Chinese Companies Are Transforming Business—and the West Is Struggling To Keep Up
Many of the headlines covering business transformation and business success still focus on Facebook, Apple, Amazon and Google, the “four horsemen of the digital economy.” Their combined market capitalization reaches into the trillions of dollars. Yet, the observation of their dominance was already being made in 2010. Much has changed since then, and the change emanates from China.
Chinese Internet giants are not just companies as we understand the idea of an enterprise or as we might read about in the Harvard Business Review.
Increasingly, these companies resemble a hybrid. Yes, there is an enterprise, or usually a platform, at the core of much China-inspired economic activity. But each rising Chinese commercial power is really part of multiple ecosystems of interlocking companies.
Rise of the Corporate Ecosystem
The capacity to create ecosystems at the enterprise level enables extraordinary economic growth. But it also means that China is redefining the nature of an enterprise, creating dynamic cartels that are different from conglomerates and different from Korean chaebols. In doing so, they are disrupting the capabilities of management, key personnel, ways to work and ways to do business.
With U.S. venture capital active across these ecosystems and invested in some of China’s most exciting companies, there is little to fear here for the U.S. financial industry. But there is plenty to fear in the inability of many companies to update their thinking on how a company should be run, how it should scale, and how it should function in day-to-day work practices.
When GE sold its Appliances division (named after the Internet of Appliances, an old name for the Internet of Things) in 2016 to Chinese white goods manufacturer Haier, Haier set about eliminating more than 12,000 middle managers and restructured the business into an ecosystem of small, nimble work units, “which can better respond to consumers’ demand,” Haier chairman Zhang Ruimin told the South China Morning Post in October 2017.
Chinese advantage arises from the speed with which management go beyond the orthodoxy and create new thinking on the fly. In particular, at least for now, they are focused on the business ecosystem.
Think Ecosystem, Not Platform
Western companies focus on the idea of the platform at a time when platforms have become commodities even though they are at the forefront of technology. Platforms represent highly scaled, seamless transaction engines that take the friction out of business. But it is the ecosystem that makes platforms work.
There are essentially two types of ecosystems: those that cooperate at the interfirm level (the classic case being Arm Holdings in mobile chip design) and those that focus on the customer environment (a classic case being Amazon). Chinese companies have the capacity for both.
Chinese companies have an advantage that is being welded each day into a new way of doing business. Western companies need to adapt—and fast.
The Change You Cannot Plan
An easy case study for people to understand customer-facing ecosystems is Amazon Kindle. Kindle is successful not because Amazon has a great publishing platform. The platform is at best mediocre; for example, there is no capacity for intuitive page editing in Kindle’s product descriptions, and Amazon’s pay-per-click marketing platform is a mystery to most users.
However, there is a huge ecosystem of people, small companies and gig economy assistants who help indie publishers to get Kindle right. The companies have emerged organically as a result of Amazon’s success and Kindle’s weaknesses. Amazon did not plan them. This is the nub of consumer-facing ecosystems. They are very difficult to plan. Participants make no money from Amazon itself. Yet they are central to Kindle’s success.
The Chinese Approach
The Chinese approach has been to focus on the enterprise-level ecosystem to capture consumer attention and spread it across multiple selling opportunities through interlocking ecosystems. Having created success, they are now also developing a consumer-facing ecosystem.
At the enterprise level, I can book a journey on Fliggy, buy travel insurance from Zhong An, book a taxi to the airport on DiDi, or drive my own car with an AliOS-powered map on the windshield. I might also have a quick home-delivered meal before going to the airport, courtesy of Ele.me and pay everything with Alipay, earning 88 membership loyalty points in the process.
This represents a step up in ease of use for consumers. But all these providers are owned or part owned by Alibaba, as is much of the cloud service that underpins them.
The route to scale is much easier with such an ecosystem. And Alibaba has recently opened up 1500 APIs to facilitate more consumer-facing ecosystem participation.
Western companies are still stuck at the shall we, shall we not phase, becoming simple platforms with APIs. The answer is that most of them are too late to become platforms with complex ecosystems. There are four reasons for that:
- They do not understand the need for ecosystems of interlocking enterprises that can scale for markets of billions because they are focused on the platform; in any case antitrust legislation would prevent it.
- They cannot develop consumer-centered ecosystems that self-perpetuate outside the platform, because these are built on new relationship skill sets, something that only Amazon has attempted because it could turn a blind eye to profit.
- They struggle with the idea of pace. While some platforms update their systems dozens of times a month, very few are capable of launching two new products a week. It requires a new way to work that has not yet entered Western business practice.
- They are blind to emerging market needs or changes in upstream value and the pace at which social attitudes and needs are changing. Without those insights, Western companies waste their time on delivering to old needs.
In all these cases Chinese companies have an advantage that is being welded each day into a new way of doing business. Western companies have lost the initiative and much—including regulation, business practices, ways of working and ambition—now needs to change, at pace.