The diversity of services (apps) for China’s ravenous mobile community appeal to the growing needs of users. Whether for shopping, for entertainment, for financial management, or for gaming and gambling, Chinese smartphoners can find services to fit their needs, and companies find their profits.
In this third part of our series on China’s Mobile Economy, we look at the app side of the mobile equation. For author Winston Ma, the service side of the mobile economy is were the money lies. In the pages devoted to mobile applications, he distinguishes between several areas of development and investor opportunity: e-Retailing, e-Commerce, entertainment, movies, and finance.
e-Retailing: Goliath vs. David
China’s e-Retailing sector is characterized by one Goliath (Alibaba), one David (JD.com), and a few upstarts active on the fringes of the main battlefield. The one dominates with 61% market share, whilst the other holds a meagre 19% (based on Gross Merchandise Volume in 2015, page 100). Alibaba is a pure platform to connect sellers and buyers and has become a gigantic tentacular octopus, although with two strong arms: Taobao (C2C) for the cavernous trove of general merchandise, and Tmall (B2C) for branded items, namely fashion or luxury goods. This means a high transaction volume and high margins since it does not involve inventory or distribution costs. JD.com, on the other hand, has warehousing and keeps inventory.
This cat and dog war centers for good part on better customer service, and better exploitation of big data to understand customers’ needs.
Yet, as Winston Ma points out: “… it would be real tragedy if there could only be one right e-commerce model for China’s Internet market.” (page 97). For the Chinese government, e-commerce certainly offers the advantage of levelling the supply field for urban and rural areas, narrowing the gap in living standards. And in fact, start-ups are sprouting on the sidelines, taking advantage of the diseconomies of scale that Alibaba’s enormous size imply. For example, Vipshop offers deep discounted flash sales, whilst Mogujie focuses on women’s fashion and offers in-depth advice via its social functionalities, thus helping insecure Chinese customers find their way in the jungle of shapes, sizes, colors and labels.
As could be expected, the battle has involved its fair share of dirty tricks: sales figures “brushing”, fake customer reviews, inflated Gross Merchandise Value figures not reflecting the high volumes of merchandise returns or incomplete sales, and so on…
e-Finance is a top driver of China’s mobile economy. Indeed, without the prior establishment of secure and trusted payment systems, the Chinese public would never have espoused mobile commerce in the way it did. For author Winston Ma, different sub-segments within financial services are worth distinguishing: e-Banking, crowdfinance (funding and lending), and investment services (e.g. money management, insurance, etc.).
Many of the financial services available to Chinese mobile users were developed as spin-offs by the large BAT (Baidu-Alibaba-Tencent) trio. As seen before, Alibaba introduced its e-payment service AliPay in 20__. WeChat Pay from Baidu followed shortly thereafter. As for Internet banking, in January 2015, Tencent launched WeBank, one of only five privately-funded banks approved by the China Central Bank (PBOC). WeBank was designed to facilitate access to credit for SMEs and individuals, taking advantage of the lack of investment choices for individuals. The lack of credit cards in the Chinese market eased the direct jump to digital payments.
Crowdfinance also developed quickly, benefitting from its image of being fun and prestigious, namely in financing ventures such as movies or gaming. Once again, established mobile players, namely the BAT trio, quickly introduced crowdfinancing options. Yet much of the initial steam was lost when the June 2015 government policy guidelines took effect, and when a string of high-profile failures (Ponzi schemes) dampened the public trust. One important restriction were the constraints on guarantees that could be offered, and on the number of investors that could be contacted (memberships became important). Peer-to-peer lending also underwent a radical shakeup with the 2015 Policy Guideline changes, ending the world’s largest peer-to-peer lending market and this shadow banking activity.
Online wealth management fared far better, with the volume of assets under management skyrocketing, due to the very low interest rates offered by state-owned banks. June 2013 saw the launch of Yu’e-bao, the first e-money market fund, by Alibaba. This created a shock wave among traditional banks, that saw their deposits flow out at very strong rates. Alibaba then introduced a slew of other financial services in its Ant Financial division.
Fun and games – Mobile entertainment
Yet Chinese smartphones are not only about shopping and finance; mobile entertainment is another important field of application. On the video streaming front, as audiences become more sophisticated, content is moving from user-generated to professionally-generated. As in Western markets, the business model relies on selling advertising to large audiences.
Serialized online literature is an intriguing market specificity. With a need to fill long work commutes on public transport, smartphone readers have turned to serial reading, financed by micro-payments of a few cents per chapter. This picturesque micro-business environment – featuring “loser” readers and “drop-dead on street” authors – enables top authors to make substantial sums.
Yet, as could be expected from a country enamored with betting and gambling, online sports wagering is taking off, despite official illegality. To circumvent this obstacle, wagers are disguised as donations to sports charities. In this manner, the 2014 FIFA soccer World Cup garnered an estimated $1.5 billion in lottery proceeds.
The first part of our three-part series on Winston Ma’s book (Casium issue 51, published July 27) provided some background information on how the mobile explosion occurred in China, and some hints on the reasons why.
In the second part, (Casium issue 52, published August 10) we looked at the hard-fought scene for smartphone handsets in China.
Title: China’s Mobile Economy; Opportunities in the Largest and Fastest Information Consumption Boom
Author: Winston Ma
Winston Wenyan Ma is a managing director of China Investment Corporation (CIC), the sovereign wealth fund of China, with a focus on long-term investments in large-scale concentrated positions. Since joining CIC in 2008, he has held leadership roles in major direct transactions involving natural resources, financial services and high-tech sectors.
Prior to joining CIC, Winston Ma served as the deputy head of Equity Capital Markets at Barclays Capital. Previously, he was a vice-president at J.P. Morgan investment banking, and a corporate lawyer at Davis Polk & Wardwell LLP and Freshfields.
He is the author of the bestselling book Investing in China: New Opportunities in a Transforming Stock Market (Risk Books, 2006) and has been widely quoted in global financial media.
Winston was selected as a 2013 Young Global Leader at the World Economic Forum (WEF) and in 2014 he received the Distinguished Alumni Award from NYU.