With the rapid development of cloud computing, big data, and the internet of things in recent years, human has entered a new stage—the Post-mobile Era. Widespread of computer technology and network communication is bringing unprecedented opportunities of cloud storage in China.

According to IDC, the global cloud storage (excluding hardware) market size was USD 14.724 billion in 2017, and the Chinese cloud storage market size was USD 1.355 billion (9.15 billion yuan).  In 2017, the size of China’s enterprise cloud storage industry was 9.025 billion yuan, while the size of the personal cloud storage industry was about 125 million yuan.

Why cloud storage in China is important

China is now one of the most attractive markets to do business. However, internet restrictions have always been a problem for international entries. Many of you must be very frustrated with the “Great Firewall,” China’s internet regulation and filter system. You might also find out that VPNs are not stable enough to access Google and other blocked services. In this case, we have conducted a research on emails, cloud storage system, and live co-working platforms with IBB China I&C Technology, that is offering collaboration alternatives for small and medium businesses in China.

What emails can you use in China?

Email is not as commonly used in China as in the west. However, most personal emails are free, offered by Chinese Internet giants like Tencent, NetEase, Sohu, and Microsoft (Outlook). These emails are good for start-ups: it’s free, it’s able to use in China, and it’s good to send emails to servers abroad. The shortcoming is that you may have some weird suffix in your email address, like “@qq.com” and “@163.com”.

For enterprise emails, NetEase, Tencent, and Sohu offer a free service for small start-ups. To use this service you shall own (or buy) a domain name, and then you can set up an email account with your company’s suffix. You might need a Chinese person to help you with the application because they don’t have English UI. Once you are successfully registered, you can create up to 200 email accounts with your company’s name for free. Of course, you can also host your email privately.

Apparently, most foreign companies prefer this way. As the head of marketing & sales in IBB China, Mr. Tadas Plonis explained: “Using a big corporate provider may not be a good idea. All big service’s data providers like @qq.com (Tencent) or @163.com (NetEase) are hosted on China’s public cloud. Think that emails are just digital letters. You can choose to keep your “secret letters” in a glass box in a public place, or you can keep them privately in your room or office safe. That is the difference between having your Email on China’s public cloud and hosting it internally.”

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 Cloud Storage in China: Where do you store your files for work?

Indeed, cloud storage makes co-working and file sharing much easier. However, many cloud storage services have been shut down from June 2016. IBB China tested 15 providers in May. Daxue Consulting re-tested all of them with two additions in November. After the big crackdown, we found out more than half of cloud storages either stopped the service or are blocked by GFW – Great Firewall of China.

Most providers offer personal cloud storage services. These platforms are mostly influenced by Chinese regulations because individual users upload and share on the platform illegal contents like pornographic materials. Thus, providers like Kuaipan(快盘), Vdisk(新浪微盘) and Dbank (华为网盘) had to have to close down services. One interesting example is Qihoo 360 Yun Pan(360云盘). The company responded to the new regulations by transforming from offering free personal cloud storage to paid enterprise services.

Then in November 2017, it updated its product and launched the “360 Security Yun Pan (360 安全云盘)”, which provides paid personal and enterprise services. Currently, for individual customers, the cheapest deal is 99 RMB per year, 100GB storage. For enterprises, 360 Security Yun Pan offers four kinds of packages (“Starter”, “Advanced”, “Ultimate”, “Customized”) with different prices and a 15-day free trial.

The good news is that there are still some operators survived under strict regulations, like Baidu Cloud(百度云) and Weiyun (微云). However, free storage is limited. The initial free storage for Baidu Cloud is 15G, while that for Weiyun is 10G. Obviously, you need to pay for it, if you want to expand your storage.

Contact us for any question on the Chinese market

Cloud storage in China: What if you want to edit your files with others at the same time?

If you work in China or want to collaborate with someone in China, you may need to find co-working platform beyond Google Docs and Dropbox. Most platforms like Youdao (有道云笔记) and Wiz (为知笔记) have multi-terminal services. You can access to the working files on your laptop, your phone, and tablet. However, they do not have integration with Microsoft, which means you cannot download your co-working files when you have finished your editing.

These platforms usually show compatibility problems. Zoho is the most similar platform to Google Docs, but you may need to pay. The free version is more like a trial. The free storage is only 10MB, and only one project can be created. You can create a new document and edit with others at the same time, including Word, Excel, and PowerPoint format. You can also save these documents as MS Office format on your laptop. Zoho is an integrated platform and it also offers extensive services, including emails, project management, meeting schedule, and forum. The only disadvantage for Zoho is that it works a little slow in China.

What cloud tools in China can support your business

Now you may have a basic understanding of what can be used to support your business. Apparently, for the private sector, most platforms are free in China. On one hand, Providers like Tencent and NetEaseoffer free email services are most commonly used by Chinese people. Cloud storage Weiyun (微云) and Baidu Cloud(百度云) have large storage and fast upload speed. On the other hand, things are a little different for enterprises.

You can still use free enterprise emails provided by Tencent, NetEase, and Sohu. They help SMEs host emails with the appointed suffix, but the data are saved on China public cloud. Thus, if you want privacy and security, you’d better host emails by yourself. To store business files, you can still choose free personal cloud services. However, Chinese government adjusts policies and internet regulations towards new technology frequently, which may have some negative effects on these providers. Alternatively, Qihoo 360 and IBB China have enterprise deals. You may choose a plan in terms of the business demand. For live co-working platform, Zoho offers the most integrated cooperation platform for a monthly fee.

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This article Guide to Free Internet Essentials in China 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.

Come 2020, the Coronavirus crisis acted as a game-changer for the entire industry. Nurturing disruptive innovation, and highlighting the most promising startups, could this virus eventually stretch back fundraising activities in China?

A brief History of startup investments in China

The history of Venture Capital in China begins long before one could imagine for a state with communist underpinnings. Yet, the late 1980s already saw private investment take off, thanks to reforms and new programs launched together to stimulate the Chinese economy.

The ‘Torch Program’ has been the launchpad for China’s high-tech revolution

In 1988, the Ministry of Science and Technology (MOST) launched the ‘Torch Program’, aimed at developing high technology and achieving industrialization. The program established high-tech industrial development zones across the country, gathering scientific and technological resources, as well as talents and money. These high-tech zones include three major parts:

• Science and Technology Industrial Parks (STIPs) to develop the commercialization of emerging technologies and research. China set up 54 STIPs, which accounted for close to 50 percent of all of China’s R&D spending.
• Productivity Promotion Centers (PPCs), incubators designed at providing consulting and product testing services.
• Technology Business Incubators (TBIs) support the growth of Chinese startups by providing incubation services, such as free office spaces.

Torch truly enabled China’s high-tech revolution by being critical to the growth of large international tech companies such as Baidu, Lenovo, ZTE, Alibaba, and Huawei. According to Steve Blank, one of the first to write about the rise of China’s VC market, “of all the Chinese innovation programs, Torch is the one that was run like a startup – iterating and pivoting as it learned and discovered. This enabled Torch to evolve with China’s rapidly global economy.”

Output’s estimations of the Torch Program display the importance of Torch parks as an engine of Chinese technology in the economic growth of the country. Thus, the initiative is responsible for 11% of China’s GDP, and more than 10% of China’s industrial value.

[Source: LinkedIn, The ‘Innoway’ incubator of Zhongguancun Science Park, the first STIP to be established, in the suburbs of Beijing]

Seed funding in China brings capital for early-stage startups

Even if the Torch program enabled startups to access financial resources (by 1991, 70 percent of them received bank support), those were generally at a later stage of development. To bridge the financial gap for early-stage startups to access larger investments, the State Council launched the Innovation Fund, known as ‘Innofund’. This initiative provided small and medium tech companies with capital raised from local governments, banks, investors, and enterprises. By 2014, the found backed more than 30,000 Chinese tech startups, allocating over RMB 19 billion ($2.7 billion) to kickstart early-stage projects.

State-sponsored venture capital funding to support state-owned companies

Since the mid-1990s, the Chinese government extensively encourages investments in technology and IT infrastructure. Innovation became one of the only areas in which the government allows venture investments, with state-sponsored VC funds becoming a popular way for local authorities to finance projects. These government-backed funds were meant to invest primarily in state-owned companies with the goal of increasing quality standards to compete with international companies.

To attract even more capital into technology startups, the MOST launched the first of many state-owned ‘guidance funds,’ in 2007. The fund invests in VC funds in targeted sectors of interest, as well as co-investing alongside other VC firms. In 2018, there were more than 2,000 operating guidance funds, with total funding reaching RMB 5.3 trillion ($790 billion).

[Daxue Consulting – The history of the VC market in China]

Foreign investment in China represents a third of China’s venture capital investments

In 2018, foreign VC funds contributed to more than 30% of startup investments in China, most of them using USD to raise funds. Nonetheless, an increasing number of these foreign VC firms are now considering raising funds in China using its local currency, Renminbi (RMB). Since the 2010s, RMB funds are becoming increasingly attractive to foreign investment in China. Thus, non-RMB funds are not currently allowed to exit via IPO on domestic exchanges, an option only made available by RMB funds. Overall, local-currency funds benefit from less regulatory supervision and greater flexibility regarding the sector of investment.

[Data source: Pitchbook, 2018 Chinese VC deals by investor location]

How innovation and Chinese tech giants shape the Venture Capital market in China

China’s VC market has seen a dramatic rise over the past five years, heavily relying on robust financial infrastructures. A strong regulatory system, open market, and the diversification of ways of exiting build this financial pedestal. Aside from this trend, the distinctive growth story of the tech investments in China can be explained by the two following trends:

Entrepreneurship promotion and innovative ecosystem

In 2014, Premier Li Keqiang introduced the principle of “Mass Entrepreneurship and Innovation” to support the development of innovative startups. Since this announcement, the government has created favorable conditions for the development of micro-companies. Tax Incentives for Mass Entrepreneurship and Innovation cut the corporate income tax of small businesses by half, and days required to start a business in China have considerably fallen from close to 30 down to less than 9.

[Data source: World Bank, how long it takes to start a business around the world]

According to the Global Innovation Index (GII), China is gradually closing the gap with other highly innovation-skilled players such as Germany and the United States. The country leapfrogged from the 26^th place in 2016 to the 14^th in 2019. The index lists knowledge and technological output as the first area of capabilities of China to thrive into global innovation. With 7.4 million university graduates in 2017, China has boosted the number of students qualified for higher education. In 1997, only 5.5% of college-aged students were enrolled in universities, against 55% in 2017. This growing educated population represents a significant pool of knowledge to nurture research and technological outputs.

If capital such as R&D expenses is commonly regarded as the driving force behind scientific innovation, startups born from theses researches foster Venture Capital firms that seek return on investment from these highly promising new-born companies. From the 1980s, capital injected to promote entrepreneurial spirit and build an innovative ecosystem of incubators eventually enabled the Venture Capital market in China to bounce in recent years.

Unicorn startups in China

The intertwined links between the growth of an innovative technology ecosystem and the Venture Capital market in China can be assessed through the number of unicorn startups in China. These privately held startup companies with a value of over $1 billion represent an indicator of the degree of implication of both VC firms and tech startups in the Chinese innovation landscape.

[Data source: Deloitte, Location of Unicorn startups in 2019]

Baidu, Alibaba, and Tencent: Venture Capitalists gluttons

Chinese tech giants, known by the acronym BAT (Baidu, Alibaba, Tencent) dominate the Chinese consumer journey, providing an extensive range of services that cover every segment of daily-life activities. Initially, each of these companies started with a single business. Baidu provided an internet search engine, Alibaba was a B2B marketplace, and Tencent was a messaging application. As Chinese consumers quickly embraced mobile internet technologies, BATs rapidly expanded their strategies to meet consumer needs.

As BATs want to capture every minute of the day’s availability from Chinese consumers, they represent a significant investment force in startups in China. They invest through their corporate funds, a practice called Corporate Venture Capital (CVC). According to Pitchbook, the top three technology companies in China had made more than 920 Venture Capital investments by 2018. Importantly, the Minister of Science and Technology has publicly stated his strategy to use BATs to accelerate the country’s leadership in three strategic sectors: Baidu oversees accelerating autonomous driving, Alibaba the smart cities, and Tencent the computer vision.

The government’s involvement in BATs’ strategic axes and their investments echoes the multiple funds-of-funds that have accompanied tech investments in China since 2007. For example, BATs have invested in nearly a third of Chinese Unicorn startups. Recently, Baidu, Alibaba, and Tencent all invested in the rise of the short video apps lead by ByteDance.

[Daxue Consulting – The mechanisms behind the Venture Capital market in China]

The ‘capital winter’ was there before the Coronavirus

The venture capital investments of the past five years fostered a new generation of startups, from Tiktok’s parent company ByteDance, to the ride-hailing giant Didi Chuxing. 2018’s forecasts about the Venture Capital market in China were still predicting the trend to keep its growth pace towards more deals backing the Chinese startups. However, after five years of exponential growth, the trend is now reversing.

The second quarter of 2018 marks the peak of tech investments in China, with digital-payment giant Ant Financial closing a record US$14 billion deal. In the meantime, lifestyle-services giant Meituan-Dianping raised US$4 billion, while Q1 saw Didi Chuxing secure a US$4.6 billion investment. By comparison, 2019 Q2’s largest venture deal was a $1 billion investment in JD.com’s affiliate healthcare branch.

[Data source: Crunchbase, 2016-2019 Chinese VC deals, and dollar volume]

The tech investments in China plummeted from US$93.8 billion in 2018 to less than US$40 billion in 2019, evidencing the ‘capital winter’, which defines a significant slowdown in fundraising and investment activities. As China increasingly positions itself as the engine of global innovation, which factors precipitated the winter for the Venture Capital market in China?

Investors are becoming more cautious than ever

Alexandre Dorangeville, vice-president at Rochefort & Associés, a cross-border investment bank, told Daxue Consulting the VC market in China is likely to come at the end of a cycle.

“Some companies – Ofo, Luckin Coffee are the classic cases – displayed the ability to burn cash without showing any ability to become profitable.” 2018 set the expectations of the investors very high, and the results have not yet come up to the desired outcomes. Additionally, poor post-IPO performances of several Chinese tech companies, including electric car maker NIO and smartphone manufacturer Xiaomi achieved to undermine investor’s confidence.

However, the sector is far from depressed. Financial data provider company Preqin estimates the amount of capital waiting to be deployed of Asia-focused Venture Capital firms to be about $95 billion. It is not the shortage of money, but rather that investors are more critical and selective. As a sign that investors behave less risk-taking, Bruno Bensaid, angel investor at Shanghaivest, observed that early-stage startups have been hit the hardest.

Trade War worsens the general economic downturn

The trade war and the general slowdown in the Chinese economy also affected startup investments in China. In 2019, the U.S. government blacklisted a swath of Chinese tech companies, including telecommunication giant Huawei, and the Alibaba-backed AI startup Megvii. As the United-States remains a hot choice for Chinese startups to exit via IPOs, the trade war affects foreign investment in China, who have limited exit options. Another blacklisted company, the most valuated AI Chinese startup SenseTime, was reported scrambling to survive after losing access to U.S semiconductors, necessary for the continuity of its operations.

On the bigger picture, the development perspectives of Chinese startups are intrinsically linked to the country’s economy. However, it is showing clear signs of deceleration, with a historically low level of growth.

Assessing the Coronavirus impact on tech investments in China

While the Venture Capital market in China relies primarily on meetings between investors and co-founders, travel restrictions froze the entire industry. As a result, the number of deals during the Coronavirus drop-off to nearly zero during the last two weeks of January 2020. Instead of canceling its meeting with 30 startups, Sequoia Capital China decided to organize an online pitch contest during the quarantine.

The Coronavirus impact on startup investments in China pushed  the ongoing trend towards further caution, said Dorangeville. According to him, assessing the impact of the crisis on the portfolio is the immediate task for investment funds to carry out. “The teams are currently focusing on existing assets and redirecting their cash to portfolio companies to ensure their survival, rather than investing in new deals.”

In the first quarter of 2020, we saw the first contraction of China’s economy in more than forty years. According to data published on April 17, 2020, by the National Bureau of Statistics, the GDP officially plunged by 6.8% compared to the first quarter of 2019.

Thus, the winter could be longer for tech investments in China.

Changes in consumption and tech advancements from the Coronavirus in China

During the epidemic, more than 20 province’s government worked with technology companies to build AI solutions to the Coronavirus in China to report epidemic related data and feedback, providing invaluable advice for public crisis management of priority populations. Part of the tech advancements from the Coronavirus in China, we reported the deployment of disinfection robots in hospitals, big data-powered QR codes and smart image reading systems.

Even if the Coronavirus created a fertile environment for AI, big data, and robotics developments in China, it is not likely to foster a new breed of highly promising startups. Indeed, tech advancements from the Coronavirus in China responded to a specific demand to contain the outbreak.

However, results from Daxue Consulting’s analysis during the Coronavirus show great changes in Chinese consumers’ habits. According to Daxue Consulting’s report, more than 70% of the Chinese tried at least one new service for the first time. The highest are online learning and working from home apps, followed by live streaming and online diagnosis. These online services are will likely keep a strong growth, with 73.6% of people saying they will continue to use it online after the epidemic.

[Data source: Daxue Consulting research, changes in Chinese consumer behavior after the Coronavirus outbreak]

As far as the Coronavirus created a boon for innovation in China and new habits of consumption, does it necessarily mean new opportunities for startup investments in China?

Could Startup investments in China eventually bounce back?

According to Pitchbook, there were 66 deals for the week ending on March 28, 2020. This is the most of any week so far this year and just below the figures from the same time last year. Online learning gaining the most traction from the Coronavirus, Chinese online education startup Yuanfudao managed to raise US$1 billion.

Dorangeville said the post Coronavirus impact on startup investments in China is likely to see Corporate Venture Capital –BATs’ funds being the largest ones on the Chinese VC market – taking the opportunity to close exclusive deals. CVCs in China have a longer-perspective in their investments and the cash available to look at current deals. They will therefore be better able to restart bargaining at low prices by being one of the only sources of financing for the Chinese startups.

“However, this will only be the immediate impact of the Coronavirus,” says Dorangeville, “On the long-run, I think that the 2019 trend will be reinforced after the Coronavirus crisis: investors in China will be even more cautious, taking distance with cash-burning business models and being more active in their post-investment portfolio management companies.”

Author: Maxime Bennehard

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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 China paradigm podcast. Today, I am with another podcaster and the editor in chief of TechNode – John Artman. You’ve been in China for 12 years now and you have been with TechNode for more than three years – correct me if I’m wrong about the timing but that’s what I got from your LinkedIn. You are also managing two podcasts on the tech industry in China, maybe three if you have hidden one, but the two that I know are China Tech Talk and China Tech Investor. I’m a listener of them, I think they’re a great resource to understand the Tech scene in China and I’d like to talk about those two activities you have, being editor in chief of TechNode a tech media in China for westerners, and covering China tech through TechNode, but also through Chinese podcasts. Thanks for being with us today, and my first question is going to be a question you ask every person – what’s your China story?

John Artman: Yeah, so it’s a bit of a long one. So, I moved to China in 2008, previously I had visited here twice, so once in 2004 and once in 2006 with my university. I started studying Chinese in 2003. I went to a small public university in North Carolina called Appalachian State and we had a small Chinese department, but I was very lucky to have a great Chinese teacher who was visiting from Sojo University. She gave me my Chinese name and really inspired me to keep studying. So, anyway I graduated in 2006 with a degree in psychology and philosophy and a minor in Chinese language and then I worked for about 9 to 10 months at a mental health facility for children, which was very, very stressful and then – 

Matthieu David: In China?

John Artman: No, no in the US, near my university. And then didn’t know what I wanted to do, I guess I was trying to figure something else out. A bunch of my friends has moved to Nashville, Tennessee. They were artists, musicians and, writers so I was planning on moving there as well, but before I actually moved I had Christmas with my father’s side of the family, and my uncle used to live in Beijing, and he was like: “John, you could go and mess around with your friends whenever you want, or you could go to China, you already have the language skills. You can go to China and you can figure, and you can ride the wave”. I thought that it was a really good idea. So, he put me in touch with an English teaching school, like a private training center for adults. I was able to get a job there, came to China in 2008. I had a one-year contract to teach English and that was basically going to be it. Come here, teach English for a year and then probably come back and do something else.

It ended up that I met my now wife. We dated for a while, we have two kids now and I ended up working at China Radio International for about five and a half years, started off doing research and guest booking, then I worked in pre-recorded weekend shows lifestyle kind of silly stuff mostly, but then the last couple of years that I was there, I was very fortunate to help design and host a program called Round Table, and if you listen to China Radio International – Easy FM is the name of the station – in Beijing, it’s 91.5, that show is actually still going, more than 4 years after I’ve left. It’s a very popular format, but basically, it was a one-hour show where we discussed Chinese social issues, and so we used mostly Weibo as well as public forums for inspiration, news and things like that. Funny enough, TechNode and its discussions on Chinese tech company, both for that show as well for some technology reporting that I was doing, was actually a pretty big resource for understanding what was happening.

So, I was there for about five and a half years, reached the bamboo ceiling as it was – it’s a state-run media so there’s not much room for a foreigner to grow. Also, this was a few years after the present leadership gained power, so everything was becoming a bit more politically correct. And so, I worked in localization for a year and a half, mostly servicing Huawei and their translation services center. I helped to build a team of English native writers and editors to help Huawei – a Chinese tech company – with their technical documentation and then I saw that TechNode –this was maybe early 2016 – was looking for a managing editor. I had been out of tech and media for 2 years at that point and I was really kind of missing it. Being part of a public discussion, having impacts, helping people understand certain issues were really important for me and so I applied. My now-boss and CEO Lu Gang and I had conversations over the next few months, trying to feel each other out, get a sense of what we wanted and what the organization needed. So, I joined in November 2016. When I joined there was me and there were two other reporters, and now fast forward to almost the end of 2019, we’re 15 writers and editors, we launched a membership program called TechNode Squared, in May earlier this year. We’ve got about 250 members that want to understand the Tech scene in China right now and we’re just building up momentum and pushing forward. Really focusing on unbiased factual reporting about Chinese tech companies and Western tech companies in China and then also offering analysis and insights into what’s happening on the ground.

Matthieu David: How do you organize the editorial line of TechNode, as an editor in chief? I feel for tech media in China for westerners there’s a lot of hot news, breaking news, so I think it’s all the more difficult actually to have an editorial line. So, how do you combine those two aspects of getting a lot of breaking news, some companies need to raise money, some changes in technology and so on, on the other hand, to have an editorial line?

John Artman: Yeah so, I mean, I think that first of all, we have a very strong team of editors. So, we have a news editor, we have our senior editor who does a lot of different things and then we have our commentary editor. We have specific people in management and editing roles to make sure that things are getting done in kind of the way that we want them to. At the end of the day, reporters are responsible for not only covering news but then also making sure that they’re working on their feature stories. Then you know, we have three different newsletters right now as well, so we are all quite busy I would say, but at the end of the day, it’s really all about passion. We’re a team of I would say 60% local, 40% international and we’re all just very passionate about what we do. I think that TechNode is a very unique tech media in China for westerners. Where it is a media company,  it’s more than a media company and we get a lot of opportunities to talk with executives and people on the ground to really figure out what’s going on, and I think that’s really what it’s about, it’s about figuring out what’s going on and then writing a story to explain that to our readers.

Matthieu David: How do you pick the topics? When I listen to your tech industry podcasts in China – another part we’re going to talk about – I feel there are topics coming from time to time, more recurrent than others like the mention of ByteDance for instance, as a third player compared to Tencent and Alibaba. It seems that it is a topic you went into deeper than other topics. So how do you pick a topic? How do you assess that this is going to be the topic which is going to become important, the topic you want to go in-depth? How do you do that in an environment where you have so much news which can actually be weak signals and change actually the environment and also the noise, and that’s a difficulty?

John Artman: So yeah, that’s a very good question. I think that at the end of the day it’s really just about us – because a large part of our job is talking with people on the ground, talking with people who work with these Chinese tech companies or Western tech companies in China, talking with people who run their successful business in China on these companies platforms, analysts, investors. So, I think, it’s really just kind of about sounding things out. So, getting a sense of what’s going on and then kind of making some guesses about what we think is important. Also, we get a lot of signals as well from our readers as well as from our members, so we get direct feedback from both groups, but then also we have a very clear page view metrics, so a lot of it is like: “okay, so this story got a lot of page views, so this is something that we should follow up on”. I think that one good example of that actually is our coverage of automated vehicles and electric vehicles. We started reporting on that specific sector of the Chinese tech companies earlier this year, or should I say taking that sector seriously earlier this year. We just saw a lot of great feedback, people wanted more. There was a lot of demand for more interest, for more content about this industry and so, we went the whole hog. So, now we have two reporters. One reporter who covers it full time, one reporter who covers it part-time and then we have a whole newsletter dedicated to that industry. So, I think, as a product manager for a tech media in China for westerners, I’m looking at the following: who are our users? what do they need? Then trying to create products to fill that needs, but our product is of course content and different kinds of content. 

Matthieu David: Okay yeah. I know you have a link with TechCrunch and I know it certainly has been a source of inspiration, certainly also a comparison. How do you compare them with their work? How do you compare with managing a tech blog, a tech media now, a big one in the US, an influential one as well in China? How do you compare them? How different it is and how similar it is?

John Artman: Yeah so, I missed part of the introduction to that question but just to clarify, TechNode and TechCrunch are two separate companies. TechNode is the exclusive China partner of TechCrunch. We’ve been friends with them since 2011. We helped them to bring the first TechCrunch to disrupt if I remember correctly in 2012 to Beijing. Actually, I was working at CRI then and I went and that was very exciting. And we’ve been helping them to do TechCrunch events in China ever since then and we also manage TechCrunch.cn which is Chinese translations of their English content. 

So, what’s the difference? I think one of the biggest differences is that we’re a lot less bloggy than they are. You have to remember that both TechCrunch and TechNode have been through a lot of changes over the years. TechCrunch got started with Michael Arrington back in the early 2000s and he was just an investor, a guy in Silicon Valley, as you know there’s a lot of bullshit – excuse me my bad words – but there’s a lot of nonsense going on in Silicon Valley. No one’s writing about it. I am going to write about it and Arrington was never shied away from controversy. So, doing something like TechCrunch was a good way for him to amplify his own voice as well as agitate for change. Journalism is activism to a certain degree, but then you know, TechCrunch was eventually bought by AOL, now its owned by Verizon and so I think that really kind of what we’re seeing is different generations of writers. So, even TechCrunch started off as very bloggy, very personal, a lot of personal opinions and now you have a lot of young and intelligent writers, so they still insert some of their opinions but at the end of the day, it is in general much more professional than it used to be. For TechNode we had very similar beginnings as well. Lu Gang started writing actually. It was called Moby Node at the time; he was in the UK getting his Ph.D. in telecommunications engineering and he started writing just a personal blog about kind of whatever. A little bit of tech and then came back to China and saw that there were not really tech media in China for westerners. So, he started doing that as well, following the Michael Arrington TechCrunch model.

Now when I came on board, I had been out of media for a little while and part of my onboarding process was kind of taking the measurement of the landscape and you look at the kind of where we are now with media and where we were then when both TechCrunch and TechNode got started. I mean – when TechNode and TechCrunch got started, like the New York Times, Bloomberg, Reuters, they didn’t do a good job of having that content on the web. At the end of the day, people getting content from the internet wasn’t quite mainstream.

I think that looking at now, everyone’s online, everyone’s getting their news from everywhere, so I was kind of looking at that and say ok, number one, what’s our unique advantage? And how can we stay niche? I think that at the time only doing tech in China, it felt like it was going to be a bit of a challenge, that there wasn’t going to be that much interest, that it was too niche, but at the same time, when I was working in the radio, TechNode was an amazing resource. So, I wanted TechNode to stay as a great resource for people inside of China and outside of China who really wanted to understand the country and, of course, understand the tech scene in China. So, these days we are a type of content that’s competing with all other types of content and it’s not just we’re competing with other blogs or other websites who cover tech in China, but we’re also competing with Bloomberg and Reuters in the information. And so, ever since I’ve joined, my main focus has been on making sure that we are unique, that we are offering something that you really can’t find anywhere else, and if the content is similar well the formats going to be different, or the level of professionalism is going to be higher. So, that’s really kind of where our commitment to neutrality comes in.

It’s always very disappointing to see tech media in China for westerners that I respect publishing exaggerated stories about tech in China or maybe too simple stories is another way to put it. So, what we really strive to do is to stay neutral. We’re a Chinese company, I’m an American like I said – our team is 40% international, 60% local but at the end of the day we’re all committed to China in some way shape or form. I would say in terms of foreign staff, the shortest that any of our foreign staff has been here maybe like 4 or 5 years and all of our foreign staff, they’ve lived in China before they joined TechNode. So, we’re all very interested in telling the China story so that people can understand the tech scene in China, but we’re interested in telling it in a balanced way because we recognize that it’s a very complex country. The politics, the economics, the technology landscape is extremely complicated and so, rather than taking a side or aiming for what we call clickbait, we want to be neutral and just give you the facts and help you understand what’s actually happening for Western tech companies in China and Chinese tech companies. And so, we’ve kind of evolved from the bloggy style into something that’s much more professional.

Matthieu David: 50 people work in the company and this requires financing it. So, what’s your business model now? Recently, you started to adopt a subscription business model, but what are the different streams of revenue you have now?

John Artman: Yeah, so TechNode is a lot more than just our English media. So, we started off as English media but now we do events. For example, I was just in Shenzhen last week for the TechCrunch event down there. We do one of every single year. We also do the Asia Hardware Battle, which is, I think, pretty self-explanatory. We gather hardware start-ups from around the Asia region, all the way to the Middle East, in fact, so the Middle East all the way to Japan in terms of geography and then we find experts and judges to choose the best ones. So, we do the TechCrunch Asia hardware battle. We do something called China Bond, which is like an awards ceremony, kind of recognizing the best start-ups and the best innovations of the year. And then we also have our services teams. We have two teams focused on financial advisory, so one team based in Singapore, which does cross border financial advisory like helping Indian and southeast Asian start-ups get in touch with Chinese investors and then we have a domestic financial advisory service as well, that focuses on something very similar, matchmaking basically within the China market. So, all of this is to say that the English content isn’t very well monetized. We’re very much supported by the rest of the company and our membership as well as our annual Emerge event series is part of that monetization process and so ever since I’ve joined. I mean I’m pretty entrepreneurial so one of my main goals is to make TechNode English sustainable. Maybe not profitable but at least breaking even. 

Our membership and our Emerge events series are a large part of that and so right now, you go to our website and you sign up for our membership, it’s a $100 a year if you want to understand the tech scene in China. I think we give you three newsletters; we give you access to our community as well as access to some of the reports that we produce as well. That’s great value for money and it’s not always going to be a $100 per year. Then, with our Emerge events, we charge a relatively high-ticket price compared to a lot of tech events in China organized by other tech media in China for westerners for instance. We are pretty expensive, I mean not like super expensive but definitely higher than most people are used to paying, and that’s for a reason because, for a lot of companies, events are a marketing tool, it’s a way to raise awareness and kind of create an offline community. For us, it’s definitely about the offline community but the content is the producer and so we charge for that. So for example – in May we did panels on AI ethics in China, we did look at China to southeast Asia, blockchain regulation, corporate innovation and we had some pretty big names – from Walmart to WePay the thing is again, for the content offline you know, we take it very, very seriously and we just did a side stage at TechCrunch in Shenzhen. We did cloud gaming, mass customization so and we had some really great speakers there as well. We give time for the speakers to go in-depth, so a lot of times you’ll see panels or fireside chats, maybe 15 to 20 minutes and we aim for about 45 minutes for each panel. So, really kind of going in-depth and making sure that we’re covering the entire topic rather than just a small slice of it.

Matthieu David: You have not mentioned advertising which is the usual model of monetizing content. Is it because you don’t monetize through advertising or because it is too small, and you don’t worry about it?

John Artman: Yeah, so, on the one hand, compared to TechCrunch for example, our traffic is much lower than theirs. We’re very, very niche but at the same time, we have some really amazing SEO. We get some pretty decent engagement on social media, so our traffic is pretty good I think for our size. That being said, that is one of the big things that we’re going to be focusing on going into 2020 is increasing traffic.

So, on the one hand, it is a traffic problem, I mean like we don’t have millions and millions of people visiting us every month but at the same time it’s also my own kind of philosophy as well, I want the customer to be the end-user, so the reader is the customer, not a sponsor, or an ad network. Now, we do sponsored-content on our Tech media in China for westerners. That’s something that we’ve offered for quite a while. In that, we do projects with companies on a regular basis but it’s not something that we really enjoy doing or like really are very active in pursuing. My boss might not like me saying that but at the end of the day, I don’t like advertising. I have always been philosophically opposed to it. I think again that the people paying for a service or a product should be the ones actually using it and that’s why we launched our membership because this way we have a direct link to our readers and to our fans. $100 is not a lot of money if you want to understand the tech scene in China but it is a barrier, it’s a psychological barrier. So, people who choose to cross that barrier, they’re doing it because they want to invest, they want to invest in the production of news and information that’s relevant to them. We do have an ad network on our website that is a Carbon ad. So, it’s a very small network, they only have a selected group of advertisers that are on there and you’re not going to see random advertisements for your Kim Kardashian or alien babies and things like that on our website. Instead, you’ll see advertisements for things that are relevant to you, so for example, discounts on Adobe Creative Suite, discounts on Slack memberships and things like that. We’re very happy with Carbon. Carbon has been really, really good for us because again, it’s very relevant, highly targeted ads for our specific leadership.

Matthieu David: The other format you have is a China podcast. You don’t monetize the podcast if I understand because I’m not listening to any sponsor of the podcast when I listen to you. Could you share about why you started a China podcast and again, what’s the difference? I know you had actually an episode on that. What’s the difference between the West and China on podcasting, or podcasting from China to the West? You had an episode where you were mentioning that podcast is very different in China than to the West because China goes through platforms like Ximalaya and all those which wants to monetize and sell the courses whereas in the West it’s free. Would you mind sharing a bit of the reason why you started a China podcast and the differences you see with podcasting between the West and China?

John Artman: So, yeah, I’ve been podcasting for a long time. I did radio as I mentioned before and working at a radio station, I think there’s a lot of creativity left on the table. So, Charlie Custer, a long time China watcher – I think he might still have his website  Chinageeks.com – and I started a podcast called China Punks and it was just us kind of going through the news in China and giving our own young and let’s say “curmudgeon” kind of opinions on stuff. We never really promoted it and never really got huge, but it was a lot of fun to do. So, when I joined TechNode, I knew that I wanted to do a podcast, I knew that I wanted to do something in audio, because audio and conversations are just fun and I think that, for me at least, I learn through writing, I learn through talking. When you think in your head, you have the kind of swirling around, but it doesn’t really kind of come out until you’re actually trying to communicate them and having people ask you questions and getting feedback, I think, is extremely important for the creative process.

So, yeah when I joined TechNode I knew that I wanted to do a podcast on Chinese tech companies and Western tech companies in China but the talent that we had internally at the time was not quite appropriate for what I wanted to do. I was just kind of on the lookout for an appropriate co-host and I noticed that Matthew Brennon was very active on WeChat. He clearly was an influencer of sorts and also really knew his stuff, and so I reached out to him and I was like: “hey, I’m John, just joined TechNode, do you want to do a podcast?”, and funny enough, we didn’t actually meet face to face probably until about six months or even longer than that of doing the podcast. I originally pitched him to do a podcast only about WeChat, and so, every week we would do a podcast about what’s happening with WeChat, and funnily enough, he was like “no I don’t really want to do that, I don’t want to only focus on WeChat”. So, it evolved really and now we discuss many topics to help people understand the tech scene in China. So, we do some WeChat every once in a while, but we’re actually very broad when it comes to the topics that we cover. So, for example, recently we looked at the social credit system before that was private traffic, we’ve done asymmetry’s between US and China in AI, we’ve covered blockchain quite extensively although not recently and basically anything that we find to be interesting. And then, Elliot Zaagman who also is a contributor invited his friend James Hull with whom he is just having some really great conversations. So, Elliot is a writer and he also does some consulting in China and then James is a professional investor, he used to work for a state-run investment company and now he works for himself managing money for other clients. So, Elliot at one point pitched me: “hey, let’s do a podcast, James and I are having these great conversations, I want to make this a recording” and so we did and actually just the other day, it was their one-year anniversary. So, they’ve been going for about one year. Matt and I, it’s about 2.5 years now, I think.

Your other question was: “what’s the difference between podcasting in the West and in China?”. Well, the biggest difference is that podcasting in China isn’t really podcasting. Or at least the way that we think about it. So, podcasting in the West is very similar to talk radio, where you have one person talking for a long time. Dan Carlin is a great example, hardcore history or common sense, it’s just one guy talking for hours at a time. Or you have podcasts like this one, or the one that Matt and I do, which are one on one interviews or a three-person conversation about a topic, whereas podcasting in China is just audio content. So, you take a lot of the content that’s kind of popular in other formats. It’s only audio, so it could be storytelling, it could be in some case discussions but in most cases, it’s actually educational. People will pay money to basically take an audio course or to gain access to an audiobook, or something like that. It’s much less to do with talk radio, I mean again, there are some shows that are quite popular that are very similar to talk radio, but the bulk of the content that you find on platforms like Lizhi and Ximalaya are in fact more educational or can be storybooks or things like that. A lot of the audio content produced by Chinese people, you’re not going to find on the open web, so you’re not going to find it on Spotify, you’re not going to find it on Apple Podcasts, because you can’t monetize on Apple Podcasts or Spotify.

I mean you can have an advertiser, but advertising in the podcast space is quite difficult and for advertisers, the metrics are still very grey because there’s really no good platform that can give you a 100% saying: “okay; this is how many people actually listened this is how much they actually listened, this is how many people were actually exposed to your message”. In general, that kind of stuff is very difficult on the open podcasting, whereas in China, users will pay directly for the content, whether it’s a 100 RMB for a course, whether it’s like 1 RMB per audio file or something like that and so, it’s actually a lot easier to monetize and to make a business of Ximalaya and Lizhi.

That being said, we interviewed someone who is an early-stage VC based in Shenzhen a couple of months ago and he does three podcasts and all three of those are on Apple Podcast and Spotify, all in Chinese, which is interesting. I don’t think he’s making that much money from it, but then there is another podcast, a friend of mine runs a podcast called BBPark, it’s all in Chinese, it’s all for Chinese listeners, it’s available on the open web but they monetize in kind of KOL method where they actually engage in e-commerce. They have meetups that they’re able to monetize on, and they have a few other things that they do as well to monetize, but they’re very unique because they’ve been podcasting since 2011-2012 I think, so really kind of first-mover advantage, been around for a long time and it’s very, very talks radio-ish I would say. A lot of younger people who kind of grew up listening to the radio, they enjoy listening to it and its young people who host it, so they have a lot of really interesting personality, they’re able to connect directly with their listeners and create that community, but as I said, it’s very unique what they’re doing, whereas in most cases if you want to monetize it has to be on Ximalaya and Lizhi.

Matthieu David: That’s the thing actually, in China I feel that – I don’t know if you feel the same –  the words are similar since we use the word blog in China and in the West we use the word podcast in the West and in China, but actually the real product today is very different. Let’s say blog for instance. I had a very hard time explaining to a Chinese CEO of a big firm that we are getting a lot of attraction on our own blog at Daxue Consulting. He was thinking of a microblog like Weibo or twitter, right? He was not thinking about the long content or the long piece of article, where we were going in-depth, it was not in his mindset, and the ICP regulation, to get to the compulsory ICP you need to have your own website. It certainly slows down or even kills this other guide for a very long article on your own platform and you go on platforms, you don’t have your own website in China. That’s the same I believe for podcasts.

I’d like to talk about Chinese media censorship. Basically, there is Chinese media censorship when you publish content. You are publishing for the West, so, in some way, you are a bit outside of the radar, because you’re publishing in English, but on the other hand, you are in China. Is it a concern for you? Is it a concern to comply with Chinese media censorship regulations?

John Artman: Well, it’s funny because actually, I just learned a new metaphor for something like this. A Chinese tech investor did an interview about the blockchain and I think the interviewee Matthew Graham made a really interesting metaphor. Basically, the anaconda in the chandelier where there’s an anaconda in the chandelier and it’s not really doing much but you’re in a room full of other people and you don’t want to be the loudest person, right? You don’t want to be the one to draw a lot of attention to yourself, because you never know when the anaconda might strike, choosing you because you’re so obvious. So, I guess that’s a really interesting way of thinking about it. I mean, in general, we don’t touch on sensitive issues, in part because sensitive issues are actually outside of our editorial purview. We focus on technology in China, we focus on telling people what’s happening with Chinese companies and certainly, we do ruffle the feathers of the companies themselves, there have been many conversations with companies of various types, about our coverage of them, because that’s journalism.

We tell the truth as we see it or as best as we can about what’s happening inside these companies, why they’re making certain decisions and what their prospects are and so on and so forth. So, we definitely get a lot of pushback from the companies themselves, but I think to your point, we are trying to baste, we are in English, so we are I think to a certain degree under the radar, but at the same time we don’t touch on sensitive issues. I have worked at state media for five years and I think my sixth sense is pretty well developed when it comes to this kind of stuff. We basically stay away from all that stuff, and at the end of the day, it’s not to our detriment either, because again we just want to understand what’s happening, why it’s happening, so we just want to tell people the way it is, and I do think there are sometimes, like especially with my weekly column, that I write when I do have a bit more freedom to go in-depth and have my opinion, there are sometimes, I think, where it does get a bit close to some line, but at the end of the day, it’s still factual.

I’m not here to smear China, I’m not here to create fear mongering or anything like that. At the end of the day, it’s how can we best explain China to westerners through an appropriate Tech media in China for westerners, and I think that there is actually a middle ground to all of this. A lot of people in the West, they want to see China as a boogieman, as an enemy, but I don’t think that China is, and I think that if you want to understand the world, you have to take a dispassionate point of view and that’s certainly what we try to do. So, the short answer to your question is that we cover Chinese Tech companies as well as Western Tech companies in China. Tech is pretty neutral in general and then when it does come to potentially sensitive issues, we try our best to avoid those.

Matthieu David: I’d like to know a bit more about numbers, about how many – metrics about TechNode and your podcast, would you mind sharing a little bit of the audience you have? Who is reading to you? Who is listening to you? Which countries? How many people, if you can share some?

John Artman: Yeah so in 2018 we had about 4 million visitors to our website, 2019 is going to be more than that. When it comes to our podcast, we get about 7000–8000 downloads per episode for the talk. China tech investors are much more niche and so we get a little bit less than that, but in terms of audience, the largest group of people that consume our content is from the United States. So, consistently we see the largest group is from the US, and then the second largest group is from mainland China actually. Looking at kind of our analytics back end we can see that most of the people coming from China are actually English speakers, so maybe they’re European, maybe they’re from the UK, or from some other English speaking country and so when I say mainland China, I don’t mean Chinese readers. Most of them are going to be English speakers. And then I would say, so number 1 in the US, number 2 in mainland China, 3 and 4 are Singapore and Hong Kong. That kind of switch positions and then number 5 in India. We’re very international in terms of our audience but at the same time, the largest by far, I mean our website, for example, around 30% of our traffic comes from the United States, and that’s the largest of any other demographic. So definitely we can see there’s a huge amount of interest in Chinese tech companies from specifically the United States, but then at the same time, there’s also a pretty decent number from elsewhere around the world.

Matthieu David: We’re coming to the last 10 – 15 minutes and I’d like to have your view on some topics which are coming over and over in China about tech. The first one is, why are there so many failures with Western Tech companies in China? It could be a one-hour talk but I’d like your opinion and some ideas, Microsoft has been successful, but it seems to be a bit of an exception when you look deeper. Uber failed, Google for some reason failed in some way, even if they do export advertising, they’re selling ads for the Chinese companies, but they don’t operate anymore in China. So, one can see a lot of players failing in China for various reasons. Some are more political and licenses, others are purely business issues like Uber. So, what’s your take on it?

John Artman: Well, I think that first of all the Chinese market is extremely difficult. I think that even you talk to domestic entrepreneurs and most of the Chinese market is extremely difficult. It’s highly competitive and you have to move fast, extremely fast. If you’ve thought about it for more than a day, you’re probably moving too slowly. Also, for Western Tech companies in China, there is a lot of issues around localization. So, there’s the localization of the product and there’s the localization of the team. So, for example, I think Groupon is actually a really interesting example for Western Tech companies in China. So, I’m not sure if you remember, Groupon came in around 2010-2011 and all of the management in China was done by Americans. So, they flew Americans in and then tried to figure it out and it’s one of those things where the working culture is so different in China than it is in the West. China kind of lacks professional culture, and I don’t mean that in a pejorative sense. I don’t mean that there’s something wrong with it necessarily, but Chinese people don’t think of their jobs in kind of a professional way right, whereas I think that, at least in America, parents kind of trained their children to think this way.

My early bosses really kind of trained me to be this way, being conscientious, scheduling everything, making sure that everything is delivered on time, that quality issues are raised before delivery and things like that. Whereas in China, there’s a very different relationship between managers and employees. The manager is expected to be very hands-on, to kind of tell the employee exactly what to do and to give very extremely specific feedback. And so, I think as a Western manager it has been a bit difficult for me. If you’re a Western Tech companies in China trying to come into the market and you don’t find managers who know how to manage Chinese people, you’re never going to get off the ground. So, yeah, it’s the market, its company culture, and then yeah, localization of the product as well. Localization of the product, localization of the marketing and advertising in China, I think that if you look at the consumption landscape of China, people like games, they love discounts and they love their celebrities. So, these days, of course, it’s moving a lot more to online celebrities, but also it used to be traditional celebrities. I think that there’s a whole suite of different things, but then also it’s also government policy where it has been. I think they’re trying to make it easier actually, in the past couple of years where it’s easier to get a wholly foreign-owned enterprise license, but at the same time you have to know the right people, you have to know the right people to get the license, you have to know the right people to help you open markets, so finding the right managers, finding the right partners, finding the right team on the ground I think is what makes it so difficult for Western Tech companies in China.

Matthieu David: You already answered partly the question I want to ask next, which is: what are the common misconceptions about tech in China? From an observer’s point of view, when you talk to people from overseas and foreign tech.  Actually, in the West and in China, what do you feel are the main misconceptions about what’s happening in China in the tech industry? Do you find some – I’m sure there are many –, of them being podcasting, same way but it’s different, the way it’s practiced, blogging is the same but actually a very different way of doing it. Generally speaking, have you found some parts where there is a misconception on how to analyze the tech scene in China?

John Artman: Yeah, I mean I think that probably the biggest one is related to a podcast episode that we did recently on the social credit system. I think one of the biggest misconceptions is that the government wants to be involved in everyone’s life. 

I think that, historically, if we look back to the founding of the people’s republic of china and kind of the evolution of the communist system here, the government used to want to be very involved. The success of the state-led capitalist system that we see now has been in fact a part of that story. It’s been the story of the government slowly kind of receding from everyone’s personal life. It used to be that the people that you worked with are the people that you married, the people that you lived with and everything was very, very controlled on a business unit basis.

These days it doesn’t happen anymore, and so if we take a look at the social credit system, for example, number one – that system was more designed for a private company or companies, the state-owned and non-state owned. And then, over the last few years, there has been some more exploration of applying it to individuals, but a lot of it is still applying it to individuals in the context of business malpractice, of not repaying your debts. Not replying or complying with court orders and things related to business malpractice. So, if your company kills people because you created a low-quality product, then, well, your social credit score is going to be affected. So, no, the government doesn’t want to be involved in your life, I think that we are going to see probably more tracking of behavior, more analysis of behavior, but I think it’s going to be very similar to tech companies where at the end of the day the government is much more interested in aggregate behavior.

So, how are we enforcing those traffic laws? Are people following commercial laws? How are we enforcing those commercial laws and so it has much less to do with today this person bought oatmeal? Why does the government care about that? They really don’t. It’s much more about broader social management questions as well as broader economic management questions. I think for a westerner, for an American, who is raised to be very individualistic and to treasure freedom of speech and freedom of behavior, whatever that means, it’s very difficult to wrap your head around and ultimately accept. I’m not sure I’m comfortable with it. I can kind of explain it a little bit as I did before, but it still feels weird. Just because it feels weird to me doesn’t mean that it’s necessarily bad. I think that any technology is open to abuse, but at the same time what china is trying to do with a lot of their technological governance systems is really trying to solve age-old problems. There’s a phrase in Chinese that says: “the mountain is high, and the emperor is far away”. China has historically had amazing amounts of problems enforcing central government policies and even on a provincial level, and so this is just one way to leverage technology to actually implement real enforcement mechanisms and to actually create more trust in society as well as trust between individuals, trust between customer and a company. Then, also trust in the government that the government is actually going to be enforcing laws and regulations. 

Matthieu David: True, social credit I think is the example of misconception from the West in China and portraying something very new, and it’s not that new actually. My last question is concerning your industry and yourself, towards your peers. How do you stay up to date about China? How do you stay up to date about the news? You mentioned Weibo as a source of inspiration for a round table, I think. Now, what are the best sources you would recommend using, of course, TechNode and your podcast, but beyond that, what would you suggest using to be up to date on China?

John Artman: Well, I would say in the English language there are two main resources; one is Sinocism by Bill Bishop. So, Bill Bishop has been a China watcher for many, many years. He used to live in Beijing, so he does a daily newsletter. Well basically he aggregates and curates news stories about China and that’s one of the main ones that I read. Then there’s another one called SupChina. SupChina is much more focused on culture, whereas Bill Bishop is much more focused on politics and business I would say. SupChina is very focused on culture, but both are very, very good resources for keeping up to date. You spend 15-20 minutes reading these newsletters every morning and you’ll pretty much know what the big trends are, what are the big discussions going on and things like that. In Chinese, I would say there are a few resources when it comes to understanding the tech scene in China.

One is – I kind of hate saying it because it’s also our competitors in the tech media in China for Westerners industry– cn.technode.com. That’s obviously a resource, but then apart from that there’s 36Kr, so 36Kr.com – so that’s a technology media. PingWest is also one, their website is really kind of my main sources when it comes to tech news in Chinese. Hushio is a good one for kind of longer-form essays and it’s usually not just tech but it’s also business, and then, of course, there’s Tencent and others, and kind of like the news aggregators where they have huge teams, but they don’t actually do much original reporting. So, I would say those are my main sources of information about China.

Matthieu David: Thanks. Thanks very much for your time John. It was very, very interesting, and I hope you enjoyed it and hope everyone enjoyed it. Thanks for listening and thanks for participating.

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.

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

This article Podcast transcript #88: How do media cover trends and news around Chinese tech companies? is the first one to appear on Daxue Consulting - Market Research China.

A large number of traditional flowers from a variety of regions in China have developed a rich culture of flowers. These include the peony in Luoyang, the plum blossom in the Yangtze River basin, the camellia in Jiangsu and Zhejiang as well as many others. During the Ming and Qing Dynasties, Hua Xiang, a region adjacent to Beijing, became the base for flower production made exclusively for the court. Farmers in Canton, at that time, began to produce ‘Nian Hua’, a flower sold on the streets. These two developments began the commercialization of local flower traditions in the country. After China reformed its import policies, foreign flowers have rushed into the Chinese flower market. This influx of foreign business helped shape the formal flower industry by infusing foreign business concepts and cultivation techniques into the industry.

The Current State of The Flower Market in China

A study conducted by the Chinese Ministry of Agriculture in 2016 shows that there were 79,512 flower companies in China, including 14,108 large and medium-sized companies with a planting area of at least 3 hectares or with an annual turnover of 5 million yuan. The study also reveals that there were 1,639,133 florists, 5,053,523 employees, and 247,616 technical experts in the Chinese flower industry. Although florists do not have the industrial and commercial registration that large companies possess, their production sales and output are not any lower.

Characterized by large-scale flower plantations, industrialized operations, and exports of numerous flower brands, Yunnan Province has transformed from a flower production base to a market-oriented base in China.

By the end of 2017, more than 12,000 households of over 400 florist cooperatives have registered with KIFA (the Kunming International Flora Auction Trading Center), with total flower farmland exceeding 2,600 hectares and an output value of about 450,000 yuan per hectare.

Trade volume of KIFA has maintained double-digit growth, selling 6.53 billion cut flowers worth 5.4 billion yuan in 2017.The Trend of Online Flower Business in China

The flower market in China has developed rapidly since the Chinese consumption upgrade. Multi-channel retailing has emerged in the Chinese flower market, driving the rapid growth of online flower sales. According to incomplete statistics from the China Flower Association, there were 2,980 flower vendors in China in 2017. The sales of fresh flowers reached 10 billion RMB, of which online sales exceeded 50%.

The scale of the online flower business in China

The market size of the Chinese online flower business in 2017 was about 23.5 billion RMB. In 2018, it reached 36.6 billion RMB, of which Taobao’s sales were nearly 15 billion RMB. The number of online merchants and products was about 400,000 and 25 million respectively.

[Data source: iiMedia, “Market size of Chinese flower business”]

With the expansion of consumption scenarios, the demand for flowers will further increase with more categories and service optimization.

Industrial structure of Chinese online flower business

Chinese online flower suppliers have formed into three main echelons according to different target groups according to customer transaction and other variables. High-end brands include roseonly and Beast野兽派, whose per customer transaction is over 500 RMB. Mass brands include Teddy flowers, FlowerPlus, CWZ Flowers(春舞枝花卉), huaji(花集), whose per customer transaction is between 100 to 200 RMB. As for e-commerce platforms including Taobao, Tmall, and JD, their per customer transaction can be even lower.

[Source: daxue consulting, “Industrial structure of online flower business in China”]

Customer willingness to adapt to the online flower business in China　

Based on data from iiMedia, 63% of Chinese netizens have heard of the online flower business and 36.1% of them once purchased flowers through these platforms. The majority of them know about the Chinese online flower business through online and offline promotions, which include experiential and emotional marketing.

[Data source: iiMedia, “Distribution of netizens’ usage and knowing channels of online flower ]

In terms of customers’ preference, B2C platforms such as FlowerPlus, Reflower(花点时间) and AmorFlora(爱尚鲜花) are used more frequently by netizens; while the customers of   Flowerexpresses (鲜花说) has expanded since launching B2C business in 2016. Although the usage of high-end Chinese online flower business platforms such as Roseonly and Beast are relatively lower, their customers are all high net worth users with strong purchasing power.

[Data source: iiMedia, “Customers’ preference of online flower business in China”]

Case Study: How Chinese Flower Brand Beast Succeeded on the Chinese Online Flower Market

Beast is a homegrown brand, which is regarded as the pioneer of the Chinese O2O high-end brand by British Wallpaper Magazine. It has run an online flower business in China since 2011. Currently, it also provides high-frequency products including clothes, cosmetics, furniture, etc. The beast targets high- and mid-end consumers and aims to represent floral and artistic life. Though the Beast is a young brand, it has a good performance and strong competitiveness in the Chinese flower market. Let’s see how it explored an effective online flower business system in China.

How Beast Established its online flower business

Beast started its online flower business in China from the Weibo store, which is an experimental studio and only serves consumers who live in Shanghai. This allowed Beast to successfully create an exclusive brand image by providing unique and customized service to a limited number of customers.

[Source: daxue consulting, “How Beast runs business on Weibo”]

Beast expanded its online flower business by establishing a brand-owned official website in 2012. Three years later, Beast cooperated with the online marketing strategies of Tmall in various ways to stimulate sales. After Beast entering Tmall in 2015, the sales of the brand had seen a ten-fold increase in the period of three years. Tmall also supported the brand to further extend product segments and seek new opportunities.

[Source: daxue consulting, “Beast cooperated with marketplaces to expand business”]

Beast’s successful branding strategy helped the brand to realize dramatic growth in the marketplace and avoid brand dilution at the same time. And then, it continuously established self-owned channels, which include the brand app in 2016 and the WeChat store in 2017.

[Source: daxue consulting, “Sales channels of The Beast”]

The Beast began the business using brand-owned channels and entered the marketplace relatively late, which enabled it to leverage e-commerce platforms to drive public traffic into its private traffic pool to improve customers’ retention and repurchase rate. Based on accumulated users’ data and feedback, it can optimize services and products before establishing new sales channels.

Beast’s online marketing strategy in China

Leveraging the power of famous IP, successful brands and popular celebrities

[Source: daxue consulting, “Beast’s online marketing strategy in China”]

Beast leverages the power of famous IP, successful brands and popular celebrities to create a series of hot topics which can improve brand awareness in its extension segments like FMCG.

Beast announced its cooperation with Li Xian李现 (popular Chinese actor) in September 2019. The topics reached 190 million views and 127 thousand discussions, successfully raised the public’s attention and improved brand awareness.

Creating emotion connection with consumers through story marketing

[Source: daxue consulting, “Beast builds emotional connection with customers”]

Story marketing is another of Beast’s online marketing strategies in China. The brand shares buyers’ stories anonymously with flower’s photo on Weibo, which brings romance to their products. By telling the story, Beast identifies the voice and tone of the brand. Each story behind the order helps the brand build strong emotional connections with viewers, who would share their thoughts and personal experiences in the comments section. The emotional tie greatly improves brand acceptance and allows premium prices.

Realizing further growth by brand expansion

[Source: daxue consulting, “Beast’s current products category”]

Beast introduced more high-frequency products to improve brand awareness as well as brand loyalty. Thanks to Beast’s strong emotional connection with consumers and its powerful brand image, those related products and new categories can have high acceptance levels in the market.

Through product segments extension, Beast successfully transformed itself from a flower brand to a lifestyle brand.

Three obstacles in Chinese flower industry

However, the flower market in China is less competitive than other international markets such as that of Holland which is famous for flower production. This is due to three main reasons.

Lack of innovation in the development of new species

For flower production companies in most countries, it is important to cultivate new strands of species to differentiate their flowers and increase their sales. China has both the resources and ability to do this, but the lag of protection for new varieties has prevented companies from doing so.

Lack of large-scale production companies

 The majority of the farmers in China only hold small production areas and usually the employees consist of family members. Most families of Chinese flower farmers consist of 2-3 people making an annual revenue only in the tens of thousands of RMB. The number of the farmers is only 20 times that of the number of firms. Furthermore, only 14,108 large and medium-sized companies exist among 79,512 firms, making up only 17.7% of the total. Unlike most large countries, no firm dominates the flower market in China; the production areas are small, and the revenues are even smaller.

Lack of emotional connection with customers

Information transmission channels have changed during the Internet era. The young generations have become the main purchasing power of flower market in China. In this context, utilizing social media to quickly disseminate products’ information and catering to the preferences of young consumers are important for establishing a brand that can meet the emotional needs of consumers.

Brand independence is how Beast captured the hearts of Chinese consumers

Beast is a good example of running an online flower business in China. It started with Brand independence and leverages e-commerce platforms to boost sales and reach new customers. It successfully builds an emotional connection with customers and drives them into its private traffic to improve customers’ retention and repurchase rate. Private traffic is also a strategy of Brand Independence, which is worth learning more about to imitate the Beast’s success. If you want to learn more about how your online business can work with private traffic, you can read our article, email our project team at dx@daxueconsulting.com to start your China market strategy project.

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This article The flower Market in China: How one brand captured the online market is the first one to appear on Daxue Consulting - Market Research China.

With the increasingly intense competition in e-commerce in the Chinese B2C market, customer acquisition cost will be higher. So, marketers are exploring new cost-effective methods like private traffic. This article will help you learn about private traffic in China and how to establish your own private traffic pool.

The Recent Development of Private Traffic

Private traffic is frequently discussed in the context of social e-commerce platforms’ popularity. Monetizing of public traffic pools becomes difficult in the competitive e-commerce environment. So, many companies now dig more value from regular customers and target them using private traffic. Also, private traffic is valuable to consumers because it gives them intimacy with the brand.

The trend of Private traffic in China

[Source: daxue consulting, “Searches of private traffic in 2019”]

Based on searches of ‘Private Traffic’ on Baidu, we can see the trend took off in early summer 2019. Four times higher search index on Baidu shows that “private traffic” showed up more in Chinese marketers and consumers daily life. With several successful examples emerging in the market, more people want to learn how they can leverage private traffic.

Consumer willingness to join private traffic pools in China

[Data source: iiMedia, “Acceptance level and distribution of private traffic in China”]

Private traffic depends on consumer willingness to join private traffic pools and interact with brands. The data from iiMedia Research illustrates that 30.8% of the respondents indicate they support private traffic operations, 61.6% of the respondents are relatively neutral and only 7.6% of the respondents express their dislikes. Analysts reckon that the high acceptance of private traffic is due to online marketing in China becoming more common. On the one hand, it is difficult for netizens to avoid being marketed. On the other hand, content marketing solves the pain point of users’ information asymmetry and brings value to them.

Private traffic explained

Private traffic refers to the traffic which can be fully managed by the brand, without relying on any third party or paid channels. It is free from the algorithms of large ecommerce platforms like Tmall and JD, putting the brand in control of how consumers see their products.

Differences between public and private traffic

[Source: daxue consulting, “Differences between public and private traffic”]

Private traffic helps brands contact consumers directly and improve consumer retention rate. Brands can focus purely on target consumer groups while saving money on acquiring traffic.

In contrast, public traffic in China highly relies on platforms and external channels, so it normally requires high cost on getting traffic and makes brands have less control over the traffic. Despite these channels can help the brand reach a wide range of consumers, it’s still hard for brand to achieve customer retention.

[Source: daxue consulting, “Daxue consulting private traffic in China – Different logics of public and private traffic”]

In addition, compared with public traffic in China, private traffic allows brands to reach customers with good continuity. Shopping assistants and Key Opinion Consumers (KOCs) can provide one-on-one service for customers. By offering product-related expertise knowledge and useful information, it is easier for brands to build trust among consumers. After the trust continues to deepen, consumer shopping behavior will extend from individuals to families and friends. Hence, the private traffic will become fission marketing and generate a positive circulation. So, the conversion and repurchase rate on self-owned channels are naturally higher than that on Chinese B2C E-commerce platforms.

Why is Private Traffic So Attractive？

Establishing a private traffic pool can help a brand reach customers easier at a lower cost, as compared with Chinese B2C E-commerce platforms. There are mainly three advantages that a brand can take as below:

More cost-effective

Like owned traffic in the West, private traffic is a direct response to the rising costs of reaching fans and followers.

The customer acquisition cost of Taobao in 2013 was 30 yuan per person, and by 2017 it had risen to 250 RMB. During the 11.11 promotion, some brands ’public traffic procurement costs 20% -30% of total revenue. Merchants have to buy traffic during each event, but the distribution of traffic on the Chinese B2C E-commerce platforms is unbalanced according to the reported that 80% of Taobao’s traffic is given to the top 20 merchants.

[Data source: Analysys, “Customer acquisition cost of Tmall and JD”]

Based on data from Analysys, customer acquisition cost of Tmall increased by 60% from 2015 to 2017 while JD increased by 164% during the same period, both of them exceeded 250 RMB. However, customer acquisition cost of private traffic is much lower. For example, Perfect Diary can attract consumers enter its private traffic pool with only 2-3 yuan for each.

Improving brand image and conversion rate

In the public traffic pool, the brand can hardly rebuild connection with users, who once purchase its products. However, by having its private traffic pool, the brand can develop closer relationship with customers. Also, it can help to improve brand image through the word-of-mouth promotion from regular customers to new ones in customers’ community. This kind of behavior will have a superimposed effect, which is much more effective than common promotion method.

Getting closer to customers

Before introducing new products, companies need to do a wide range of market research to meet market demands. With the private traffic pool, companies can collect needs and feedback from consumers directly. Private traffic can effectively reduce churn rate, especially when the brand interacts with customers in a more human-like and personalized manner. By operating private traffic pool and establishing emotional interaction with users, the products recommendation will not be blocked as annoying advertisings, but accepted easily by consumers.

How Private Traffic Work

Traffic flow in Private Traffic

[Source: daxue consulting, “Daxue consulting-private traffic in China – General logic of private traffic in China”]

Directing traffic to a private traffic pool is based on five steps: acquisition, activation, retention, revenue and referral.

A brand funnels traffic from public pools (like e-commerce marketplace platforms) to private pools through attractive content, QR codes, and consumer benefits. Then it operates its private traffic to awaken silent customers, improve customer stickiness, retention and repurchase rate.

Three models of operating private traffic in China

There are three main models of operating private traffic. First, the shopping assistant model is suitable for new brands. The professional model, or Topic Expert model, is focused on educating consumers. The private partner model is usually suitable for luxury goods or education and fitness industries

[Source: daxue consulting, “Daxue consulting – Models of private traffic in China”]

Model 1：Shopping assistant

The shopping assistant model is suitable for new brands. It is a one-to-many relationship which helps early users understand the brand. Brands leverage social media platforms to share products’ using experience and promotions with consumers in the private traffic pool. This model meets customers’ demands of acquiring rich information conveniently and special benefits. This model can be compared to a retail associate in a department store.

Similar to how Watsons’s shop assistants provide services for consumers in store, such as skin tests and makeup trials. In the shopping assistant private traffic model, customers can add shop assistant’s WeChat account, thus they can have after-sale services, personalized service and information of new arrivals.

Model 2：Topic expert

Topic expert is suitable for targeting consumer groups in the professional or lifestyle categories. A brand with core cohesion, such as Nike, gathers fans to establish an interest community, organizes offline activities like running, yoga and so on. It can attract individuals, who need sense of belonging and relevant knowledge and improve customer’s stickiness. In the case of Nike, the topic expert would be like your fitness-obsessed friend, who can tell you what shoes to buy for running vs. basketball, and what to bring to your first Yoga experience.

Model 3：Private partner

Private partner model is usually suitable for luxury goods or education and fitness industries, whose customers need valuable and personalized services. Many educational institutions adapt this model to manage users hierarchically by one-to-one services. They usually organize offline events instead of pulling customers to their community directly. The private partner is like the digital version of an advisor or consultant, who can provide personal guidance and exclusive advice.

How to establish private traffic ecosystem on WeChat?

[Source: daxue consulting, “WeChat ecosystem of private traffic in China”]

First, create a personal account on a platform like WeChat to interact with customers and provide personalized services. Second, share high quality content on WeChat moments to promote content and gather interest in your brand. Third, drive public traffic for brand-owned sales channels such as mini-program to effectively connect ecommerce and social media marketing. Finally, integrate and correlate the whole ecosystem through public account, which can provide entrance to its mini-program on its homepage and posts to complicate the traffic circulation.

If you want to learn more details from operating private traffic cases in China, you can read our case study about Perfect Diary, a Chinese cosmetics brand that has grown 50-fold through a private traffic strategy. Because platforms like Taobao and JD are becoming more expensive, now is the time for brand to gain independence from these platforms by establishing private traffic in China. If you want to know how to get brand independence in China, email our project team at dx@daxueconsulting.com to start your China market strategy project.

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At the beginning of the 21st century the Chinese government began to make systematic use of new mediating technologies to measure the trustworthiness and financial creditworthiness of individuals and businesses. Establishing an online financial credit system was seen as key to better integrating China into the global market economy. The first credit-scoring companies were established in the 1990s, and following this the People’s Bank of China (PBC) established an enterprise and personal credit database. While initially focused on financial aspects like loans, the system was extended to the measurement of personal and corporate trustworthiness in relation to contract fulfillment and legal commitments. Discontent with widespread corruption in private and public institutions and with fraudulent company practices officially encouraged the Chinese government to launch a plan in 2014 for a full-blown national social credit system (SCS).

The “Planning Outline for the Construction of a Social Credit System (2014–2020)” focuses on restoring trust and improving ‘sincerity’ in government, commercial and societal affairs. Furthermore, it aims on raising judicial credibility and the ‘honest mentality and credit levels of the entire society’, with international competitiveness and a ‘harmonious Socialist society’ as the ultimate goals. Hence, the system isn’t only directed at citizens, it also targets businesses, and the Chinese government itself.

Does China’s social credit system seek to address the issues within the market?

The current legal system of regulatory checks and balances guiding the Chinese market is weak. There is widespread rule-breaking in areas such as IP violations, contracts, environment, labor violations, tax, and scams and fraud. As a result, this has fostered a low-trust market environment.

To address these issues, China’s social credit system seeks to set up a regulatory architecture to gather data on people and companies to define and determine trustworthiness. This serves as an info-intermediary to inform the government and regulators, and to grade all players within the greater business ecosystem such as companies and the public so they can take action. And lastly, to turn these data gathered insights into actionable and legitimate determinations that either restrict market access to those who don’t follow the rules, and to improve market access for those who do.

How does the social credit system help execute the government’s plan?

For China’s social credit system to work effectively there needs to be data interoperability between businesses, the local government, and Beijing. At present no single government agency has enough data or power to carry out the tasks detailed by the SCS alone. Therefore, the social credit system was created to bring all of China’s state agencies together to share data and cooperate in restricting market access to rule-breakers. It is made up up three interconnected components: a master database, the blacklisting system, a punishment and rewards mechanism. Beijing seeks to use these three primary components in conjunction to guide China through the next phases of development.

Connecting data across all state agencies: How it’s collected and where it’s stored?

To solve the issue of data interoperability, the National Development and Reform Commission (NDRC) created the National Credit Information Sharing Platform (NCISP) (全国信用信息共享平台). The NCISP is controlled by the central government and is the primary clearinghouse for social credit files on individuals and corporations. Government documents lay out in great detail exactly which records the central database will contain, which government agency will contribute which datasets, as well as which records will be open to the public and which won’t.

The NCISP is divided into 3 groups, with the top at the national level, the middle at the provincial level, and the municipal at the lowest level. In looking at the diagram below created by Trivium China, each center node is surrounded by a wide range of societal institutions, government bodies, and business organizations, with each having its own database, ratings standards, and blacklists. Data flows from the outside nodes to the center, and then from the center node up to the higher levels of government. Therefore, it is no wonder why pulling together this data, both structured and unstructured would lead to issues of interoperability. And as a consequence, may lead to legal errors, system inefficiencies and bureaucratic irresponsibility.

[Source: Trivium China, National Credit Information Sharing Platform]

Relevant authorities for implementation and enforcement

The National Development and Reform Commission and the Central Governmental Agencies designed the national discredited blacklist and credited redlist system, constructed the cyberinfrastructure to publicize information, and built the multi-agency joint sanction cooperation to punish discredited people. Yet it is mostly the local governmental agencies that implement these policies by collecting and uploading data, classifying and punishing people. Interestingly, many local governments also construct their own municipal SCSs and reconfigure the meaning of “trustworthiness” and “credit” in their local practice. Unlike the severe fragmentation among different agencies in the central government, local governmental authorities can better coordinate (or force) different departments to work together at the local level.

While there is still no cross ministry SCS agency at the central governmental level, municipal governments will commonly establish a new municipal governmental agency, for example, often with the name “XX SCS center/office,” to design and implement municipal SCSs. Although some cities’ municipal SCS for businesses are divided according to the different social fields under different governmental jurisdiction, the municipal SCS for individual persons is always united into one system on the local level. (See figure below for further details on the SCS for individual persons).   

Thus, the system is very intricate, with a multitude of players seeking to govern a field while simultaneously designing, implementing, supervising, cooperating, and inputting data into various systems and labelled blacklists. When different actors in different industries and professions bring their own formulas to solve the problem and contribute to the system there results in a lot of position overstepping and mismanagement.

[Relationships among social credit systems for natural persons in China]

China’s social credit system is a merging of technologies

China’s social credit system is run by the state. But its development and functioning relies heavily on close cooperation with big Chinese internet companies like Alibaba, Baidu, Tencent and SenseTime. These provide technical infrastructures, and mine and process huge amounts of data harvested from countless sources and data-points, including geo-location and online payments. Simultaneously, the government is constructing several national data platforms for collecting, storing, sharing and mining population data with a focus on ‘integrating these separated platforms into centralized data infrastructures.

For example, one of the more famous and widely used apps Alipay has a form of credit collection, namely the Sesame Credit score. In practical use, Alibaba has begun to leverage the app’s popularity to try to solve a conundrum such as the lack of trust between buyers and sellers online. In 2016, Alibaba signed another data-sharing MOU with the central government, promising to expand its involvement in meting out penalties and perks. Agreements like these between China’s digital ecosystem strong players are only the beginning of a slow integration between the SCS and the world of e-commerce and digital payment.                                   

Although some commercial companies, such as Ant Financial and Liulian Technology (Shenyang), helped different governmental agencies to build their own SCS models or cyberinfrastructures, there is no evidence that commercial SCS data is included in any municipal governmental SCS calculation to date.

[Source: Alipay Screenshot, Ant Financial’s credit system]

How do businesses search for information on companies and punishment measures?

Businesses can find all related information regarding the SCS on the NCISP. Below are translated examples of what the menu looks like when performing a “search” for registered companies using their social credit numbers on the platform. A searcher can begin by choosing a city or by company SCN. Furthermore, by scrolling alongside the left side menu, you can see the respective ‘punishments’ the SCS is responsible for to companies who break the rules. As you go down the list the punishments become more severe. They go from listing an entity as merely partaking in an abnormal operation to labeling it a “dishonest entity.” Then from exposing companies to random checks to handing out administrative punishments, freezing assets, and on to sending out cancellation notices for business closure. And lastly, to being blacklisted. Thus, the repercussions for all businesses in China are not to be underestimated.

[Source: National Enterprise Credit Information Publicity System website, China’s corporate social credit system website explained]

To provide a case example of how the SCS works, recently there was an announcement from the Shandong Provincial People’s Government. It reported that to “reduce corporate credit risk” (降低企业信用风险) during the current Coronavirus (nCoV) crisis, enterprises with delayed deliveries, deferred payments, overdue contracts, and other dishonest behaviors will not be put on the dishonest entities black list. Below is a translation of the text, which is declared on the 12th measure.

  [Source: Shandong Provincial People’s Government]

What companies need to know about the blacklists and redlists

The “blacklist & redlist” mechanism is widely used across different sectors to build the social credit system. A blacklist is a public record of companies (and individuals) found in serious violation of existing regulations. A redlist is the opposite – a public record of companies (and individuals) that have been consistently compliant. Blacklists are for entities with adverse credit information and redlists are for entities with good credit information. Important to note is that insofar blacklists are not yet centralized, but rather the state, provincial, municipal and local agencies manage their own blacklists. The primary focus of most of these blacklists is on the regulation of malpractice in the business environment.

How Blacklisting Works?

• Step 1: State agency determines the company is non-compliant
• Step 2: State agency puts the company on a blacklist
• Step 3: The blacklist is sent to the NCISP and included in the company’s social credit file in the master database
• Step 4: Other state agencies get access to the blacklist
• Step 5: The public can see blacklist data as well

The system for blacklisting is very complex and organized by different agencies and by different levels of government. Below is a table chart which outlines some of the categories, leading agencies, and purpose and subject of their blacklisting mandate.

[Leading agencies involved in China’s social credit system blacklisting system]

Here are a few ways in which companies can be put on the blacklists

• Not honoring legal obligations
• Failing to pay employees
• Fraudulent financial activity
• Tax evasion
• Import-export offenses
• Endangering public health and safety

However, this list is set to get much longer as regulators in the fields of medicine, travel, education, sports, agriculture, e-commerce, energy, and others start to create and hone their own lists to discourage behavior like:

• Excess energy consumption
• Polluting the environment or endangering ecology
• Operating without the right licenses
• Safety violations and accidents
• Counterfeiting, fraud, and IP violations
• Poor production quality

Redlists are structured along similar likes as blacklists: there are a few big major redlists at the national level, and then a whole series of local redlists at the city and provincial levels

What is in China’s Corporate social credit system?

• Basic company registration data
• Braches/Subsidiaries
• Executive-level personnel
• Annual Reports
• Social insurance payment history
• Provident fund deposit history
• Administrative licenses
• Administrative penalties received
• Inspection records
• Awards and honors
• Utility payment history
• Red and blacklist records
• Equity structure (shareholders, legal representative, stock info)
• Tax information (taxes paid and owed, tax rate, tax period, etc)

Important to note is that most of the data from above do not come from high tech sources, but rather are derived mostly from the records generated in the course of your business operations such as customs, tax, and utilities. Furthermore, regarding the data above, some of it is self-submitted, like the annual reports and details of personnel. So in essence, there currently still remains a small level of control.

Social Credit Score components for companies

There are five ancillary aspects of the SCS that only apply to companies and organizations.

1. The National Credit Information Publicity System
2. Unified social credit numbers
3. Company grading systems
4. The new random inspection system
5. Credit commitment letters

The National Credit Information Publicity System

Corporate social credit records are available to the public via the National Enterprise Credit Information Publicity System (NECIPS) 国家企业信用信息公示系统, a website which contains compliance data on any company with a license to operate in China, including local subsidiaries of foreign companies. NECIPS’s public records include information on key shareholders and personnel, operational licenses and permits, inspection results, notices of company dissolutions, notices of frozen assets, operational irregularities, and any past violations.

NECIPS is set to become ground zero for corporate due diligence, and will be a key resource for companies to monitor the state of their own credit records. But the site is more than just a clearinghouse for data discovery; it’s also a data management portal. Company representatives can sign up for an account and upload basic company data and annual reports.

[Source: China’s enterprise social credit publicity system screenshot]

Unified Social Credit Numbers

In 2015, as a preliminary stepping stone to implementing the enterprise social credit system, the central government began assigning a new code – the Unified Social Credit Number (统一社会信用代码) – to each domestic company and organization. The USCN has now replaced traditional business license numbers on business registration certificates as the primary code by which an enterprise is identified. A USCN can be used to search for information on any China-registered company the National Enterprise Credit Information Publicity System.

[The Unified Social Credit Number is circled in red]

Corporate grading systems

As we’ve seen in previous sections, under China’s social credit system, market regulators will treat companies differently depending on their social credit record. Companies with good social credit will enjoy simpler bureaucratic processes, decreased inspection rates, and other perks. Companies with poor social credit may have higher taxes, be subject to more frequent inspections, be barred from participating in government procurement, and other repercussions.

The determination of who has good credit and who has bad credit will largely be based on four different types of grades that companies will receive: Comprehensive Public Credit Rating, Operational grades, Industry association grades, and Financial credit scores.

The new random inspection system

In 2015, Chinese regulators took a step towards cracking down on corruption by implementing a new safety and production inspection system called “Double Random, One Open” （双随机，一公开), wherein both the company to be inspected and the inspector are randomly selected (hence “double random”), and the inspection results are openly published (“one open”).

[Double Random, One Open inspection system notification]

The government’s goal here was to standardize the timing of inspections so that inspectors can’t excessively target one company while ignoring another, and to standardize the inspection process so that inspectors don’t have as much discretionary decision-making power. While random inspections aren’t a core component of the SCS per se, the results of these inspections are publicized on the National Enterprise Credit Information Publicity System website, and are included in a company’s social credit file.

Credit commitment letters

One of the most recent additions to the SCS is something called the “credit commitment system”, which was introduced in a national policy released in July 2019. The system encourages companies to sign standardized letters promising to operate in good faith and to honor social credit regulations.

Signed credit commitment letters are openly published on the National Enterprise Credit Information Publicity System website and are included in the company’s social credit file. Companies with good credit who have signed credit commitment letters may have various bureaucratic applications pre-approved on the strength of their promise.

Myths & weaknesses of China’s corporate social credit system

The SCS is not a fully integrated and unified system, which is often the way it is portrayed in the West. In practice, the system is highly fragmented and technically complex, consisting of a variety of social credit initiatives and projects at the local and regional levels that will unlikely be fully integrated at the national level. The data is not high tech and new. Regarding the definition of trust. The idea that the social credit system will artificially increase levels of “intentional trust” may not materialize. Therefore, SCS may not address the actual underlying social issues. Lastly, there is high potential for abuse. If the system is built in such a way that it is open to abuse, allowing fraudulent companies to come away with good credit records, it will call into question the entire system’s validity.

Uneven implementation across industries

While it is clear that the SCS will eventually have ramifications for every company doing business in China, policymakers have placed a special focus on implementation in industries they feel are most in need of regulation. This has been particularly evident in the roll-out of Comprehensive Public Credit Grades, the central government’s new four-tier rating system for enterprises. 

In September 2019, the NDRC announced the completion of credit evaluations on 33 million Chinese market entities. To put that into perspective, there were 34.7 million total companies registered in China in 2018, so the evaluation covers most registered companies in the market. But only a tiny portion of those results have been made public. Furthermore, these ratings have not been incorporated into any of the searchable, centralized platforms, but published in Excel spreadsheets. Also, there has been no word on whether or not these grades will eventually be added to, and viewable via, the main public portals.

Data dispersion

Two main platforms were created to serve credit data to the general public: the Credit China website and the National Enterprise Credit Information Publicity System (NECIPS).  But data sharing between the two is patchy at best, with records that appear on one often being unsearchable on the other. Making matters worse, several state agencies host their own credit data platforms with equally poor interconnectivity, haphazardly transferring data from and sharing data with NECIPS, Credit China, and each other. 

Boundaries of the system aren’t clearly defined

Social credit policy at the national level has encouraged provincial and city governments to extend the system by developing blacklists, rewards, and punishment schemes for their own jurisdictions. But policymakers are very much aware of the social credit’s potential to exceed its own mandate. Deputy Director Meng Wei stressed that social credit must have a clearly defined legal basis, and outlined the “Three Prevents”:

1. Preventing credit record data collection from expanding beyond reasonable and appropriate boundaries.
2. Preventing the unauthorized creation of blacklists and related punishments.
3. Preventing the unauthorized or illegal applications of the credit system.

What we know

• China’s corporate social credit system will be used more broadly to regulate the commerce sector. In June 2019, the State Council released a guidance document that calls for establishing three components — a credit commitment system, a credit report mechanism, and a classified credit regulation — as the basis for inspecting businesses.

• China has already built credit profiles for 33 million enterprises and organizations, including foreign companies. By some estimates, over two-thirds of China’s regional governments have released or are in the process of releasing local social credit initiatives. 

• Companies will be evaluated based on compliance with their specific industry regulations.

• There is no set of blanket standards guiding how companies will be evaluated. Instead, China’s central and local governments have published a total of 1,500 documents defining over 300 rating requirements for companies in different industries, but several have yet to be released. Understanding exactly which types of criteria companies will be evaluated on will be crucial to maintaining a healthy score.

• Companies can land themselves on both a blacklist and a “red list.” So far, China has compiled a total of 51 blacklists for non-compliance with laws and regulations.

• The blacklist for the commercial sector has been divided in two parts: the joint credit punishment list for dishonest entities, which restricts a company’s direct sales and commodity quotas, and the special attention list, about which not much is known other than companies that find themselves on the list will face “stricter regulations.

What we don’t know

• What the rating system will look like? Recent policy documents have made mention of a “Comprehensive Public Credit Rating” (公共信用综合评价) which is a national corporate credit evaluation that will determine how companies will be treated depending on their social credit scores. But exactly what the rating will look like, and how much it will matter, has been unclear.

• It is unclear how the national-level rating system will synchronize with the various rating systems developed by local governments and industry regulators, whose ratings will also be taken into account in the comprehensive evaluation of a company.  But, it has been reported that while the national-level rating will serve as a foundational metric, city and provincial-level ratings will take priority.

• Can (and how fast will companies be able to) get off of a blacklist?

In summary, there are many questions to be answered. Like, will there be a meta-score based on all the available ratings for every company? A standardized system for the types of treatment companies will receive based on the results of their evaluations? How the algorithms will calculate the score? Will it be immune to biases against foreign companies? Strategic industries? However, the draft PRC Social Credit Law might answer some of these questions, but for now, the timeline for this legislation is unclear. 

What does the enterprise social credit system mean for companies operating in China?

Carrying out the above steps will bring a company up to date and position it well to effectively manage the effects of the Corporate SCS. However, as the System continues to adjust, expand and improve, companies need to stay on top of further developments. An effective monitoring system that provides companies with the ability to react quickly needs to cover two dimensions. First, the close observation of government-side changes to ratings and rating requirements. Second, the internal monitoring of business operations with regard to the sustained fulfillment of, sometimes changing, requirements. This will necessitate regularly checking a company’s rating scores across all ratings and the monitoring of entries about the company in the different databases.

How to prepare for China’s enterprise social credit system

Every company in China, regardless of size or ownership structure, needs to expect that all its operations in the Chinese market are in one way or another, either via scale ratings or compliance records, tracked and recorded by the mechanisms of the Corporate SCS. However, the implementation status of the Corporate SCS, and with it the intensity of data transfers, tracking and recording, still varies between different industries and locations. Most of the key industries that are front-runner industries with regards to the System, meaning the coverage of the ratings is already far advanced, includes the automotive and chemical industries, as well as the entire logistics industry. Foreign business invested in these sectors will need to prepare.

Early and thorough preparation is the key for companies to tackle the challenges of the Corporate SCS. With enough preparation, companies will avoid being surprised by the accelerating implementation of the ratings, or suddenly being faced with a rating downgrade, or even a classification as a distrusted enterprise, followed by all the potentially severe consequences.

The corporate social credit score system is likely to have a huge impact on China’s business environment. Any company whose operations extend into the Chinese market must invest in understanding the SCS and its potential to impact their operations, as well as how to engage with it to minimize risk.

For those already active in the market, taking a stand still and “wait to see how the system develops” is the wrong move. Companies need to be proactive and begin creating an internal mechanism for tracking the system’s growth and impact.

What to keep in mind

• Understand exactly what the system requires from your company
• Assess where your company stands regarding the requirements
• Design and implement effective adjustments
• Continuous monitoring
• Exchange with government authorities

Author: Jeffrey Craig

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Buying or selling products for business in China? Understanding the B2B Market in China

Although traditional B2B marketing still plays an influential role in attracting clients and selling products in the B2B market in China, the digital B2B marketing strategies become more and more critical with racing digitalization in every aspect of life. 95% of B2B clients search the Internet for suppliers nowadays. Not surprisingly, the revenue of the B2B e-commerce in China boomed 275% from 16 million RMB in 2012 to 60 millionRMB in 2018.

Further,  B2B e-commerce in China is dominated by several critical online platforms. In 2018, the leading players represented nearly 70% of the whole market share, of which Alibaba has the largest market share (28.40%).

[Data source: Statista-Market share of B2B e-commerce platform in China in 2018]

The B2B businesses in China can be divided into two broad categories—trades in commodities (e.g., steels, chemical products, textiles, etc.) and intangible products (e.g., SaaS, logistics, legal service, etc.). Taking a further step, the B2B market in China has diverse market segments. Although different market segments are in various stages of development, one typical character is that no major players have formed a monopoly. The opportunities to enter into China’s B2B market are many.

Characteristics of B2B in China

There are five trends in China’s B2B market:

1. Online small scale foreign trade recently has become a hot topic in China’s B2B market.
2. B2B e-commerce value-added services of middle and small scale companies is currently rising.
3. The profit of e-commerce service providers keep growing.
4. B2B e-commerce facilitated the switch from the building of an information flow system to a fund flow system.
5. The vertical structure of the online B2B market offers company a lot of potential for future growth.

Characteristics of B2B Clients in China

Domestic suppliers and B2B clients are accustomed to using digital platforms to build, convert, and maintain relationships. Overall B2B marketing strategies in China make B2B clients become digital savvies. They actively search for information online and make purchase decisions even without the help of sales representatives. Additionally, B2B clients in China look for similar online experiences that they encounter as consumers in a B2C condition. Specifically, the B2B clients expect to have optimized search engines, read ratings and reviews from other companies, have personalized products and differentiated customer experiences, and get a consistent experience across online and offline touchpoints.

Digitalization of the B2B market in China makes the information more transparent and accessible; however, B2B clients in China continuously regard strong and weak ties in social networks as vital resources for businesses. Therefore, B2B clients still believe in conventional ways to do business. Trade exhibitions, recommendations from well-known companies, and other ways to build offline connections are important to acquire clients in China..

Challenges foreign companies face in B2B Marketing in China

Lack of social connections is international companies’ one universal disadvantage. Traditional Chinese culture emphasizes the interdependence of social relationships. Businesses heavily rely on networks of trust and mutual obligations than on strong, codified laws. As a result, “Guanxi” has become an essential concept that foreign companies need to understand and adapt to. Unlike domestic suppliers who are deficient in human capital, international companies need to build social relationships and get the trust from domestic B2B clients in a short period.

Moreover, compared to domestic suppliers, international companies are failing to keep pace with the progressing B2B e-market in China. The lack of investment in digital channels contributes to B2B clients’ negative purchase experiences. The limited experiences with digital B2B marketing in China also increase the probability of failing to adapt promotions that fit with the fast-changing digital ecosystem. On the other hand, the domestic companies’ products and B2B e-marketing are maturing. To grab market share, B2B marketers in foreign companies must enhance the digital competitiveness to attract B2B clients in China and satisfy their needs.

Essential steps for B2B marketing in China

Search and Planning

The unique and dynamic environment of the B2B market in China deserves in-depth investigations before the foreign companies enter into the market. Investigations should also take Chinese culture into consideration.

One effective way is to cooperate with local marketing consulting teams and to seek advice from experts. A comprehensive understanding will help the companies to evaluate the risks involved with implementing a series of decision-based actions and select a proper market segmentation and targeted buyers.

Traditional B2B Marketing Strategies in China

Competitive offline distribution network still deserves companies’ attention and enough investment, primarily when B2B companies target specific regions and compete with local suppliers. An offline presence signifies companies’ long-term commitment to China and provides security to B2B clients. Consequently, traditional offline B2B marketing strategies in China, such as conferences and exhibitions, are favored by B2B clients in China. Participating in such events is an excellent way of making initial contact with customers. It is also a good mean of moving a potential social relationship with B2B clients forward relatively quickly.

Digital B2B Marketing Strategies in China

One key point that every company must know to achieve success in the B2B market in China is that e e-marketing in China is different from it is in the western world. Popular online sites like Facebook, YouTube, Twitter, and so on are banned in China. To enter the B2B market and reach B2B clients, companies should adopt widely-used social media platforms in China .

Chinese Official Website

A well-organized and professional-designed official website is a must. The official website is more than an online catalog. B2B clients use official websites as efficient tools to know B2B companies and companies’ products or services. Official websites play considerable roles in every single stage of the B2B clients’ journey. Therefore, clear and attractive official websites, also known as brand.com, are effective channels to generate interests from B2B clients, attaining sales leads, and partnership opportunities. 

Two standards are crucial in website optimization. First, the website should be designed and tested in a mobile-friendly way. 99.1% of Chinese Internet users access the Internet with mobile devices. Building a website that is responsive to various electronic devices will help companies display information visually and win more customers. Second, the content of the website should be delivered in simplified Chinese. Chinese consumers get used to receiving persuasive information with high-quality content in Chinese. Adopting the local language will make it easy for customers to understand and trust the messages. It also shows companies’ respect and commitment to the Chinese market.

[An example of Chinese B2B Official Website Source: IBM]

Cooperating with B2B e-Commerce Platforms in China

It is expensive to create and maintain an official website, especially for small to medium-size enterprises. Collaborating with leading e-commerce platforms in China is smart, as B2B e-commerce in China is flourishing and the platforms are frequently used by B2B clients in China. Different from official websites, B2B e-commerce platforms in China aim at selling products and services directly to B2B clients.

Alibaba is the B2B e-commerce market leader with strong brand recognition. The company owns a platform for international businesses and a platform for domestic businesses. On the platforms, foreign suppliers can create a homepage to publish product information, while buyers use the search engine to find the needed products.

[Website of 1688.com Source: 1688.com]

Baidu’s Search Engine Marketing (SEM) Services

It is important to list the top in search engines. B2B clients are more likely to read top information and think the business of top websites are more authentic than the rest. Baidu is to China what Google is to the rest of the world. In 2019, Baidu had a market share of 61.3% of search engines in China. B2B clients in China frequently use Baidu to find suitable suppliers.

Baidu provides SEM services to let companies’ information become more accessible to potential B2B clients at the search or discovery stage. A Baidu’s pay per click (PPC) advertising campaign is a vital way to generate leads from China in a quick but short-term way. However, the quality of the PPC is not guaranteed. Baidu’s search engine optimization (SEO) is another way to optimize content for the target B2B clients. It has an excellent effect as a part of a long-term and sustained marketing approach.

Baidu’s SEM campaign will be especially beneficial when the companies have their own official websites. Even if the companies are not ready to spend money on Baidu’s SEM, they should at least apply for Baidu Webmaster Tools for the official website, which will keep track of the web pages that are being indexed.

[source: Official website of Baidu marketing]

WeChat

WeChat is the primary way Chinese people keep in touch with contacts and exchange information. It has over 1.15 billion active users by the third quarter in 2019 and is popular in white-collar professionals, with 53.4% of WeChat users age between 25 to 35.

People use WeChat as a primary method in business. To communicate with B2B clients in China more effectively, foreign employees, especially sales representatives, in the companies need to have personal WeChat accounts. As the work-life boundaries in WeChat are blurred, employees in the B2B companies have opportunities to develop close relationships with the B2B clients, which may bring more human capital.

Creating companies’ WeChat official accounts is an easy and quick way to reach out to potential B2B clients and maintain relationships with current B2B clients at a lower cost. The official accounts allow for one-to-one personalized interaction between companies and B2B clients. That is, B2B clients can communicate with companies directly through the messaging functions; get customer services directly when needed. In addition, B2B clients might be interested in the insights of industries and B2B companies’ products and services. B2B companies can share their knowledge on the WeChat official account. The more professional and helpful content, the more (potential) B2B clients will follow the official accounts.

Official WeChat account for B2B

Similar to Official websites, WeChat official accounts are platforms for B2B clients to get information and updates of the companies instead of selling products to clients directly (although companies can have online stores on WeChat). Having and continually improving the WeChat official accounts is a must, especially when the companies do not have official websites.

WeChat advertising is a new trend. It allows companies to advertise on WeChat with banner ads, KOL advertisements, and Moments ads.

[Dauxe consulting’s WeChat official account source: Daxue Consulting]

Weibo

With 216 million daily active users, Weibo is an appropriate social media platform in China for users to get information and explore topics. Weibo has a vibrant business community, B2B brands like Intel and Cisco included. Companies can create engaging content and host certain topics through hashtags by using their Weibo account. Weibo is a self-publishing tool for broadcasting to the public. B2B companies use Weibo to acquire more potential B2B clients, mainly those who are enthusiastic about sharing and social activities.

Furthermore, verifying the business accounts has multiple benefits for B2B companies. Once the account is verified, Weibo will classify the brand profile into relevant categories. The categorization will help B2B companies to get a connection with other related companies and the target groups of B2B clients. Weibo is especially useful when B2B companies have social elements in the marketing approach.

[An example of a verified business account in Weibo, source: Cisco]

Zhihu

Zhihu is a social question-and-answer website with a market share of 7.6% in 2016. One important fact to note is that Zhihu has tremendous trust rankings on search engines, such as Baidu. Marketing strategies such as creating discussions regarding companies, writing in-depth articles, and providing useful information to users on Zhihu can significantly improve the B2B companies’ presence on search engines. 

Besides, Zhihu’s expertise and depth of topics overpower other social media platforms in China. It also has a friendly atmosphere, making the contents in Zhihu widely recognized and trusted. As a result, the information displayed on Zhihu is more influential when B2B clients are making decisions.

[An example of brand-related questions in Zhihu, source: Intel]

PR for B2B companies in China

PR agencies will help to increase the companies’ exposure and to build companies’ reputations. It is one of the most cost-effective methods. Companies can have an expert or a leader to talk about the products positively or cooperate with Chinese online news (e.g., Sina, Sohu, 163, etc.; online news portals should be chosen according to the field specialization). Daxue consulting can also perform a PR campaign evaluation in China to ensure your company is on the right track.

Other social media platforms in China

UGC, Douyin, Toutiao, and so on are other poplar social media platforms in China. In order to gain a competitive advantage in the B2B market in China, foreign companies need to select suitable e-marketing strategies according to their products and segmentations and follow the right marketing plans to deliver their message to the potential B2B clients they are looking for.  

Business Analytics

To ensure the effectiveness of the marketing strategies, companies should track and evidence the marketing campaign progress in a timely and accurate way. The results will help B2B marketers to refine or re-target the e-marketing campaign if necessary and let B2B marketers relocate resources to the most effective marketing strategies to get the maximum return. Baidu Analytics (Baidu Tongji and Baidu Zhanzhang) are analytic tools to produce an insightful report and to help B2B marketers integrate useful marketing strategies and deliver personalized messages to target customers through multiple channels.

[Source: Baidu Tongji]

Do not make these B2B marketing mistakes in China

Neglecting of Local Culture and Business Etiquette

The competition is fierce in the B2B market in China. Neglecting of local culture and business etiquette will become particular obstacles to build up and maintain a good connection with B2B clients in China. Although it is difficult to change companies’ style or culture, it is important to show the openness and willingness to learn Chinese culture.

Therefore, employing local staff to assist B2B marketing in China is essential. Besides, the parent companies should understand the complexities of China’s environment and let their Chinese branches employ more flexible strategies to do business in China. 

Being Professional is not Enough

Regardless of the industries, the products and services provided by foreign companies need to be tailored to fit with Chinese market requirements. International companies are often perceived as being professional. However, they are not flexible enough to customize their offers to solve a specific business problem. As a result, B2B clients in China only regard these foreign companies as mere suppliers but not as true partners or long-term solution providers. The failure of going beyond the sales makes against building “Guanxi” with B2B clients.

Targeting China as One Large, Unified Market

China is the third-largest country in the world, with 661 cities and 23 provinces. Elements such as economic status, culture, population, etc. are divergent across regions. Therefore, targeting the whole B2B market in China is not a wise decision. Foreign companies should start small, learn, and then adapt as necessary.

Email Marketing is not popular in China

Due to unique Internet-cultural developments, email has never been necessary for Chinese. People prefer to use instant messaging app even for business communication. In December, 2018, only 166 million devices used Email app; while more than 1.2 billion devices used instant message app. Predictably, email marketing in China can be a very frustrating process. With high probability, the B2B clients in China will not check emails and ignore the advertising.

But it is still necessary to have an official email address for business communication. One thing to keep in mind, Gmail is not accessible in China. To avoid complications, domestic email services, such as enterprise e-mailbox from Netease or Tencent, are highly recommended.

Work with a B2B Marketing Agency in China

Daxue Consulting is a professional market research company based in both Shanghai and Beijing. As an expert in conducting consumer research and marketing analytics, our team helps foreign companies with vital insight, knowledge, and expertise understand the complex business factors in the B2B market in China.

Our team is here for you to satisfy all your marketing, design, and development needs. We can help you develop integrated B2B marketing strategies and to achieve success in the B2B market in China.

Developing trends of China’s B2B industry

According to experienced professors and analysts, the future trend of B2B include: merging of vertical search engines and industry websites; putting equal stress on domestic trade and foreign trade; sharing of information from all industries’ websites and creating leagues; paying attention to practical application of the platform; the transition of B2B deals into small B2B deals; introducing the concept of SNS; getting more support from the government; introducing new things to the internet and strengthening the application of information technology.

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According to IBISWorld, in 2019, the revenue of the kitchen appliance market in China was $51.9 billion. From 2019 to 2024, the revenue is forecast to increase at an annual rate of 2.8% to $59.55 billion.

Compared to developed countries, the penetration rate of household appliances in China is relatively low. Hence, China has great potential in the household appliance market. In the next five years, the household appliance market in China will integrate cloud-computing, Big Data, the internet of things and other cutting-edge technology.

What will drive the market growth?

In the following five years, it is anticipated that demand for replacing appliances will be a major driver of growth. The household appliance market in China is significantly affected by the real estate sector. What is more, the penetration rate of household appliances in China in tier 1 and 2 cities has reached 85%. The penetration rate of household appliances in China in tier 3 and 4 cities is less than 50%, which indicates that households in these areas will be a major growth market for this industry. The focus for tier-1 and 2 cities will be replacing current appliances, while in lower tier cities it will be first time purchases.

In the past, domestic brands in China’s household appliance market have focused on middle- and low-end markets while high-end markets are dominated by foreign brands. With the development of China’s living standards, domestic demand for high-end products is increasing, which will motivate domestic brands to launch more of these products over the next five years.

Low import demand: influenced by culture and lifestyle

According to IBISWorld, compared to exports, imports in China’s household appliance market are low, with a value of $288.6 million in 2019, which was 0.9% of domestic demand. Major imported products are dishwashers and electric stoves, occupied 55.7% of the total imported value.

Over the five years, import growth in China’s household appliance market experienced a significant fluctuation, growing 48.3% in 2015. Imports grew significantly from 2010 to 2012, owing to the increase in export rebates.

In the future, imports are expected to increase at an annual rate of 5.7% from 2019 to 2024. However, imported products will continue to account for a small percentage of the domestic market due to the cultural and lifestyle differences in China. In addition, favorable government policies and the remarkable performance of domestic brands impedeon imports.

[Data source: IBISWorld, ‘Import partners in China’s kitchen appliance market’]

Overview of the kitchen appliances market in China

Influenced by adjusting policy of China’s real estate market and fierce competitions among market players, the household appliance market in China has underperformed. Additionally, the gross margin rate of the kitchen appliances sector was over 40%.

Shrinking market size: affected by the real estate sector and market competitiveness

In 2016, the market size of kitchen appliances was 62.7 billion RMB while the growth rate was 7.9%. In 2017, it reached its peak with the market size of 69.7 billion RMB and the growth rate was 11.2%. Since 2018, the tightening policy of China’s real estate market has significantly affected the performance of the household appliances market in China, including the kitchen appliance sector. Due to increasing number of new entrants in the kitchen appliance market in China, the market competitiveness has become tighter. Moreover, the business development model of kitchen appliance market in China is problematic and lacks dynamics.

[Data source: qianzhan, ‘Market size of China’s kitchen appliance market’]

Relatively low market penetration

The penetration rate of kitchen appliances in China is relatively low in comparison with that of developed countries (i.e. United States, Germany, France and United Kingdom).

[Data source: qianzhan, ‘Comparison of penetration rate of kitchen appliances between tier1 & 2 cities in China and developed countries’]

Market expansion in tier 3 and 4 cities: great business opportunity

In China, due to decades of urbanization, the market demand of tier 1 and 2 cities are nearly saturated. Rising household income in tier 3 and 4 cities and rural areas indicate potential business opportunities.

The penetrated distribution channel of e-commerce service providers has facilitated the market expansion of kitchen appliances in tier 3 and 4 cities. For example, Suning has established 1300 direct-sale stores, 1800 authorized service stations and 200 online concept stores. JD has established 1300 service stations and 1000 county-based service centers, hired 50,000 promoters in rural areas. More than 18,000 of online stores have been set up on Taobao, which can reach 10 provinces with the population of 200 million in the countryside. 

Trends of the kitchen appliance market in China: quality and function matter

According to qianzhan, kitchen appliance consumers in China are more demanding of quality, appearance and function. In order to fulfill their needs, companies in this sector have dedicated to providing a variety of products with different functions.

In terms of functions, kitchen appliance consumers in China ask for integrated kitchen, juicers, electric ovens and steam stoves is rising. With the growth of middle class in China, Chinese consumers will be more demanding, and this will foster the innovation of products in China’s kitchen appliance market.

In terms of product intelligence, value-added functions (i.e. Wi-Fi, intelligent reminder and remote control) are now applied in kitchen appliance products.

Product segmentation of the kitchen appliance market in China

[Data source: IBISWorld, ‘Product segmentation in China’s kitchen appliance market’]

The electric cooker market in China: occupies the largest market share

According to IBISWorld, in 2019, electric cooker market in China was the largest, accounting for 30.7% of total industry revenue. China is the largest global production base for electric cookers. Currently, low- and middle-end products make up the largest share of the segment. However, domestic brands in China’s kitchen appliance market are working to develop high end products to fulfil rising demand. With changes in consumption patterns and increases in consumer purchasing power, demand for middle- and high-end products, such as induction heat and tailless electric cookers, has surged in recent years. Domestic brands in China’s kitchen appliance market are also developing new high-end energy-efficient products.

The range hood market in China: potential business opportunity

According to IBISWorld, in 2019, range hood market in China account for 26.2% of total industry revenue. Range hoods have become necessities in Chinese kitchens over the past three decades. To appeal to more customers, companies have launched new products like near-suction range hoods, which occupy 20.7% of total range hood sales.

In 2018, the sales volume of range hoods was 18 million, which was way smaller than the sales volume of air conditioners, refrigerators, and washing machines combined(40 million). This indicates a potential business opportunity in the range hood market in China. However, in 2018, affected by the periodical recession of real estate industry in China, the sales performance of range hoods failed to meet the expectation.

[Data source: chyxx, ‘Sales volume of kitchen appliance market in China (2018)’]

Baking utensil market in China: becoming a trendy kitchen appliance

According to IBISWorld, in 2019, the baking utensil market in China accounted for an estimated 22.5% of total industry revenue. Spurred by the development of ovens and induction cookers, and the growing popularity for baked goods, the sales volume of electric baking utensils has been rising. Cabinet and desktop ovens are common in baking utensil market in China while cabinet ovens are more favored by kitchen appliance consumers in China. In 2018, the sales volume of cabinet ovens was predicted to be 557 thousand with the YOY of 6.8%.

The microwave oven market in China: stable sales volume

According to IBISWorld, in 2019, the microwave oven market in China contributed 14.4% of industry revenue, with sales of 77.8 million units. From 2012 to 2018, the average sales volume maintained at 110-130 million. It is expected that sales growth rate will maintain at 6%-10% until 2030.

[Data source: chyxx, ‘Sales volume of microwave ovens in China (2012-2018)’]

The dish washer market in China: significant growth in recent years

In 2018, the sales volume of dish washers was 1.36 million with the value of 5.9 billion RMB. Even so, dish washer market in China is relatively small and the penetration rate of dish washers in China is relatively low in contrast with developed countries. However, in long term, it is predicted that dish washers will become necessities in China as the penetration rate of dish washers is positively correlated with the economic development. This has been proven to be correct. From 2010 onwards, the YOY of dish washers has been surging. In 2020 and 2030, the YOY is projected to be 73% and 36% respectively.

[Data source: chyxx, ‘Sales volume of dish washers in China (2009-2019)’]

The coffee machine market in China: growing market size

Regarding the performance of coffee machine market in China, since 2009, the market size has been growing. In 2017, the sales volume was 2.29 million and the market size was 0.6 billion RMB. It is anticipated that the market size of coffee machine sector in China will have continuous growth in the future.

[Data source: abaogao, ‘Market size and proportion of import of coffee machines (2019-2017)’]

Key players in the kitchen appliance market in China

Overall, the top brands in are domestic, Media, Robam, FOTILE and Galanz.

Key players in China’s range hood and stove market: Ruled by domestic brands

[Data source: chyxx, ‘Market share of range hoods brands in China (2017)’]

[Data source: chyxx, ‘Market share of stove brands in China (2017)’]

The top 4 players in China’s range hood and stove market are domestic brands and they occupied more than 50% of the market share in 2017. Robam and Fotile were the main players and accounted for more than 30% of the market share. Followed by Midea, Vatti and Siemens with the average market share of 10%.

Key players in China’s microwave oven market: overwhelmingly dominated by domestic brands

[Data source: dingkeji, ‘Market share of microwave oven brands in China (2019)’]

Galanz and Midea, as the notable domestic brands and had and accounted for more than 90% of the market share in 2019. While Panasonics, as a Japanese brand, occupied merely 2.1% of the market share. Other foreign brands such as Whirlpool, SANYO, Toshiba, Siemens together accounted for less than 2%.

Key players in China’s electric oven market: Siemens ranked at third

[Data source: dingkeji, ‘Market share of electric oven brands in China (2019)’]

In China’s electric oven market, the top 2 players were still domestic brands, Midea and Galanz, accounted for 33.9% and 27.4% of the market share respectively in 2019. The top 3 brands together accounted for more than 62.5% of the market share. Siemens is the top foreign brand with the market share of 12.5%.

Key players in China’s coffee machine market: led by foreign brands

[Data source: dingkeji, ‘Online stores: top-10 brands in coffee machine sector (March 2019)’]

The China’s coffee machine market partially relies on import since domestic manufacturing has already met China’s market need. In 2017, foreign brands occupied approximately 44.97% of the market share whereas domestic brands occupied 55.03% of that.

Nevertheless, the market of high-end coffee machines in China is dominated by foreign brands. In March 2019, the top 3 coffee machines brands that had the most sales volume in online stores were De’Longhi, Philips and Nespresso.

Brand analysis: top brands in China’s kitchen appliance market  

Midea Group

[Photo source: 16pic.com, ‘Logo of Midea’]

According to IBISWorld, established in 1968, the Midea Group is a large integrative modern corporation that dedicates to manufacture household appliances, but also provides transportation, real estate and financial services. In 1980, Midea Group entered the household appliances industry, launching the Midea brand in 1981.

The main industry products of Midea Group are rice cookers, extractor hoods, microwave oven and induction cookers. The company has become one of the largest white goods manufacturers in China. It has 14 domestic manufacturing bases in China, covering five major regions.

Midea has expanded its network to cover many third- and fourth-tier markets in China. The company has established 1,500 service centers to cover covered all third-tier cities.

Additionally, Midea Group has collaborated with other firms to expand their product categories in the last 2 decades. The group established business relationships with Sanyo and Toshiba to make high-end electric cookers and microwaves.

In February 2014, Midea Group built Shunde Innovation Center. In 2017, Midea continued to develop its manufacturing operations as demand increased. In the first half year of 2018, Midea was awarded nine patents for its dishwashing technology including its world-first hot air-drying technology.

Hangzhou Robam Appliance Co. Ltd.

[Photo source: qqzhi.com, ‘Logo of Robam’]

According to IBISWorld, established in 1979, Hangzhou Robam Appliance is headquartered in Hangzhou, Zhejiang province. Robam has developed into a professional producer of kitchen appliances such as range hoods, gas stoves, disinfection cabinets, electric ovens, steamers, electric pressure cookers and induction cookers.

In 2011, Robam developed 38 new products, opened 200 new specialty stores, and expanded its online and TV shopping distribution channels.

In 2015, the company set up 450 new specialty stores, with the total nationwide at 2,450. In 2016, the firm set up and rebuilt 89 experience stores and 449 specialty stores. By the end of 2016, the specialty stores of the company totalled 2,650.

In 2017, Robam expanded and set up 2,614 retail stores. In the first half year of 2018, the company continued to expand. The market shares of major products including hoods, gas stoves, disinfection cabinets, electric ovens, steamers had high ranking in China.

Ningbo FOTILE Kitchen Ware

[Photo source: ebrun.com, ‘Logo of FOTILE’]

According to IBISWorld, established in 1996, Ningbo FOTILE Kitchen Ware Co. Ltd. manufactures electric and gas appliances and integrated kitchen solutions. Distribution channels of FOTILE include home appliance chain stores, building materials supermarkets, tradition general merchandise stores, exclusive agencies and e-commerce. The company also has a research and development (R&D) team of 200 employees. Investment on R&D absorbs over 5.0% of production costs every year and the company owns 400 patents, 55 of which are invention patents.

Galanz Group

[Photo source: NetEase, ‘Logo of Galanz’]

According to IBISWorld, founded in 1978, Galanz Group is a comprehensive company that mainly manufactures microwave ovens, air conditioners. The company has R&D centers in Shunde and Zhongshan, 13 subsidiaries and 60 sales offices in China, and branches in Hong Kong, Seoul and North America.

Other household appliances made from Galanz Group include water heaters, gas stoves, range hoods and disinfection cabinets. Sales of Galanz household appliances experienced substantial growth in 2011. In June 2011, Galanz began to set up specialty stores in over 2,000 county-level cities for the purpose of market expansion.

In order to use advanced technology resources, Galanz sets up R&D centers in Japan, South Korea, the United States, Hong Kong and other locations in 2013.

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For over a decade, China has been the largest vehicle market in the world. Although 2018 marks the first year of declining vehicle sales (not including second-hand vehicles), China is still the largest vehicle market in the world. The high sales in the vehicle market also boost the development of the car insurance and the extended warranty market in China.

The growing second-hand car market in China

Second-hand car sales are a large part of the future auto insurance market. The second-hand car market in China shows the significant growth. In 2018,  the sales of second-hand cars in China grew by 10.3%, despite the new car sales decreasing.  

[Data source: China Association of Automobile Manufacturers ‘New vehicle sales in China’]

[Daxue consulting ‘Graph of second-hand vehicle sales in China’]

2018 sedan sales in China were 8,222,000 units, and YOY growth of +11.56%. MPV (multi-purpose vehicle) had 781,900 sales and YOY growth of +8.09%. Crossover vehicles had recorded sales of  310,950 units of vehicles and YOY growth of -12.20%

[Source: Daxue consulting, ‘Second-hand car sales in China’]

Second-hand vehicle purchasing channels

The main purchase channels of second-hand vehicles include offline and online. Offline channels which still dominate the second-hand vehicle market  in China; however, online platforms have gradually been accepted by consumers. 4s stores only have around 12% market share, since their relatively high price and they cannot meet the personalized requirements of customers. Also, 18-35 years olds are the main consumers of online second-hand car platforms (B2B, B2C, and C2C)

[Data source: 2018 used car market analysis report, baijiahao ‘Second-hand car purchase by age’]

China’s license plate policy

The license plate policy in China was implied by both vehicle owners and Second-hand vehicle buyers. According to the Regulations on the Registration of Motor Vehicles (机动车登记规定) in China, all vehicle license plates (except truck and small van) should follow vehicle owners and license plates are not allowed to sell to other people. However, license plates can be transferred to car owners’ immediate family members After car owners sell their cars, their license plates will be recycled by local government or original car owners apply to remain license plates for a while, depending on local province laws. 

On the other hand, for second-hand vehicle buyers, they must apply for new license plates after they purchased second-hand vehicles. If second-hand vehicle buyers purchased second-hand cars in different cities, they will have temporary license plates (usually allow to drive in 60 days) after purchasing and they need to apply official ones after they return their cities

Policies regarding car warranty in China

A car warranty offsets the cost of repairing or replacing certain parts of vehicles. It comes in handy if consumers are not prepared to pay the costs of vehicle repairs. In China, vehicle manufacturers/brands provide warranty services at least in three years or driving less than 60,000 km. Warranty services in China often only include vehicles’ core parts such as Engine System, Gearbox, and driving system. However, wearing parts (car parts other than core parts) usually have a shorter warrenty period, these include; Air filter, Air conditioning filter, Oil filter, fuel filter, clutch plate, spark plug, brake lining, tier, bulb, battery, Fuse, Remote battery and wiper blade.

In China, based on the “guarantee and maintenance booklet” (保修保养手册, which is in every new car), there are 3 conditions that consumers can’t have warranty services from vehicle manufacturers when they purchased new cars. Consumers don’t follow the requirement of brands when they maintain their cars. If consumers didn’t go to 4s stores or maintenance stations designated by car brands to repair their cars, then they won’t have a warranty service. Also, consumers retrofitted their cars privately after they purchased cars. Almost all car manufacturers in China refuse to provide warranty services to those cars that have been retrofitted. Furthermore, Damage to the car results from misuse. If the damage of vehicles is from man-made reasons or traffic accidents, car owners only can get payment from commercial motor insurance.

Overview of the extended warranty market in China

Extended warranty in China is a service that continues to protect consumers’ vehicles after factory warranty ends, it provides similar coverage beyond those time or mileage limits. The extended warranty market in China covers mainstream vehicle types: Sedan, SUV, MPV, Crossover vehicles, etc. Extended warranty in China is usually divided into 2 types which are, EW for the whole vehicle and EW for any single vehicle part, the Chinese EW suppliers provide EW services by different car parts, mainly include engine system, vehicle gearbox, driven system, exhaust system, cooling system, steering system, electronic control fuel injection system, braking system, air conditioner, electric system, and vehicle body. The time period of EW services are from 1 year (minimum we found from PICC) to 8 years (maximum we found from Vango). In 2017, the market size of second-hand vehicles EW in China 3 billion RMB The market penetration of second-hand vehicle EW in China was less than 10%. The market penetration of second-hand vehicle EW in China was less than 10% 

Car insurance focuses on car damages and  injuries of drivers and passengers from external reasons, such as traffic accidents, theft, flood, fire, etc. Insurance companies pay the fee for car repairing or medical treatment from car accidents after consumers purchased their products. While Car extended warranty is for automobile fault from no-external reasons or quality problems, such as engine failure. The EW providers give free services of replacing/fixing car parts that no longer working after consumers purchased their EW products.    

Advertisement analysis of extended warranty in China

Advertisements usually highlight the terms of EW offers (years and km), they also give price to show how cheap they are. 

[Source: Daxue consulting ‘Changan Auto Ad for extended warranty in China’]

[Source: Daxue consulting ‘BMW and SAIC Ad for extended warranty in China]

Consumer perceptions of extended warranty in China

A small sentiment analysis study on Zhihu shows the questions and concerns of Chinese consumers. Zhihu is a Q&A platform that reaches higher-, well-educated Chinese netizens. On Zhihu, the most common opinions about the extended warranty market in China consist of the following: Some EW products have many limits, for instance, consumers must go to places (such as 4s stores) designated by EW suppliers for vehicle maintenance. Consumers believe those limits bring bad consumption experience.

Consumers think EW products are not suitable for some situations, such as they plan to switch cars in 2-3 years, some car parts are not easy to damage, etc. Some of the questions posted on Zhihu include; Why EW is not very popular in China, and How to pick suitable EW for vehicles. On Zhihu, the most common opinions about extended warranty consist of the following: It is important to pay attention to the terms in EW contract, especially the disclaimers and EW is more recommended for luxury cars and original EW for whole car could be the best choice for car owners.

On Zhihu, the most common opinions about extended warranty consist of the following: “information asymmetry” makes consumer think EW is tricky and not worth to buy; Not worthy, more like a stunt, A few of Chinese car owners know EW, Not useful for mainstream car brands, Could be useful for some niche car brands and “Wool comes from the sheep’s back”, sometimes it could be more worthy to fix the car by yourself than buy EW.

Extended warranty companies in China

Extended warranty companies in China comprise of both domestic companies and international players. Local Players include Ping An, PICC, Zhongqigouhui, Autocare, Lizhen and Vango. While International Players include, , Allianze, Mapfre Group, and AMC. However, China’s auto insurance market is dominated by large domestic brands. Due to the scarce insurance licenses and fierce competition, small and medium-sized companies are difficult to grow through the traditional business model.

[Source: Daxue consulting ‘EW top companies’]

Business models of extended warranty companies in China

Zhongqiguohui – 中汽国汇

Zhongqiguohui’s Business Model is based on Partnership in both Up-stream and Down-stream. Under Up-stream cooperation, Zhongqiguohui partner with Insurance companies such as PICC and Ping An, which provide insurance coverage back-up for them. While under Down-stream cooperation, Zhongqiguohui partners with 4s stores around the nation, which can help with product promotion and provide direct maintenance and payment. The Core business of the company includes; Customized EW services, Road rescue, Risk control consulting. However, the comparative advantages the company is; In-time reaction, intelligent detection system, wide cover of cooperation with 4s stores with value proposition in user experience. EW Package Provided is 8 years / 200,000 kilometres (including original warranty), with the Service option that includes Basic service which covers 2 basic systems (Engine system, Gearbox system). Selective service which cover 6 core systems (Engine system, Gearbox system, Transmission system, Brake System, Fuel system, Electrical system) and Premium service which cover all 12 systems (Engine system, Steering system, Suspension system, Brake system, Gearbox system, Transfer case, Axle and drive system, fuel supply system, Cooling system, electronic system, air conditioner system, Subsidiary system).

Zhongqiguohui’s WeChat account

Offer online purchase service for EW various payment methods, which begins with Fill out the vehicle information and get the valuation. Then, Submit the order and complete the payment (support various methods includes Wechat, AliPay, UnionPay, Apple Pay, etc.). Lastly, Upload the picture of ID card, driving license, odometer and the car.

[Source: Zhongqigouhui Wechat ‘Zhongqigouhui Wechat Interface’]

PICC – 中国人民保险

PICC’s Business Model is based on Partnership with Strategic cooperation in car brands which provide EW to all new cars under Brand and used cars with official authorization, and Strategic cooperation with 4s store and repair shop which provide product promotion, direct maintenance, and cover insurance payment. The Core business of the company is EW services and Road rescue. Also, the comparative advantages of the company are on High cost-effective, flexible transferred warranty, wide network around the nation, with Value proposition on User experience. EW Package Provided is 1-3 years (on the top of the original warranty), with the Service options that include, Comprehensive approach which provides a guarantee for engine, gearbox system, control unit in engine transmission, fuel system, intake/exhaust system. Original warranty in which the whole car excluded consumable items listed by regulation

PICC’s WeChat account

The WeChat account of PICC is developed to Promote user satisfaction by offering online support and in-time reaction and convenient access to buy insurance. In PICC’s WeChat store, there are three types of insurances are provided: travel, accident, and family insurance

In the “Bestsellers” section, Car insurance is ranked second. If the list is organized by popularity, it might show that more people in China are tending to buy car insurance online.

More services provided than WeChat, The APP covers more services but still includes online store, Property and car insurance are listed as a separate section in APP, in the car insurance section, the EW service is listed and The purchase process looks quite similar with that of finance products.

Allianz – 安联保险

Allianz’sBusiness Model is based on Partnership with JD as joint venture: which has a combine insurance and risk management with digital technology and e-commerce ecosystem. Strategic cooperation with financial institutions: that offer favourable terms for the credit card clients of UnionPay, Visa, Bank of China and SPD Bank. The company channels its product through Offline store, official site, self-operated Online store, Tmall, and JD store. The Core business of the company includes, Life and health insurance, Property and liability insurance, Asset management, Travel insurance and assistance (outbound tourism-focused), with the strong Value proposition in technology-oriented insurance company, with data as base and driven by technology and customer satisfaction.

Mapfre assistance – 路华救援

Mapfre’s wholly-owned subsidiaries in China and MAPFRE aspires to lead in all markets where it operates, harnessing a proprietary and differentiated management model founded on profitable growth, with clear and purposeful client orientation that encompasses both individuals and businesses, featuring a multichannel focus and unrivalled vocation for service. They Partner with Down-stream cooperation to develop close relationships with global automakers like Renault and dealerships to promote brand value worldwide. The company channel itself through Official site, offline store, and email. The Core business of the company includes Road rescue, EW service, Travel rescue, and other value-added services. EW Package Provided is 1-3 years (on top of original warranty), with Service coverage that includes, Free repair service using original parts, Flexible service for different models, different brands, and different driving regions Value-added service includes nationwide road rescue, scooter, dealer information inquiry. However, Mapfre’s s WeChat account doesn’t include an online store and online services and the WeChat account of Mapfre doesn’t include any digital services but only normal articles. The article about EW offers was published in 2015 and got 2590 reads in total.

Ping An – 中国平安

Ping An–only provides EW service and their Business Model is based on Partnership through Strategic cooperation with The Warranty Group, Ping An introduced EW service jointly with The Warranty Group, but no information about this cooperation can be found. The Core business is EW services and road rescue, with the Value proposition in User experience. The company’s Touchpoint include Offline store, official site, hotline, WeChat, mini-program, Weibo, app, email. EW Package Provided is year/20,000 kilometres or 2 years/40,000 kilometres (on top of original warranty), with Service option in the Basic package which provides a guarantee for Engine assembly, Transmission case assembly, Precursor assembly, and Rear axle assembly. Platinum package which provides a guarantee for the whole car (compliance with China’s manufacturing standards) exclude parts didn’t provide by the original supplier.

Ping’An’s WeChat Account

Ping’An WeChat account for car insurance in online service + store and market communication Provide basic and daily service for car owners. No car insurance products provide in Ping An’s Wechat store, although this account provide service for car owners. Also, Ping An’s mini-program for car insurance Provides car insurance purchase service and is generally has similar to the function of the WeChat account, but includes car insurance online purchase. It includes “maintenance” in the service list but nothing provides internal, it seems some promotion will be done later, Extra benefits are offered on this platform and No service about EW is provided in this mini-app.

[Source: PingAn ‘minibus App’]

Based on the rank on iPhone in China and According to the data provided by App Annie based on Appstore, it has stable performance in the lifestyle sector, ranking the top 10th generally. Much better performance than PICC’s app, which might be related to the social function and marketing strategy.

[Source: APP Annie ‘Ping’An Performance’]

In China,  EW offers can be transferred along with the ownership of the car. However, it could be various in different service providers. Generally, seonc-hand car owners can buy the EW as long as meet some specific requirements of service providers. Your rights and obligations in this service contract can be transferred directly from you to the new buyer within 15 days by paying a transfer fee of 280 RMB. This service contract cannot be transferred to any entity engaged in the car selling of the renting industry. However, the following requirement need t\o be satisfied; At least 1 month before the end of the original warranty, More than 2,000 kilometres remains (in the guaranteed distance offered by the original), and Non-operating vehicle with authorization from China mainland brands. 

Pain points and incentives of the extended warranty market in China

The first pain points of extended warranty market in China comprise is the lack of publicity. Many Chinese consumers/car owners are unfamiliar with extended warranty or believe it is just another insurance. Secondly, EW products and services are not yet perfect. For consumers, they have limited options for EW products (time and km). Some EW suppliers can’t provide good service experience. In order to attract more clients, many car brands started to offer longer original warranty services. It makes the EW supplier hard to have more consumers.

Incentives include the fast-growing of second-hand vehicle sales in China. The developed internet and social network make EW suppliers can advertise their products and engage consumers more effectively. Policy support. The Chinese government further opened the market to international companies.

Additionally, China’s car market is transitioning to green energy and electric vehicles. Extended warranty products in China should take this transition into consideration to gain market share.

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This article The Extended Warranty market in China is the first one to appear on Daxue Consulting - Market Research China.