8 hours by their naked eyes. Now, the manager has no way to verify that they actually worked for 8 hours since employees are ‘hidden’ through their computers. Therefore, many managers simply believed that employee definitely would not work for 8 hours.

Trust becomes a crucial factor for China’s remote work tools market to develop

Business owners and managers can see that everyone is working hard for 8 hours on-site. Even though, in fact, 8 hours on-site does not mean 8 hours of real work. Although there is no way to monitor at home, it does not mean that the work efficiency is lower than on-site work.

A week after the resumption of work, companies adopted the new project management manner said that remote conference did not affect the efficiency of work. Contrarily, it somehow showed higher efficiency than working on site.

‘Trust’ is the most important thing for Chinese managers. Managers should be able to believe that employees can do the same or better jobs at home than they do in the office. In order to support this kind of trust, the corresponding performance measure methods should also be adjusted. They should shift from time contribution to results oriented. Whether business owners could change their methods about performance measure and develop trust in their employees becomes a crucial factor for the remote conference tools market in China to develop.

Competition among Chinese remote conference tools

In February, when the epidemic prevention and control situation was most tense, the average daily downloads of DingTalk, WeChat Work and Tencent Meeting reached 229,400, 205,600 and 217,800 respectively.

These three Apps have been in the top 10 of the Apple App Store free application rankings since February 4th, corresponding to the high download volume and frequency of use. The video conferencing market in China have been greatly boosted during the epidemic. According to Apple App Store data, the current version update frequency for DingTalk is 2 times per week, WeChat Work 1.5 times per week. Tencent meeting is slightly lower, but it has reached 1.3 times per week as well.

Main functions and features of 3 mainstream remote conference tools in China:

WeChat Work: For office scenarios, WeChat Work currently provides free basic applications, including announcements, punching cards, approvals, reports, schedules, and collaboration tools. The basic operations are the same as WeChat and can exchange information with WeChat.

Source: Zhike, WeChat Work video discussion among employees working remotely during COVID-19

Huawei Cloud WeLink: WeLink is an intelligent work platform that Huawei Cloud launched at the end of 2019. It provides functions such as health check-in, information notification, 1,000-person online collaboration, thousand-person video conferencing, audio knowledge audio, cloud documents, online training, and work reports. It also can connect to large screen, smart camera, cloud printer, NFC and other external hardware devices.

DingTalk: The well-established remote conference tool, which has the functions of employees’ groups, group live broadcast, punching cards, online collaborative documents, nailing approval, and logs. It allows external intelligent hardware, audio and video calls. It provides adaptation solutions for industries such as medical, education, and government.

Source: News.nciae, DingTalk online class

Challenges of Chinese remote conference tools

As the epidemic prevention and control situation has gradually slowed down, more and more enterprises have returned to work on site. Daily activity has become the core KPI of remote conference tools in China. The only way to survive in the remote conference tools market in China is to ensure the amount of daily activity. This is not an easy task. There are three problems to be solved behind the video conferencing market in China.

Challenge #1: Building a tight connection between the office and online

A good remote conference tool requires a tight connection between office scenes and various functions. Therefore, users will not experience the split feeling of switching between different software. This requires remote conference tool innovators in China not only have a product thinking skill but also a platform thinking skill.

WeChat Work is an example of one of the successful remote conference tools in China. The version of WeChat Work 3.0, released on the “2020 WeChat Open Course PRO” in January, not only launches an efficiency package, but also a one-stop video function supporting video and audio calls and micro-documents supporting office collaboration. Wechat Work 3.0 also supports the “session mark” function of information processing, opens 13 types of 390 interfaces covering basic capabilities such as communication, storage, and security.

Source: Zhike, Wechat Work 3.0 switches between different software

Challenge #2: Connecting with external customers

The core essence of remote conference tools is to connect customers externally and continue the business. As WeChat Work can connect with WeChat, WeChat Work users can add WeChat personal users, the two Apps are on different platforms, but they can communicate and connect directly. WeChat Work is the only remote conference tool in China that can achieve the insensible connection of C-end touch.

Source: Zhike, Wechat Work user adds Wechat personal user

Challenge #3: Making remote work tools double as marketing tools

As mentioned above, Chinese remote conferencing tools need to connect customers externally and establish their own private database. This is only the first step for remote conference tools in China to survive and establish barriers to new entrants. In other words, they should establish their own ecological network to achieve a closed marketing loop, which is both remote conference tools and marketing tools.

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The Rise of the Internet and its Impact on Censorship in China

The rapid rise of China’s mobile internet base altered the fabric of Chinese society. From civil affairs to law, politics, academia and foreign relations. Technological developments forced the Chinese government to change its tactics in controlling the Internet. Previous forms of media such as broadcast and print were strictly regulated as indispensable components of the political stability. Now, the Chinese government has implemented a plethora of strategies to censor prohibited information on the Internet. These strategies include strict regulations, employing people to monitor the web, creating organizations for internet oversight, and developing internet censorship technologies. 

Thus, the Chinese government maintains full control and ownership over the Internet, media and news. It does this by providing daily directives to media outlets on what content to cover. Moreover, the Chinese government manages its telecoms infrastructure in a way that allows for top down internet censorship to take place. As a result, China’s internet censors have blocked websites and removed certain smartphone apps. In addition, China’s internet censors are responsible for the mass deletion of microblog posts, instant messages and user accounts that touch on banned political, social, and religious topics.

Altogether, there are reportedly over 10,000 websites blocked in China. For example, major news and social media hubs like the New York Times, YouTube, Twitter and Facebook are among those blocked. Furthermore, increased internet censorship in China has recently extended to apolitical spaces such as online music stores, platforms for live streaming, dating, celebrity gossip, and blockchain technology. This has resulted in authorities suspending and tightening scrutiny over internet features that enable real-time communication. 

China’s Vision for the Internet – A New Internet Model

Access to the Internet in China is provided by eight internet service providers (ISPs), which are licensed and controlled by the Ministry of Industry and Information Technology (MIIT). These ISPs are referred to as the backbones of the mainland Chinese internet. Their role is to control access to the worldwide web and be the gateway that connects the global internet to the Chinese internet.

Chinese companies police censorship efforts

However, most internet censorship does not occur at the ISP level. It occurs on individual platforms, in which Chinese companies must police vigilantly. Thus, it is no surprise that Chinese super apps such as WeChat are built to facilitate censorship. Specifically, the multipurpose social media app WeChat increasingly employs artificial intelligence to scan and delete images deemed to include banned content. Throughout 2019, large-scale deletions of posts and accounts occurred on both WeChat and on Sina Weibo’s microblogging platform.

Therefore, it is evident that the government together with big-tech companies learned very quickly how to employ digital technologies such as data analytics and artificial intelligence to advance internet censorship in China.

China’s idea of cyberspace sovereignty

So far the Chinese government has managed to promote the Internet as a means for socioeconomic development while successfully minimizing its political impact. While many people and countries bristle at the idea of such wide-ranging internet censorship, China has sought to legitimize it in recent years by promoting the idea of “cyberspace sovereignty.” China defines this as each country having the right to “choose their own path of cyber regulation and development, and public policies for the Internet.”

These moves embody the Xi administration’s sweeping efforts to strengthen China’s system of cyber governance and internet censorship. These efforts aim to expand the legal framework for control over data, networks and information. In essence, China is pushing ahead with its own model of the Internet.

[Source: Quartz, China’s Internet Backbones and the Shape of China’s “Great Firewall,” These graphics show how China’s backbone ISPs located along the Eastern Coast control and provide access to mainland servers that route IP addresses to local IPs.]

Government’s Role in Creating a Managed Internet Ecosystem

Established in 2011, the State Internet Information Office is the responsible organ for internet censorship in China. China relies on the main telecommunication companies such as China Telecom, China Unicom and China Mobile to enforce blocks. To date, more than 60 internet regulations have been issued by the Chinese government.

The 2017 Cybersecurity Law along with other regulations have increased the pressure on private technology companies to assist the government in creating a sophisticated blueprint for internet censorship in China. The PRC Cybersecurity Law requires companies to monitor the content their customers create or share, censor content that violates laws and regulations, and report such content to the authorities. Thus, new regulations, censorship campaigns, and increasing restrictions on the use of virtual private networks (VPNs) have further heightened internet censorship in China. In 2018, regulators reportedly shut down over 6,000 websites. From January 3 to 21, 2019, the Cyberspace Administration of China (CAC) shut down 733 websites and 9,382 mobile apps, and deleted over seven million pieces of online information.

No single government department handles internet censorship in China

In sum, China’s internet censorship regime is implemented by the provincial branches of state-owned ISPs, business companies, and various other organizations. There is no single government department that handles internet censorship in China. But rather, a complex and confusing web of departments and organizations implements censorship over internet media. Below is a graphic that illustrates the interconnectedness of China’s internet censorship framework. It also includes a description of the relevant government departments and their roles in regulating China’s internet.

[Source: “The Limits of Commercialized Censorship in China” by Blake Miller. Agencies and Individuals Influencing Censorship on Sina Weibo]

Departments involved in internet censorship

• The Publicity Department of the Communist Party of China, formerly known as the Propaganda Department, takes the lead in deciding what is kosher and what is forbidden. It sets the direction for media and state messaging for the whole country. 

• The State Council Information Office (SCIO) has a parallel function to the Publicity Department, but is officially controlled by the government, not the Party.

• The Ministry of Public Security (MPS) controls technical internet censorship. Like the Ministry of State Security (MSS), it also has the power to shut down websites and printing presses.

• The Cyberspace Administration of China (CAC) is the most important regulator of internet content and has become much more powerful under the Xi Jinping administration. 

• The National Radio and Television Administration (NRTA) oversees licenses for news publishing, books and periodicals, radio, film, TV, and video game software. Before March 2018, it was known as the State Administration of Press, Publication, Film, Radio, and Television (SAPPFRT), which in turn was formed in 2013 by merging the State Administration of Radio, Film and Television (SARFT) and the General Administration of Press and Publication (GAPP).

• The Ministry of Industry and Information Technology (MIIT) shares and sometimes fights over the responsibility for regulating internet and video media. MIIT controls networks and the Internet, but more from the technical side.

• The Ministry of Culture and Tourism (MCT) oversees theater, live music, visual arts, “cultural products,” and also has oversight over video game hardware.

How does China Censor the Internet?

China censors the internet in two ways: through micro-censorship and macro-censorship.

#1 Macro-censorship

Macro-censorship uses software and hardware based interventions to prevent whole domains from being accessed. Macro-censorship is often referred to as the “Great Firewall of China.” Macro-censorship is what makes certain foreign websites inaccessible. This level of censorship starts at internet routers and applies to entire internet networks.

[Source: Global internet Freedom Consortium, China’s Great Firewall]

The Great Firewall operates under the “Golden Shield Project.” It has been in operation since 2003 and is controlled by the Ministry of Public Security. It serves as the main infrastructure that blocks access to unfavorable incoming addresses from abroad. The Great Firewall deploys several technologies to block entire websites and specific webpages from being accessed by IP addresses located in China. However, the Great Firewall of China primarily focuses on blocking external content.

Some common technical methods used by the Great Firewall are: IP blocking, DNS filtering, poisoning, and redirection, URL filtering, packet filtering, man-in-the-middle attack, TCP connection reset, deep-packed inspection and VPN blocking. Although China has never publicly revealed the technical details surrounding the Great Firewall, researchers worldwide conclude it does in fact employ these tactics such as blocking IP addresses, DNS attacks, and filtering specific URLs and keywords. However, the latter method has become more and more difficult with the increasing popularity of the encrypted HTTPS protocol. 

[Source: Global Internet Freedom Consortium, Internet Censorship Mechanisms in China]

#2 Micro-censorship

In contrast, micro-censorship targets individual expression within China’s domestic internet. Micro-censorship happens at the post, comment, and article level. It is carried out by social media companies and other internet content producers (ICPs). Micro-censorship is accomplished in several ways such as keyword filtering, manual content review, and algorithmic filtering.

However, there are a wide range of micro-censorship methods used in various ways by different companies. But in general companies utilize both human and machine-power to censor online content.

Thus, it is evident that in addition to the many efforts directly taken by the government, a key feature of China’s internet censorship on social media are the obligations placed upon individual companies. This is because they bear the ultimate responsibility for removing prohibited content from their platforms.

In China, censorship is delegated and regulated through internet content provider (ICP) licenses. ICP licenses are necessary to operate an internet business in China. These licenses can be revoked or suspended if ICPs do not comply with government censorship directives.

What role do websites play in internet censorship in China?

Chinese websites are legally required to sign the “Public Pledge on Self-Discipline for China’s Internet Industry.” This orders companies to remove offensive material and to block certain terms. As such, each platform has developed its own methods to combat “harmful” content targeted by the government. Keyword filtering is the first line of defense for many ICPs. Keywords of either single words, phrases, or co-occurring words and phrases are set up to prevent searches, posts, or comments about off-limits content. This form of review is done in two ways: through manual content review and algorithmic review.

How websites monitor content

As part of their responsibilities to enforce China’s internet censorship laws, companies are expected to have the technology to block and filter posts, and the staff teams on-site to conduct manual content review. Technology firms are not only responsible for monitoring and censoring public social media content. They are also responsible for monitoring closed chat groups and even one-on-one conversations.

Thus, Chinese tech firms often employ thousands of content moderators to remove censored material. These moderators look for code words, slang, and memes that people use in order to get around the censors. In addition, there are also censorship “factories” in China to fulfill these duties for firms. For example, one such company named Beyondsoft uses a service called Rainbow Shield. This service has compiled over 100,000 basic sensitive words and over three million derivative words. Of these words, about one-third are related to political content. Following are words related to pornography, prostitution, gambling and politics.

Most Common Internet Censorship Methods

1) Search Engine

In China, the market share of foreign-owned search engines is low, as domestic players like Baidu and Sohu dominate the market. As they are the natural starting point for Internet users, these search engines are of high interest to censors. One method search engines use to censor the Internet is to filter the search results of prohibited terms.

The search engines playing a role in the censorship of China’s internet also include the likes of international companies such as yahoo.com.cn and Google. Google for instance received widespread criticisms over its Dragonfly project and its rumored development of a Chinese censored search engine. Furthermore, Google has also removed advertisements on Chinese websites that review anti-censorship software.

[Source: Personal Graphic, List of popular search engines in China]

2) Reporting

China has recruited thousands of individuals to search the internet and report problematic content to authorities. In particular, organizations like the ‘China Internet Illegal Information Reporting Center (CIIRC).’ This organization, which is ostensibly a civil society organization encourages the reporting of “illegal and harmful information” to the Ministry of Public Security.

3) Content Manipulation

Internet-opinion companies that monitor, analyze, and Content manipulation refers to Internet-opinion companies that monitor, analyze and manipulate China’s social media interactions online. Additionally, there are specific groups and individuals that are given the task of manipulating the direction of internet discourse. For example, the “Fifty Cent Army”. The Fifty-Cent army is a group of individuals are rumored to be paid per-post. This group of individuals consists of government organized persons and netizens given the task to steer online discussion on sensitive topics.

4) Platform and URL based blocking

Platform and URL blocking restricts access to specific apps and websites like Facebook, Twitter and Youtube.

[Source: Personal Graphic, List of previous and now blocked websites and social media applications in China]

5) Keyword Censorship

The most identifiable aspect of internet censorship in China is the ever-evolving list of banned terms and phrases. Entering these identified prohibited words into a search engine will return no results. Similarly, using these filtered terms in a social media post will result in machine-automated software flagging or deleting the content.

The best analyzed list of forbidden keywords comes from Sina Weibo. The list now contains almost 3500 The best analyzed list of forbidden keywords comes from Sina Weibo. The list now contains almost 3,500 blacklisted words. However, many of the words are not ‘blocked’ forever. Instead, they are blocked temporarily during breaking news events and later made accessible once censors judge that the ‘subversive’ connotations of the words have been forgotten. Amazingly, it takes mere moments to block new terms. This allows Sina Weibo censors to respond in real-time to monitor new social media developments. This capability plays a large role in shaping the public discussion online.

However, keyword lists do not always result in automatic blocking or search restrictions. This is because there are usually different levels of keyword lists. At Sina Weibo there are three levels of keywords based on a combination of political sensitivity and the likelihood that a non-sensitive post will be flagged from the keyword.

How Sina Weibo censors content

At Sina, employees in charge of content moderation make most of the decisions about what is and what is not to be censored on their platform. First, posts are flagged and sent to content moderators through keywords. Then, management directs audits of certain posts, accounts, or user reports.

These content moderators employ a variety of methods to handle and outright delete content. Employees commonly choose to handle content in one of five ways: delete, secret, friend, restrict, and conceal. All of these ways of handling content involve hiding content from a subset of users on Sina Weibo. Though the censorship choices mentioned above are the most commonly used, they are not an exhaustive set of the ways in which Sina handles objectionable content. Below is an illustration of the internet censorship process on Sina Weibo.

[Source: Blake Miller, How Sina Censors Content and the Types of Censorship]

China’s Internet Censorship Industry Has Given Rise to New Markets

Internet censorship itself has become a lucrative business in China. For example, the online version of the Party-run newspaper People’s Daily, people.cn. In particular, they contract with companies such as news aggregator Jinri Toutiao to censor content that contravenes the government. Revenue from People.cn’s censorship services reportedly rose 166 percent in 2018.  Thus, the People’s Daily monetized its expertise in identifying ‘‘politically sensitive’’ content by marketing the services of its in-house censors and by formally training and certifying censors.

Another censorship service, Rainbow Shield, as previously mentioned, employs over 4,000 people in multiple cities to review online content. Hence, there exists a lively market for the internet censorship industry in China. Here, many for-profit organizations resort to selling various data products and services to help China monitor online content. Data in the Chinese enterprise credit system shows that more than 900 companies provide internet surveillance services or own copyrights for internet surveillance software.

China is a leader in developing and exporting internet censorship tools

According to records posted on a Chinese government procurement platform, there have been more than 400 pieces of bidding information and contract briefings that refer to the internet censorship business. Also, there are more than 2,000 companies providing various services to the Chinese government in the market.

As a result of these disclosures, China has become a leader in developing, employing, and exporting internet censorship tools and social media surveillance software. For example, the Chinese firm Semptian has touted its Aegis surveillance system as providing “a full view to the virtual world” with the capacity to “store and analyze unlimited data.” The company claims to be monitoring over 200 million individuals in China, which is a quarter of the country’s total internet users. The company even markets a “national firewall” product, which mimics the Great Firewall in controlling internet traffic in China.

Control-service providers

Hence, two types of control-service providers and agencies own the greatest market share in the industry. Technical companies and media organizations. Technical data companies rely on their data-processing technologies such as web crawling and sentiment analysis to provide their stakeholders with customer-oriented surveillance software.

Second are media organizations. China’s media players are very strong in the censorship industry because of their market oriented nature. Although official media outlets such as People’s Daily and China Youth Daily fall under the government’s purview, they still need to address market competition by exploring new profitable business models.

As a result, organizations such as Xinhua, China Daily, People’s Daily, and China Youth Daily have all started their own online-opinion-surveillance agencies that provide internet censorship services. Among them, ‘The People’s Internet Public Opinion Office’ is the most well-known. It relies on the resources of the People’s Daily and People’s Daily Online. As of 2012, this business earned a revenue of approximately $29 million dollars. This represents the second biggest source of income for the People’s Daily.

Internet censorship in China will likely get more rigorous

In sum, internet censorship in China is very widespread and its impact is felt broadly throughout society, business, and politics. As the cluster of actors operating within China’s large and interconnected digital ecosystem continue to merge business models and innovate, it is more than likely that internet censorship in China will become even more rigorous. As a result, this will have a huge impact on all businesses in China. For foreign MNCs in particular, data privacy, business control, and enterprise reputation will be the leading concerns moving forward.

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Full transcript below:

Hello everyone. This is China Paradigm where we, Daxue Consulting, interview season entrepreneurs in China.

Matthieu David: Hello everyone. I am Matthieu David, the founder of Daxue Consulting and its podcast, China Paradigm. Today I am with someone I tried to interview for a long time and finally, I can interview him. He is Eloi Gerard from CrowsNest active in the Chinese VR industry. I expect from this interview to understand more about an industry we talk a lot about. This industry only has a little impact on our daily lives but things may change because in the coming years 5G is going to appear more broadly, becoming mainstream. There is a case study that Eloi worked on and for the first time, it displays actual results on this digital technology importance for China. It shows numbers with VR, AR, XR – we are going to define all those words later. Augmented reality technology in China could become a big industry. This could become the next revolution maybe like the Internet and change our daily lives, by changing the way we shop and so on. Eloi, thank you for being with us today. So, what is the size of your business? What is the number of cases you have worked on, what do you do, exactly in terms of Digital technologies in China?

Eloi Gerard: Okay thank you, Matthieu, first of all for welcoming me in your podcast. It is a pleasure even if we are not actually living far from each other. We are both living in Shanghai, but it is good to be here. So, thank you so much for that. I created a company called CrowsNest 4 years ago dedicated to AR and VR. My background is more into content and creating content for the film industry. I used to be a film producer in Belgium and then in China for many years. I am here for 8 years now. I used to work for many years for marketing content in China. So, I was doing content for TV commercials as well as for multiple types of other marketing projects. I founded the company in the VR industry in China to dedicate our attention to AR and VR and the content in AR and VR. So, we are a studio and an agency where we really help brands to create experiences in VR and AR. One cool thing to know about CrowsNest because many people ask us, “CrowsNest; what is that? What does it mean?” You know, the crow’s nest is, in English, that part of a boat you have a mast and on top of the mast, you have this little platform called a crow’s nest where sailors are using the glasses to look around and to see in 360-degrees. So, we used the name because in augmented reality technology in China you can look in 360-degrees as well. This is why we decided to name the company so.

During the last 4 years, we had the chance to work with multiple types of clients in very different areas.  One of our first clients was a French client – Peugeot/Citroen – asking us to help to promote innovation inside Peugeot/Citroen with virtual reality devices in the Chinese market; a very wide thing.

We didn’t ask for a lot of money for this first case study. We tried to create bring attention to our service in the VR industry in China. We did our first 360-degree video for virtual reality devices in the Chinese market. The first one but not the last one since we are still using this technology to interview people within Peugeot/Citroen, to showcase what happens in their research and development center and different other applications. The goal is to visualize these types of things within Peugeot/Citroen to then attract talents and leverage on the Chinese virtual reality adoption. So, this was the idea.  After that, we had several cases for travel agencies and we still do a lot of cases in the travel industry because augmented reality technology in China is super appropriate to visualize the space. When you decide to go to Thailand, you can visualize what it would look like to go to a Thai hotel and see what it looks like to visit temples, what it looks like at the beach, etc.

Digital technologies in China are a super appropriate way to visualize that because you have a 360-degree view which creates a  new trust relationship between the consumer and the seller. In fact, when you are looking at a hotel with virtual reality devices in the Chinese market you can really see how it looks. There is a new brand promise out there. Now, with VR, you can see everything. You can see the view on the beach and you can actually see if there is a factory or something that would ruin the landscape. Without this new technology, when you are booking your trip on Expedia for instance, you will only be able to see a few pictures. Of course, the pictures will not tell you the reality because this is the job of the hotel to try to sell you something. They will really try to show you the best part of their establishment and you cannot really trust the pictures. Of course, it is the best photo that you can take and when you arrive there, there is actually a factory.  VR has the faculty to change this relationship.

Matthieu David: Let’s go a bit on the case studies and especially the one about tourism. We understand that Chinese virtual reality adoption can enhance the vision you have of somewhere you want to go to, but currently if I want to do use this technology; both on the promotion side and on the consumer side, where should I go? What virtual reality devices in the Chinese market should I use? Are we talking about something existing or something that is still experimental?

Eloi Gerard: So, you have numerous channels. For example a YouTube VR. You also have many influencers using VR, using 360-degree cameras to tell their stories and their travel stories around the globe. You do not only have YouTube VR. There is Facebook VR for instance which makes use of the Chinese virtual reality adoption. Facebook is one of the main investors in the VR field. On Facebook, you can upload videos in 360-degree. There are also Chinese platforms dedicated to the VR industry in China. 

Matthieu David: If I am on YouTube and I search for YouTube VR. Is there a channel or is it a platform called YouTube VR? What about Facebook? Is it a channel or is it a tool to upload?

Eloi Gerard: Yes, it is not something you can really visualize from your computer. You need to have one of the leading virtual reality devices in the Chinese market. In each headset, you have an App Store where you can download YouTube VR and from there you will start watching content. In the end, it is like if you were watching YouTube on your phone.  

Matthieu David: Got it. So, in VR we are all experimented with a headset and putting your phone in the headset. It is not really what you are talking about. This is a thing that could become popular because everyone has a Smartphone, but very few people have an Oculus.

So, going back to my question; you can set up and create this 3D environment or this VR environment or these pictures, even, but if you don’t have the headset where is the market currently? Again, are we talking about something experimental? It is very interesting to see the experiment and I know that you worked, for instance, on events in shopping malls or events. Are we still talking about entertainment or we are now talking about mainstream and real Chinese virtual reality adoption?

Eloi Gerard: So, what does mainstream mean? I don’t really know. To give you some numbers; at the beginning, we had this little cardboard box where you could put your phone in to visualize your content and this is not existing anymore. We don’t do that, we don’t use this type of virtual reality devices in the Chinese market anymore. The quality was really poor. It was great to introduce people to what augmented reality technology in China is. Now, we use proper VR headsets. You need to have that type of headset and connect it to your computer. You need a powerful PC to visualize complex content like games but there are also stand-alone VR headsets like the Oculus Quest which is the most popular VR headset at the moment. Sorry, what was the question again?

Matthieu David: So, my question was: are we talking about entertainment like headsets you may find in a shopping mall or at an event, or are we talking about a mass market and real Chinese virtual reality adoption?

Eloi Gerard: Okay, so at the moment there are between 10-20 million VR headsets sold every year.

Matthieu David: All combined?

Eloi Gerard: All combined and worldwide but we don’t know exactly the numbers for the VR industry in China. I would say this is the estimate that we have. So, you have for example around 4-5 million Sony PlayStation VR glasses being sold worldwide which represents approximately the number of users. When we combine users with Oculus, Windows mixed reality then, we estimate that there between 10-20 million headsets are being sold every year. This represents maybe 40 to 60 million users per month who are active users worldwide. We don’t really know. We don’t have that type of data for these digital technologies in China.

Matthieu David: Is it mainstream then, is there really a Chinese virtual reality adoption?

Eloi Gerard: It is not mainstream. It looks big and the numbers are millions, but compared to the potential market it is ridiculously small. Nevertheless, virtual reality devices in the Chinese market are not technologies that are made or that will become something that everybody will have. It is dedicated for specific purposes and for a specific audience, the first one being the gamers. So, gamers have already a powerful computer and they are very delighted to buy a headset and to enjoy many different types of new games with this technology. It’s a very large community that displays Chinese virtual reality adoption.

If you know about gaming, for example, the platform Steam – which is the leading gaming platform –calculates that one percent of their clients are using Steam in VR. Steam is gigantic, so one person is already big, but it is only one person. Then next to the gaming industry, you the narrative experience for the VR industry in China. This is for people who are using VR to watch films in China and watch content in 360-degrees to experience very new types of artistic experience and new types of story-telling. This is mainly driven by festivals that promote Chinese virtual reality adoption. Numerous film festivals around the world have now a category dedicated to VR. For example the Sun Dance, the Venice Film Festival or Try Baker in New York.  In China, we have a festival in Qingdao called the Sandbox Subversive Film Festival which is super popular and super important for us here in Asia and where all creators come to see the selected work from the VR industry in China. So, it is a new type of experience which is not a film and which is not a game. We try to drive emotions by a narrative or a story delivered to spectators via virtual reality devices in the Chinese market. This is quite confidential, but this is quite important for the VR industry in China. In general, you have to go to the festival but some of them can be downloaded via the Ocular store or Steam. It is the research and development department of the entire VR industry. That is where the industry is at the moment. Trying to see what best language is to be used or what can we developed.

Then, besides that, there is a huge application for education and that’s where there is more Chinese virtual reality adoption. Many start-ups are working in the educative fields to try to really think about how we can learn something with the use of VR and AR and digital technologies in China. How can we visualize objects in science with augmented reality technology in China? How can we learn about space, planets, the human body and all these things that can be visualized in 3D? It was not possible before but now you can really imagine that type of thing and all the applications of the VR industry in China. So, many start-ups and many big educational companies are investing in that field. It is still the beginning of the VR industry in China since we need to have an entire ecosystem of schools having VR headsets, other virtual reality devices in the Chinese market and content providers.

Matthieu David: So, you mentioned specifically in your presentation a case study for Thomas Cook. For people listening to us, people may wonder why we talk about Thomas Cook, but Thomas Cook is still active in China. Actually, the brand was just bought a few weeks ago by an investment fund that invested before in Thomas Cook. So, you have worked with Thomas Cook in China. It is something I really want you to talk about. You comment with numbers about results which is a word I rarely see when we talk about the VR industry in China, AR or XR. You say that Chinese-based platforms got a certain number of western-based customers. I remember a total of 50 000 people and times two in terms of sales and booking. My question is: if so few people have the equipment, if actually it is so selective, then, what are we talking about here? Could you explain more because it seems that there is a gap between those results which seems good in terms of engagement, in terms of numbers of users but that it contrasts with the fact that very few people can use it? What was this campaign for?

Eloi Gerard: So, for Thomas Cook, it is a great example where we created travel content and then we pushed this content on the market like on  YouTube VR and Youku VR for  China – YouCool being the equivalent of YouTube in China. There are also different types of platforms that are less known and we basically uploaded that there as well. We then asked the platform to push our content to their existing users in China that is driving the Chinese virtual reality adoption. The idea is that while the users are watching this content they can be redirected and they are on their computer so they are watching something. Then,  they can be redirected and click on the link to follow the next steps in their journey from watching the content to actually book on the website of Thomas Cook. Platforms could calculate that there is a follow up from the content in VR to the website and it displays the success of augmented reality technology in China. So, there is a clear link between watching the content to actually buying this travel that they just watched.

Matthieu David: Okay, to make sure that people understand what we are talking about: people you are talking about, were they using a VR headset or they were using their phone?

Eloi Gerard: They were using both virtual reality devices in the Chinese market. You could watch 360-degree content form your phone and then you can swap to visualize what it is and we imagine that many did it this way. So, many people could watch the content on Google but many people watched it in VR too. We don’t know exactly how many people used the new digital technologies in China to visualize the content.

Matthieu David: I see.

Eloi Gerard: It’s part of a wider campaign using virtual reality devices in the Chinese market. So, you know, you don’t know if you can actually build that to social media. We know that there are different components but the main result of this campaign is increased sales. We had the same impact with another company we worked with. Logitech, after creating VR content for them, they saw their sales increased by 2 thanks to the Chinese virtual reality adoption.

Matthieu David: So, I understand for Thomas Cook, it is pretty clear. You are offering a 3D immerging experience for people who want to go for a trip and you use augmented reality technology in China. You are able to convince them that the place is like in the pictures. It is good enough to have a better experience and a better understanding of reality than just having a simple picture. Then you have also worked for Logitech. Would you mind telling us what you did for them because it seems less intuitive for me than for the travel industry? Travel seems to be like obvious choices for digital technologies in China, but what about Logitech?

Eloi Gerard: So, they do accessories for gamers. You can imagine that the community of gamers is a community very interested in the VR industry in China. So, what they do is a steering wheel. You can play video games with their steering wheels for different games like GTA or like many other of these types of games. You have to plug the device into your desk or you have a full machine where you have the pedals and a gear to actually have the feeling that you are driving a car. They built that and they sell that. They are the leaders of this market.

You feel that you are driving a car and they wanted to know how they could promote their new version of this product in a nice way. So, they had this idea to try to reach the existing gaming community with virtual reality devices in the Chinese market and to promote these accessories to the gaming community. There is a perfect match out there. It makes sense because gamers who want to buy this type of thing are probably also those who have a VR headset. So, what we did is that we created a 360-degree video where we shot the actual partner of Logitech and celebrities from Japan. They are super cool and famous drivers. One of them is the guy who invented the drift. So, we went shooting with him on the circuit. He was explaining to users or consumers of Logitech how to do super cool things with a car and how to drift. He was also explaining how to use the steering wheel of Logitech.

So, we mixed a bit of the experience of being on the circuit and him explaining how to use the gaming gear with augmented reality technology in China. So, in this case, it is just a super cool content because it is a celebrity and for a specific community. The content is quite cool because it is a circuit so you are within the car. It is fast and it’s nothing like a travel experience with Thomas Cook. It is something that would be more appealing for gamers and it is pure branding content at the end. It is inspiring. It is a brand story. It is peripheral content for the main thing, but it is a super cool content. It is the kind of content people want to watch with their virtual reality devices in the Chinese market.

It is not like a TV commercial not using digital technologies in China. It is a celebrity giving tips on how to drive in video games. So, it’s not directly selling the product. It is a kind of soft advertising using Chinese virtual reality adoption and this is why people really love it.  People watch it in VR and after, they are redirected to buy the gears. Again, the sales have increased thanks to this campaign and I think it was the main content of the campaign. It was a global campaign and the content was even in Japanese. So, you can imagine how difficult it is to reach a wide audience. We had to translate the subtitles in English of course and I think in Chinese as well. There is way more engagement with these types of augmented reality technology in China. So, it is always about creating a great concept that reaches the audience that you want to reach. It is not like if you want to do something, but it doesn’t reach a specific audience. If you want to reach a generation Z gamer then, digital technologies in China are just super cool. You will totally differentiate yourself and engage very differently with your community.

Matthieu David: Let’s talk about the definition. I think that most people understand what VR and AR are. Nevertheless, for the other one that you are using which are XR and AV, they are probably not very clear on what it is. I am going to try to define the first two and you tell me if I am right. VR uses a totally new environment, totally virtual. What you can see is something that does not exist in front of you. AR is implementing through the lenses of a headset some items that are virtual in the place where you are. So, to give an example, you are in your home and you could actually picture new furniture, like Amazon furniture for instance – you have a case where you put furniture in a place. For VR, you would be in another apartment, somewhere else in the world and you could see the new furniture, etc. What about XR and AV and correct me if you think my definition is not proper?

Eloi Gerard: No, you are totally right. You have got it very well. So, the fact is that we are evolving in the VR industry in China and we notice that there could be different things between VR and AR. So, when we at the beginning considered that AR would be just like something like Google Glass where you have an overlay of information coming up to you thanks to virtual reality devices in the Chinese market. The industry progresses. The power of the microprocessor became better and better and we could start tracking it, we could start positioning objects into the real space and this became the new definition of AR where we have transparent glasses and we can see an object positioned on the table or an animation. So, 3D objects, something else made by a computer or something that you see all the time; something like a car on a poster or advertising for a car is actually not really a car. It is a computer-generated car that you use to visualize the car on the poster which is very commonly used by architects to create buildings. So, in AR you see the real world and some of the artificial elements while in VR everything you see is made by computers or shot and then surrounded by an artificial world. We invented a concept similar to augmented reality; AV which means that we can replace existing objects and mask them with other things. So, for gamers in AR, we like the idea that you are at your place and you see a sofa and the sofa is transformed into a castle thanks to augmented reality technology in China. This is augmented virtual reality. So, there are multiple stages between AR and VR where you can see around you and for instance your wall can become something different. It is not a simple object. The world is transformed into a full VR world.

Matthieu David: I see, so what we say AV is augmented because you add a layer of virtuality on something that is existing and the AR is more like you add a perpetual element into space which is real?

Eloi Gerard: Yes, exactly, but then we start calling a mixed reality; MR. So, with virtual reality devices in the Chinese market like the Oculus Quest or the new few HDC device, you have a screen but you also have cameras that are actually shooting the real-world. So, from inside you can see the real world and this real-world can be entirely replaced by a virtual world. These glasses could be considered like mixed reality glasses because with the same headset, you can have an AR experience or you have a full VR experience and everything in between. So, this is what we call mixed reality.  This is why Microsoft has called its technology Microsoft mixed reality which is used to define the headset and the software used as digital technologies in China.

It is a bit complex because mixed reality doesn’t qualify. You would talk about mixed reality when you talk about the headset that can do all of these things, but if you want to talk about the industry it is different. If you look at startups doing AR and startups doing VR you would maybe think, that they are doing the same thing. If you do VR, you are in special computing and you are building worlds and are organizing information in the space to promote the Chinese virtual reality adoption. To qualify this entire industry, we came up with the idea of the name XR which can mean extended reality or which can mean cross reality. So, XR qualifies the entire VR industry in China so that you can say: “We are CrowsNest XR because we can help you with your AR needs or your VR needs.“

Matthieu David: So, is it XR? Is it a word that is common in the VR industry in China or have you created this word?

Eloi Gerard: No, I don’t create words. It is commonly used in the VR industry in China. It has emerged like 3 years ago. It was created by our industry because we started using it and then it became a real thing, but I didn’t create it myself.

Matthieu David: I wasn’t sure if it was a company word you were using internally or it was an industry word. Our focus is China in China Paradigm. You talked about Oculus which is made by Facebook. You talked about YouTube VR, but how does it work in China? Do we have the same issues as the main platform where Facebook is forbidden? Are some headsets also forbidden in China? We know, for instance, PlayStation and Xbox were forbidden for a long time in China. It was 3 or 5 years ago only. So what are the limitations you see in China compared to the west?

Eloi Gerard: Yes, we have all these problems that you are talking about. So, the main leaders in our fields are Sony and PlayStation VR. They are now in China and in the rest of the world they can really leverage this gigantic network and when they publish a game in this platform it can reach China as well as the rest of the world. For the second largest one which is Oculus, it cannot officially enter the Chinese market. So, you need to use a VPN to actually use it in China, but it is so compelling that many people are using Oculus with a VPN in China. You can buy an Oculus Quest on Taobao, T-Mall or JD.com for instance if you are part of the Chinese virtual reality adoption trend. Everywhere you have these, but it creates a huge distortion of the thing.

Just imagine what it means for developers in AR and VR industry in China! They have difficulties themselves to visualize what is happening in the west. You have YouTube VR, you have also headsets being made by Google called Google Daydream and this doesn’t really work here. It is too slow. You need a VPN. So, the ecosystem in China is a bit separated from the rest of the world. It is less aware of what is happening there and it doesn’t really help to make the industry immerging out of China. You have multiple factors that make the VR industry in China very different from other countries. You have also the fact that the porn industry is a major type of content in the US and in the rest of the world. It is a huge industry in Japan. So, you have many studios doing porn content in VR and they are selling it on their own market which is outside of China. This drives, I guess, a lot of users who want to try VR for the first time. Friends think it is a perfect Christmas gift. You have your first experience in porn VR and then from there, you download games and other things.

In China we don’t have also enough schools of design to study film, to study storytelling and to combine three different skill sets which are being creative, being good in technology and being good in business. In the VR industry in China, you need to have a pretty holistic approach. Schools do not really train people to understand these three things at the same time in China. So, we have a lack of skill sets and a lack of entrepreneurs who could build platforms and build content to promote the Chinese virtual reality adoption. As a consequence, we barely have any studios in China that work for the VR industry in China. The number of good content is extremely small compared to the US or compared to Europe. So, there are multiple factors why AR and VR in China, even if it should be the largest market in the world, is actually a very tiny market. It could be something, but we have so many hurdles that it doesn’t always work and we hope we will see a greater Chinese virtual reality adoption in the future. This is a great opportunity for foreigners to actually do content here because there is space for augmented reality technology in China.

Matthieu David: You talked about some of the hardware being Oculus and Sony. You are talking about the representation of Magic Leap and Smart Glasses. Would you mind telling us more about something which is a bit easier to wear, easy to buy than an Oculus and a Sony glass? I think when we talk about smart glasses, we tend to talk about something we can wear in an event that is not entirely immerging but actually adding a layer of virtuality on your lenses. Would you mind sharing a bit more about the set of hardware we can use?

Eloi Gerard: So, AR glasses, like 3 years ago, were the first digital technology in China could be considered as being a hololens. Microsoft hololens were big glasses that positioned objects in the space with a field of view that was super tiny and a quality that was not great. You have to have your first project out there before it you can actually improve virtual reality devices in the Chinese market. So, every year there are new things coming from the VR industry in China that improve the technology. What we would like is a virtual reality device in the Chinese market that is not big and which is something which is similar to existing glasses or sunglasses. You could wear them in the street and no one would look at you because you have gigantic things with a battery. So, we imagine that at some point we will have this type of small glasses that you can wear it in the metro, that you can wear it at work or that you can wear it wherever you want. Information is provided to your eyes without anybody seeing it. This is probably now where we have more and more glass suppliers who have this kind of small glasses and one of the main ones is in China.

In the west, in the US, you have Magic Leap which is a bit smaller and we imagine that there will be a new version very soon that will make it even smaller. Nevertheless, with these glasses, you still need to use the battery and the power of your phone. It is small and it is the size of reading glasses with a wire that you plug on your phone to use the processor of your phone and the battery of your phone to display all these things. I tried it and it is actually super cool. It works really well. You have now a wider field of view, good quality of the image. I tried an experience where you have a cat being built by computers that looks like a real cat. He goes around you because the cat knows that you have a sofa, that you have a table, etc. You can visualize and have the feeling that you have this object around you thanks to augmented reality technology in China. Imagine the number of applications in different industries to help your factory to give you instructions about how to use the machine, to have information about the client, your sales and visualizing data in real-time. Basically, we imagine that everything you are doing with your computer, with your phone or with your television could be displayed in that type of thing in a more efficient way and in a more interesting way simply by using augmented reality technology in China. It provides more information than just having a flat-screen as we have right now. So, that is the idea.

Matthieu David: Talking about hardware, we know that China is a place for hardware and it is a place that produces products in many factories around the country. DJI is not a surprise; the drones are Chinese with DJI. What about the VR industry in China? Do you find some players which are Chinese and are getting momentum now? What do they do? How do you analyze situations of the VR industry in China?

Eloi Gerard: Yes, so in the VR industry in China, we are struggling because we have difficulties to create an ecosystem for China. There is a lack of content including hardware. You cannot sell hardware if you try to build a platform and this was the case for many hardware makers. They build the hardware and then they find a platform that is like a store, but then the store has nothing to promote Chinese virtual reality adoption. That is the case right now with HTC. HTC is based in Taiwan, but they bet on the fact that China would be surrounded by a firewall and they were right. They are Taiwanese, so they can be more Chinese than Google and Facebook and try to really get this market, but they did a mistake.

They do super cool headsets, their platform is the equivalent of the Play Store and out of that, there is almost no content for virtual reality devices in the Chinese market. We do not have any good strategy to try to bring developers and to bring exclusive content and exclusive games to these platforms to have users actually buying this headset and saying, “We need to buy it because we have this content.” They do not think “content” and Chinese virtual reality adoption. For example, you have Half-Life that has just been announced and will be released on Steam. It will be free with the Steam’s headset. That is something that drives a number of users into a platform or encourages them to buy a headset. It is always driven by the content. Users are not interested in something that does nothing even if the tech is amazing. You cannot have a game or a film or something which is cool.

In the VR industry in China, we are not good at understanding that content is key to drive user attraction. So, who are the main players and drivers of augmented reality technology in China? HTC tried to be the leader in China, but it has not found the right strategy. Should it be B2B or should it be B2C? They are quite lost into what to do and they are always too late in releasing the good product at the right time and that is why they are struggling to create a real Chinese virtual reality adoption. Then, you have Pico which is Beijing-based and they really stand out from that mess and succeed with their augmented reality technology in China. They are not so much focused on pure interactive experiences and 360-degree freedom experience or room-scale where you can move into the spaces. Then, in Shanghai, you have DPVR which is competing against Oculus in the VR industry in China. Now it is quite a small player and you have several other companies that bring virtual reality devices in the Chinese market. You have maybe Pimax in Shanghai which is a cool startup where they did one of the highest resolution headsets possible. It is big with a wide field of view. In Shanghai, they build these kinds of things and specialize in doing super high resolution and they found a niche into that world for gamers and also for industrial applications as digital technologies in China. So, you have several players in hardware and I would say the ones I mentioned are the main ones. For platforms, there is VR.TV is a 360-degree video platform based in Beijing. We try to make the ecosystem of the VR industry in China work. You do not have the big component that Hollywood has and America has which is the content and this is where Oculus and Sony are so good. These companies have access to the best games, the best content to watch. This is why it is really working.

Matthieu David: It is also impacting the production in China. China is the factory of the world. China produces actually for others in the world, but still, you don’t have a brand that has been able to produce worldwide from China. Nothing like not what happened with drones, for instance. Last question which concerns yourself and your relation with China. What do you read to stay up to date on China and in the VR industry in China?

Eloi Gerard: I actually read a lot on digital technologies in China. I read on the Internet and plenty of other media. There is not that much literature about what we do so I read all the news from the US. There is one website in China that I really like about the industry which is called Yivian.com. It is a Chinese website so you have to use Google Translate, but I think they are really doing a great job with good information on what is happening for digital technologies in China. It is about reading really all around. I mean every day as soon as I wake up I spend half an hour just looking at what is happening in the VR industry in China.

I also use Twitter to see what people are saying about the industry and read blogs as well. I really like the blog of my friend Tony. It is called Skarredghost.com. I will send it to you after and maybe you can post it. It’s a great blog where he gives all kinds of information about the VR industry in China. It is China-focused even if Tony is from Italy.

So you have different types of blogs and key personalities to follow that really give you the trends of the industry of augmented reality technology in China, but it is still going all around so, it is about technology, it’s about creativity and it’s about business. You have to follow three different types of things and you have to follow the politics of China also to understand what is going to work in China and what isn’t going to work in China. Being holistic is really important in this industry.

Matthieu David: If you had extra time, what kind of business would you start? Maybe other than VR and AR, but what would you be interested in doing?

Eloi Gerard: So, first, for AR and VR we are doing a lot of project-by-project right now and helping clients in marketing to build applications and to boost the Chinese virtual reality adoption. I think that there will be a new generation and a new moment to start building new platforms for different uses like platforms for education, or platform for travel. It doesn’t make sense to have a sea trip in VR yet. Why not? There are only a few millions of people having headsets. There is not anything like that so, I think there is a lot of space for that and also a lot of platforms for avatars and meetings like Zoom. This is typically something that could be built thanks to VR and AR. You could meet the avatar of your friends. It exists already, but it could be much better. Now, it is really the time where we start building these kinds of projects because the number of users is big enough to think about new ideas like that. Outside of AR or VR, I would not do anything like quantum computers. This is not my field of expertise. I am really specialized is in AR and VR content and these kinds of digital technologies in China.

Matthieu David: You have been in China for some years. What failure in any industry, in the society, in any company has a witness that you would not have expected before? A typical example is WeChat payments that everyone is using. This shows the failure of credit cards in China. People are not using their credit cards anymore so the success on WeChat which is digital payment and the area of credit cards could be an example. So, what surprising success or failure have you witnessed in China? 

Eloi Gerard: The biggest failure would be my industry, so, the VR industry in China. I think it was expected to be huge because of a series of factors that we didn’t really analyze properly. Like I said before, education, the porn industry is driving the sector. We were wrong about how the market would develop. The Chinese government is trying to incentivize different industries and subsidizing many companies in the field of virtual reality devices in the Chinese market. It creates a huge mess in the VR industry where they helped a lot of companies that were totally unqualified. They spent a lot of money and in the end, companies went bankrupt and created a huge distortion.

 So, can you imagine what it means for me? My company is self-funded. When we visit a client, he or she has seen three other government-funded companies before. They are not doing great work and when we arrive we tell them that we have a good product but they will say that they have already seen three other projects with VR and have the feeling that VR is not great. It created quite a huge distortion for the VR industry in China. Now, all these companies have gone bankrupt and we only have very few that are still competing. Maybe it represents only 5% of the initial companies, but these are the ones that did a great job. They have an understanding of what the market is about and are properly talking about VR. They are selling and virtualizing in a proper way. They use the technology for real cases and are not simply using the word VR just because it is trendy like some people would use BlockChain or AI right no.

What would be a good example of an unexpected success? I think that success in China has to be based on a concept that is driven by the density of the population and/or the huge amount of people that we have in China. Typical consumer internet businesses like Alibaba are great examples. Great concepts which are based on the fact that China is formed by huge cities with a lot of people on a reduced area are generally successful. Shanghai, for instance, is a city of 25 000 000 people and if you have a concept of e-commerce or of delivery, the delivery becomes so cheap because every guy can go within the same building and deliver to several apartments. In my country, for example in Brussels, a similar business model would be unprofitable.

So, I think that every concept which is about that is quite successful and it’s always a great idea. I would think about the shared bike which is a bit less trendy now. I think it is a great idea and it works really well for big cities. One bike can be shared amongst many people because it is a very dense place and it makes sense. I am a big fan of Mobike and this type of very simple idea. I really like that.

Matthieu David: Thank you for your time. Thanks for sharing your expertise. I believe that it’s going to be one of the topics we are going to use more and more when 5G is going to arrive and be at scale. VR, XR, AR and all the words we have gone through during this interview are gonna be used on a daily basis. I hope you enjoyed it. I did enjoy it and I hope everyone listening to us has learned something and enjoyed the talk. Thanks, everyone, bye-bye.

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This article China Paradigm transcript #90: Is the VR industry the next tech revolution in China? is the first one to appear on Daxue Consulting - Market Research China.