In May of this year, at a Sino-US venture capital forum hosted by Fengrui, I asked a colleague a long-timely curious question- is it the beginning of spring, before the spring, or is it already spring for the enterprise service software industry?
His answer was meaningful, “It should be the Spring Festival.”
This colleague is Li Chongzhe, the early project leader of Fengrui Capital. Before joining Fengrui, he was the founder of insight.io, a Silicon Valley enterprise service company, which was acquired by Elastic, a listed company on the New York Stock Exchange.
In the ten years I have been engaged in investment, China’s enterprise service software industry has called “spring” at least four times in succession. The first time was around 2014, then again in 2016, and once in 2018-2019. This year Once again. The long-term development trend of the enterprise service software industry is unquestionable, but why has the industry been called “spring is coming” so many times in the past seven or eight years, and the true “spring” has not yet arrived on a large scale?
In June of this year, at a Fengrui e-salon, similar issues were also raised by entrepreneurs. This is of course a complicated issue, but one of the sections actually points to the topic we are discussing today -the difference in the path of commercial development between China and the United States. The process of trying to clarify this problem is also a process of making the industry’s history, current outline and future development path clear.
Before entering the text, share the main points of view:
- One big difference between China’s business development path and the United States is that the social division of labor in many industries is later than digital.
- In the United States, all walks of life have gradually achieved full marketization-full competition-full social division of labor offline, and then the Internet has begun. After entering the PC Internet era and the mobile era, all walks of life turned the chain that was formed before the Internet to online and began to digitize. And in China, many industries has not been completed in full competition, before adequate social division of labor, entered the Internet age; then, based on the data of the new infrastructure platform, both ends of the supply and demand growing, began to appear new social division of labor, And then efficiency iteration.
- This difference in market formation methods and competitive landscape makes Chinese entrepreneurship exhibit completely different characteristics from those in the United States: First, the development spawned on the new data platform will bring greater efficiency improvements, especially when superimposed. When the technology is iterated. Secondly, platform-based infrastructure means that the entrepreneurial space of startups must be squeezed from the platform. To survive and develop, startups need to find opportunities in the vertical ecology. Finally, whether for platform companies or other entrepreneurial companies, in a rapidly developing market, how to grasp the variables and transform them into their own advantages is both a challenge and an opportunity.
The following is a specific analysis, hoping to give you some inspiration:
1. Typical manifestations of differences in business development between China and the United States
Generally speaking, we can divide mature market development into three stages: full marketization-full competition-full social division of labor.
When a certain industry gradually opens up to private enterprises and private capital, the industry will enter the process of marketization. The advancement of marketization will bring about sufficient competition, bring about the refinement of the division of labor, and ultimately promote the maturity of the market. As a result, this industry will form a long and complete chain with many links and interconnections.
This is particularly typical in the United States. One of the special features of China is that many industries have not fully experienced the three stages just now, they have begun to experience the digitalization of infrastructure. In short, the social division of labor in the industry is later than digitization.
To some extent, the different development paths of many industries in China and the United States can explain many interesting business phenomena. For example, why do Chinese Internet brands and D2C brands look different from those in the United States? For example, why did China’s financial payment industry skip the stages of checking, but surpass the United States to become the world’s largest mobile payment market?
1. Take the retail industry as an example
China’s retail industry: both ends of supply and demand have not been fully developed before entering the Internet.
Around the 1990s, with the gradual breaking of restrictions on foreign investment in the retail industry, a number of foreign retail giants such as Wal-Mart, Carrefour, Metro, Lawson, etc. began to enter the Chinese market and opened up business in China in the form of joint ventures.
In addition to the policy prerequisites for the development of chain retail business, there is also a necessary condition for the marketization of real estate. In the 1990s, as private enterprises were allowed to enter the real estate industry, real estate marketization began. The marketization of real estate has brought about the development of commercial real estate, making it possible to develop chain stores. China’s retail industry has begun to exert its efforts in online distribution.
At almost the same stage, the representatives of China’s private retail industry, Gome and Suning , sprouted . The two were established in 1987 and 1990 respectively. By the end of 2004, Gome’s sales reached 23.88 billion yuan, becoming the number one home appliance chain, and Gome’s founder Huang Guangyu became the richest man in China. In the same year, Suning was second only to Gome, with sales revenue of 9.1 billion yuan. The two were once collectively referred to as the “commercial twin stars of the first decade of the new century.”
The rise of Suning and Gome is also related to the commercialization of housing. With the implementation of the new housing commercialization reform in 1998, China’s real estate industry ushered in a ten-year golden era of development. More and more people have bought houses, and the demand for durable consumer goods such as home appliances has also increased.
Around 2000, Taobao and Jingdong were established one after another. At that time, Suning and Gome had not had time to sink to cities below the third tier, and China’s retail industry began to go online.
With the development of e-commerce, several super platforms have emerged in the retail industry. Compared with offline retail, e-commerce realizes the digitization of one or more links to significantly improve the degree and efficiency of retail digitization, and the platform itself becomes the infrastructure. As a result, many Internet brands have grown on the platform.
US retail industry: Social division of labor predates digitalization.
The development of the US retail industry is a completely different path from China.
If you are concerned about the US retail industry, you will not be unfamiliar with Shopify. Shopify is a one-stop SaaS e-commerce service platform that provides independent brand retailers with technology and templates for building online stores, and manages omni-channel marketing, sales, payment, logistics and other services. During the epidemic, online shopping demand surged, and a large number of sellers began to turn to online. Shopify’s market value rose rapidly, and the current total market value is close to 180 billion U.S. dollars.
So here comes the problem. Why hasn’t Shopify out of China?
Because China first launched platforms such as Taobao, Tmall, and JD.com, the digitalization of the retail industry first occurred on the platform. The infrastructure of the platform is large enough that most of the industry segmentation chains are on the platform.
For example, the Tao brand that emerged with Taobao that year, and the various subdivision services (whether it is ERP, CRM user management, store operation, marketing promotion, etc.) based on the development needs of Taobao , did not gradually iterate offline, but It appears and develops directly in the ecology of these e-commerce platforms.
How is the United States different? We can go back to the development of the retail industry in the United States.
After the Second World War, with the increasingly fierce market competition and the full offline competition of the retail industry, the social division of labor and specialization have continued to increase, and various links in the industry chain have been continuously refined and deepened, and they have become increasingly mature in competition; consumers, users Have a clearer understanding of what kind of product (brand, function, feature, price range, etc.) is needed .
After the mid-1990s, offline retail, which is relatively mature, began to “go online” and experienced several rounds of gradual development: software-online-mobile-data intelligence. From an expansion point of view, each round of development is based on the previously formed market segments and social division of labor. The process of upward “upgrading” of each node in the industrial chain can be referred to as “upturning” for short.
In the process of “turning up”, there are many opportunities for the development of corporate services. The reason is that the social division of labor in many industries in the United States predates digitalization, and the industrial chain is sufficiently large and detailed. The process of upgrading each sub-chain to online will bring a huge market for corporate services and have a sufficiently prosperous corporate service ecosystem. , There is also a good enough willingness to pay.
Since the epidemic in 2020, the penetration rate of e-commerce in the United States has increased significantly, and Shopify, which provides e-commerce services to sellers, has thus ushered in new development opportunities. This is a typical example of “upturning”.
On the contrary, China’s retail has directly “entered the network” from the stage of insufficient offline competition and division of labor. There are not so many fully developed and well-divided industrial chains and nodes that can “turn up” one by one, so there is a lot of lack of enterprise service software. Opportunities for business entrepreneurship. This can partly explain why China’s corporate service market has not been as prosperous as the United States for many years.
2. Sino-US comparison: Take the financial payment industry as an example
The development story of the financial payment industry in China and the United States is similar. Let me talk about the United States first.
The development of the US financial industry is a process of “ups and ups” step by step.
Similar to the retail industry, the US banking industry and its systems are highly mature. In the past 40 years, the payment industry in the United States has experienced gradual development: it has completely gone through the stages of cash transactions, checks, and bank cards, and has also gone through the PC Internet payment stage relatively completely, and then enters mobile payments. This gradual process also determines that the development of its financial ecology is also “upward” step by step.
The business model of mobile payment company Square has a broad market in the United States. An important reason is that credit cards are fully popularized for both merchants and consumers in the United States, so how to meet merchants and consumers’ credit card receipts and payments in the mobile payment era , Is an important “upturn” demand. Square helps consumers and businesses to use the mobile card reader invented by Square to match the smart phone with the use of apps to match card consumption.
Why is there not a big market for this kind of demand in China?
Because China has partially skipped the “upward” phase of credit cards, there are not many people who are accustomed to migrating credit cards, and China has directly entered the era of universal QR codes. According to PricewaterhouseCoopers’ 2019 Global Consumer Insights Survey, in 2018, 86% of China’s population used mobile payments, and the penetration rate of mobile payments was about three times the global average.
Why can China quickly enter the era of universal QR codes?
The reason why we can enter the era of universal QR codes so quickly is related to the development of China’s financial payment industry: we have not fully experienced the segmented development stage of the US financial payment market.
From the perspective of individual experience, we almost jumped directly from cash to wireless payment, skipping checks completely, and partially skipping credit cards and PC Internet payments.
I still remember when I first started investing in financial projects in 2012, the popularity of credit cards in China was still relatively low.
According to the “2012 Blue Book of China’s Credit Card Industry Development” issued by the China Banking Association, in 2011, my country’s new issuance of credit cards reached 55 million, and the cumulative issuance reached 285 million. At that time, the speed of issuing credit cards was very fast, but the use of cards was not very active, and many became “dead cards”. Even in 2017, according to the Foresight Industry Research Institute, the proportion of active cards only accounts for about 30% of the total card issuance.
In addition to credit cards, we actually skipped half of PC payments. Behind the PC payment, users need to bind the bank card system for settlement. In 2007, as the most widely used non-cash payment tool used by Chinese residents, the penetration rate of bank cards in my country that year was 21.9%. Therefore, it can be seen that even after Alipay (founded in 2004) was launched for a long time, the development of Internet payment was not complete. Maybe you still have the impression that the Taobao platform has supported cash on delivery for many years.
In 2012 and 2013, we entered the era of mobile Internet.
In the era of mobile Internet, with the development of China’s urbanization, the penetration rate of the bank card system has gradually increased, which means that the infrastructure of mobile payment has been completed. By 2020, the annual bank card penetration rate will reach 49.18%. By the end of 2019, 8.53 billion bank cards had been issued.
At the same time, with the help of wireless mobile broadband Internet and Internet of Things technology, with the popularity of WeChat, Alipay and other mobile applications, we can not only use mobile phones to complete simple payment, transfer, and payment functions, but also use mobile phones to complete most of the daily needs of banking services. .
Now, we have firmly ranked first in the global mobile payment market. According to the 46th “Statistical Report on China’s Internet Development Status” released by the China Internet Network Information Center (CNNIC) in September 2020, as of June 2020, the number of online payment users in China has reached 805 million, accounting for 85.7% of the total Internet users. The scale of the mobile payment market is the largest in the world for three consecutive years.
It can be seen that the gradual development of the financial payment industry in the United States is to upgrade the efficiency of stock supply and stock demand . On the other hand, China has not yet fully competed, and has not formed enough social division of labor and chain refinement. We have jumped directly to the digitalization, mobilization and platformization of infrastructure. Applications or efficiency tools born on the new platform began to compete fully and formed a social division of labor.
Since there is no influence and interference from the pre-development stage, the cost of market education will be lower on both the consumer side and the supply side, and this transition will be faster and smoother.
2. How to face up to the differences in development models between China and the United States, and find entrepreneurial opportunities based in China?
Except for the retail and financial industries, if you think about it carefully, the development of many industries, including the video industry, follow a similar pattern:
- In the United States, many industries have completed the refinement of the social division of labor and industry development in the process of achieving full competition . On this basis, entering the Internet era and the mobile era, all links of the industrial chain will “turn up” accordingly.
- In many industries in China , the digitalization of Internet infrastructure has begun to appear before full competition and social division of labor has been completed , that is, social division of labor is later than industry digitalization. After that, the development of both ends of the supply and demand based on the infrastructure began to bring about the refinement and competition of the division of labor, and then the efficiency iteration.
This difference is reflected in almost all industries, and understanding this difference can help us better understand the challenges and opportunities in the venture capital field.
1. “Flip up” is faster, especially when technical iterations are superimposed
In the financial section above, we mentioned that because in China, the development of finance almost directly skips checks, and partially skips credit cards and Internet payments. Users rely less on existing methods, and new payment methods are promoted. There is less resistance from the old model at the time, so compared to the United States, we will be faster in promoting mobile payments.
On the other hand, compared to the American-style “upside-down” step by step, because the Chinese market is formed in a different way and competitive landscape, the development spawned on the new data platform will bring more efficiency improvements.
To understand this degree of efficiency improvement, we can compare the changes brought about by offline infrastructure construction.
In 2008, my country began to build high-speed rail on a large scale. As of the end of 2018, the total mileage of my country’s high-speed rail reached 29,000 kilometers, ranking first in the world. Compared with many developed countries, the railway development is from low speed to medium speed to high speed. To a large extent, China has directly “turned up” from the intermediate stage to the era of high-speed rail. The high-speed rail has promoted the advancement of urbanization, has tightened the economic ties between cities, improved the degree of industrial coordination in different regions, greatly improved efficiency, and gave birth to more new things.
In the retail section above, we mentioned that in the retail industry, the biggest difference between China and the United States is that it has begun to promote the underlying data before it has achieved full marketization. The process of digitization first took place on infrastructure such as e-commerce platforms. These infrastructures were large enough that most of the industry segmentation chains grew on the infrastructure.
We can simply call this model “platform upturn”. On the one hand, the supply continues to upgrade, on the other hand, consumers are becoming more mature, and in the middle is an efficient connection platform. If this time happens to be in the stage of technological innovation, and there is no obstacle from the old model, under the “magic power” of technology, various factors work together to create the limit of efficiency improvement. We can also call it the “second round of opportunities”, especially when China’s market is extremely large, it brings more opportunities and the platform is easier to grow bigger.
This is why we think Taobao can be more powerful than Amazon.
2. There are more variables, and development is more complicated
Although we say that the opportunity is greater, we must seize the opportunity and face more complex issues and greater challenges.
Because the “upturn” in the United States is a step-by-step “upturn”, which is based on a relatively formed market structure and mature market entities. China is not the same. There are too many variables in the process of “turning up”. Both ends of supply and demand are changing and growing. You need to make connections in the middle. If you encounter opportunities for technological innovation, you need to be able to digest the technology and grasp it. Changes in industry characteristics.
In this case, a big pressure for companies is that everything is brand new without lessons learned. In a rapidly developing market, how to grasp the variables and transform them into their own advantages?
For example, for consumer brands, in the context of the continuous decline in the growth rate of total retail sales of consumer goods, if they want to survive and develop for a long time and become bigger and stronger, they must “hold both hands” and “hard both hands” online and offline.
3. Challenges and opportunities brought by big platforms
We mentioned earlier that it is more difficult to do SaaS in China than in the United States. In addition to the fact that many industries in China first realize dataization and then have social division of labor, there is no step-by-step “upturn” process, and there are not so many chains to serve. The important reason lies in the platformization of infrastructure. The most typical example is Alibaba’s “cloud nailing as one” layout, Tencent has WeChat, plus the e-commerce ecosystem it invests in (Pinduoduo, JD, Youzan, Weimog…)
Platformization means that the platform has taken hold of important positions/links, and the platform has a greater say in how long the subdivision chain on the platform is going to be. Especially in the Internet industry, when an innovative company has built an efficient data infrastructure platform, a lot of things can grow on the platform.
For startups, the challenge also stems from this. Take Taobao as an example. As a new retail platform and a new data platform, theoretically, there will also be a process of “upturning” within its ecology. But in fact, we have seen that there are not many SaaS companies that have grown up on the Taobao platform.
An important reason is that when Taobao provides services to merchants, it is equivalent to providing SaaS corresponding to key node locations. As a result, Taobao has become an industry infrastructure, which has also squeezed the living space of a group of vertical ecological enterprise service companies.
Having said that, how to face the platform giants and find innovative opportunities from them is a topic facing many industries.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/what-are-the-differences-in-business-development-between-china-and-the-united-states/
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