Daily Trust (Abuja)

4 August 2014

Nigeria: The Disconnect in Chinese Internet Tech Portfolio

With companies such as Alibaba, Tencent, Sina, Renren, Huawei, ZTE, JD-com, and Baidu, which is the Chinese answer to Google, China seems to have a thing or two to brag about in terms of its Internet tech portfolio.

For example, Alibaba Group, which is like eBay, Google, and PayPal rolled-up into one in terms of the range of offerings, is a hallmark of China's inroad into the world-stage on Internet technology.

Alibaba filed for an IPO in the U.S. in May 2014, in what is predicted will be the biggest in Internet company IPO history. Thus, Alibaba's IPO event is expected to trump, for Internet companies, previous record holder Facebook's $16 billion, the amount that Facebook raised on the day of its IPO on May 18, 2012. At IPO, underwriters set Facebook's stock price at $38 a share, with a valuation of $104 billion. In May of this year, it was predicted that Alibaba would raise $20 billion at IPO, and be valued at $106 billion. With these figures, only 36 U.S. companies, including Apple, Microsoft, Google, Intel, Amazon, and Facebook, will be more valuable than Alibaba. However, recent figures have projected Alibaba's valuation at $150 billion at IPO. Thus, it's not difficult to imagine how profusely, underwriters, exchanges, potential investors, and the public at large are salivating to join Alibaba's bandwagon at IPO.

Also, consider this: China has more smartphone users and households with Internet access than any other country in the world. Its e-commerce, with an estimated turnover of $300 billion last year, was the largest of any country. And let us not forget China's ambition to build its own home-grown 4G technology, rather than adopting the relatively more established 4G deployment from the West. While it would have been much easier and hassle-free to "go with the flow" and adopt the existing 4G technology, China sees values in promoting the growth and enhancing the stability of its domestic high tech base, even if there are a few tech hiccups along the way. In a nutshell, a government's goal is to bolster domestic companies. The state-owned telecom company, China Mobile, is the vehicle through which the Chinese government is advancing its 4G initiative.

So, what is the contradiction? Realize that gross data (such as e-commerce turnover of $300 billion) favors China on account of its population of 1.35 billion people. On a per person basis, China's data are not so impressive, but this is of little consequence because a business is generally interested in the volume of sales, for which the population, not its density, forms the base. So, China is okay, and the potential market its population represents will always work in the country's favor, helping to lift the country to the top of the ladder, and perhaps leave the United States in the dust in some metric!

The rather rosy picture painted above of the Chinese Internet tech portfolio seems to be at conflict with a few other details of Internet technologies in China. You just need to dig deeper and forget the headlines, in order to unearth these details. That is, there is an apparent disconnect in China's tech portfolio, the basis of which seems to have derived from the communist-era perspectives, maybe.

In my view, a sizeable portion of the progress made so far in China seems to have been the outcome of the hard work of entrepreneurs, coupled with the fact that some ventures might have received substantial and preferential government handouts. The progress is thus an outcome of business ventures, whereas the lack of progress (the conflicts) may be partly attributable to government policies. Some of the Internet technology issues in China include: Chinese government's apparent propensity for "show-case projects" rather than deep-rooted interests in tech innovation, the politics surrounding the banning of social media networks like Facebook and Twitter, the details surrounding the exit of Google from the Chinese market, the awfully low bandwidth available to individual Chinese, higher institutions, and business enterprises, and the incredibly low level of Internet connectivity among small businesses in China. Moreover, Internet-based tech trends such as cloud computing and big data analytics may just be Greek in Chinese technology vocabs, as they are virtually non-existent. In a related article in the 26 July 2014 issue of The Economist, Schumpeter pointed out that "although millions of Chinese businesses sell their products on Taobao, an online marketplace owned by Alibaba, vast numbers remain offline: only 20-25% of small firms in China are internet-connected, compared with 75% in America." Schumpeter further suggests that this low connectivity explains why the labour productivity of local small businesses in China is roughly 67% of the average for all firms in the country, whereas the analogous figures in Britain and Brazil are 90% and 95%, respectively.

The Internet bandwidth available to an average Chinese is pathetically low, both in absolute value and in the ranking among other countries, based on Q4 2012 data by Akamai Technologies. For this metric, South Korea is on top, with a bandwidth of 14 megabits per second (14 mbps), followed by Japan (10.8 mbps), and Hong Kong (9.3 mbps). The U.S. is Number 8 in the ranking (7.4 mbps), whereas China and India are Numbers 91 and 116, respectively, with corresponding bandwidths of 1.8 mbps and 1.2 mbps. Seriously, you can't do much with these low bandwidths!

The bottom line in this article is that a few selected Chinese Internet companies, such as Alibaba, are able to leverage on China's huge population to play big in the international tech arena. However, China seems to be missing out on a few critical Internet tech capabilities, such as decent bandwidth, internet-connectivity among small businesses, and a few tech trends.

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