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China: A Time of Systems, a Time of Turbulence

China: A Time of Systems, a Time of Turbulence

Two conflicting trends are challenging their strategies and business models in China.

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China: A Time of Systems, a Time of Turbulence

During our FM100 meeting in Shanghai last week, the executives who attended discussed two very conflicting trends that were challenging their strategies and business models:

  1. A time of systems: Many Chinese entrepreneurs are now rushing to professionalize their companies because their next wave of growth will require better systems and processes.
  2. A time of turbulence: Without exception, all of these leaders also observed that the rapid rise of the Internet in China, enabled by the fast adoption of smartphones, is disrupting brick-and-mortar businesses.

So, on one hand, founder-led Chinese companies see a need to build more professionally managed businesses; on the other, they are facing a fundamental disruption that is challenging all aspects of their current business models. No surprise then that the Founder’s Mentality 100 (FM100) participants asked us to hold our FM100 meeting on a Saturday.

The rise of the Internet in China is truly staggering. Here are six facts I’ve seen recently about this phenomenon:

  1. The Financial Times reports that China hosts three of the top nine global Internet companies, as measured by unique visitors: Alibaba, Baidu and Tencent.
  2. China’s BAT (the troika of Baidu, Alibaba and Tencent) are also among the top seven global Internet companies by value, according to the same Financial Times article. These valuations are in part a reflection of the companies’ user growth—with Alibaba, Baidu and Tencent topping the chart in that category.
  3. According to CB Insights, Alibaba and Tencent have been on a buying spree, snapping up 22 US private companies since 2011.
  4. Smartphone penetration in China has been lightning fast. As Bain noted in our report on China’ e-commerce, in 2012, smartphones had penetrated 66% of China’s mobile phone users, compared with 53% of those in the US. According to the market research firm IDC, 351 million smartphones were shipped to stores in China in 2013. With long commutes and access to relatively cheap phones, network charges and Internet service, the Chinese people would seem to have an almost insatiable smartphone demand.
  5. The power of the BAT and the explosion of consumer demand are disrupting industries. For example:
    • WeChat, the dominant social media platform in China, said it had 355 million active users in its fourth-quarter 2013 earnings report—just three years after its launch. The website is evolving into a platform that is heavily connected to consumers’ lives, with services that include ordering taxis, buying movie tickets, mobile gaming, mobile payments and so on.
    • Alibaba’s Yu’E Bao allows the purchase of money market funds through its Alipay platform. It has reached more than RMB 500 billion (US $81 billion) in assets under management and has 81 million users, according to recent reports. This “threat” to the traditional banking industry has created public debate about the balance between financial innovation and regulation.
  6. November 11―known as “Double 11,” “Bachelor’s Day” or Singles’ Day” in China—was created by the Alibaba-owned Taobao and Tmall to be an exceptional promotional day, with amazing discounts and special offers. The company claimed its online sales in China last November 11th topped RMB 35 billion ($5.75 billion), surpassing sales of RMB 19.1 billion in 2012—an 83% increase. To put things in perspective, Double 11 is the Chinese equivalent of Cyber Monday in the US (the first Monday after Americans celebrate Thanksgiving). In 2013, the US online community reported with pride that sales were up 16% to 21% from the previous year, to $2.3 billion to $2.5 billion.

It is no wonder that FM100 participants in Shanghai were citing business model disruption as one of their top three growth concerns. What is interesting is they also cited the need to build sustainable business systems in their top three. As one executive noted, “The go-go era of founders growing their companies rapidly with no thought to sustainable business systems is over. We are struggling now to bring in the right professionals and management systems so we can build for the long term.”

A key theme in our book Repeatability is how to respond to two types of business model changes: a) changing the existing business model through continuous improvement built on strong frontline feedback loops and b) completing more systematic reviews of the fundamental business model to ensure it remains fit for purpose against new emerging threats. Most companies have to focus on one or the other of these changes within any given year. But let’s watch China: It looks like its business leaders will be dealing with both of these changes at the same time, 24/7.

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