Source: Bloomberg. Data as of 4 May 2021.; market cap in USD bn

* Not yet listed. Valuations from recent private trades / analyst estimates.

China is in a favourable position from having the world’s largest population combined with increasingly first world characteristics. Its infrastructure is superior to many developed countries, but despite considerable progress, on a per capita income basis, it remains an emerging market. However, a rising middle class and a command economy are contributing to significantly increased domestic consumption.

There are many ingredients required to create a technology giant. However, all are necessary and missing one can create headwinds for the company.  

China leads in nearly every one of these aspects. It has the world’s largest internet population. People primarily  speak the same language; the culture is homogenous, and there are few internal trade barriers. Europe by comparison has a common market, but each country has a different culture, language and consumer habits. India – which has a population rapidly catching up with China (and projected to exceed it) – suffers from inconsistent internet access and has the most number of languages spoken in any one country.

Young Chinese people in particlar are technology savvy and well used to making digital payments through Alipay or WeChat in a way that is well ahead of any other country. China is also spearheading the roll-out of 5G, with even smaller cities already covered. Interestingly, the Chinese e-consumer is not replacing traditional commerce like in developed markets: physical retail is not as advanced in China, especially outside major cities; therefore, old and new forms of retail co-exist and technology-enabled consumption face less resistance.   

China’s first world infrastructure means that a consumer can purchase an item in a distant town and have it delivered from Shanghai or Beijing within a day or two. 

Source: UIC, The Worldwide Railway Organization, Wikipedia

Being able to sell anything anywhere in a country with 850 million internet users is a huge advantage for a company. There is no need to expand globally to become a $100bn company. As an example, consider China’s Meituan, a food delivery company, against global peers:

Source: Deloitte 

Building a technology company and taking full advantage of the market opportunity requires experienced entrepreneurs, coupled with science, skills and access to growth capital. China has all of these. As a result, many entrepreneurs have now built their second major company. The venture capital industry in Beijing is only second to Silicon Valley. There are numerous angel investors to validate business plans, hundreds of venture capitalists to finance growth and many private equity and strategic investors from which to source the capital required to help a company grow its sales from hundreds of millions to tens of billions. This scale is extremely important: in times of financial downturns, capital often dries up rapidly. We have frequently seen European start-ups suffer when venture capitalists have to cut back and focus on their larger allocations in the US. China has major strategic investors with deep resources and a long view to guide promising companies through thick and thin. Behind all this is a government that is willing to support certain sectors financially when needed.

Finally, there are the unique aspects of language, culture and regulation that make it harder for global competitors to enter the market. For example, the person who built Uber’s business in China told us that they had to completely recreate the app for China, whereas the same app is used everywhere else in the world.

In closing, a few words on the regulatory threat to technology in China. The communist leadership will always intervene where it sees malpractice or initiatives that go against its strategic goals. Almost every sector has been in the spotlight, whether it be online gaming or Alibaba’s banking aspirations and, more recently, the education sector. This risk needs to be monitored closely, although over the longer-term regulations helps the quality companies emerge more successfully as inferior competitors are weeded out.

In summary, China has both the scale and the key ingredients to continue creating large technology companies at a far faster pace than most other countries.