tag:theconversation.com,2011:/africa/topics/xiaomi-13641/articlesXiaomi – The Conversation2022-07-13T20:02:40Ztag:theconversation.com,2011:article/1867222022-07-13T20:02:40Z2022-07-13T20:02:40ZChina’s big tech problem: even in a state-managed economy, digital companies grow too powerful<p>China’s digital economy has advanced rapidly over the past two decades, with services, communications and commerce moving online. </p>
<p>The Chinese government has generally encouraged its citizens to accept digital technologies in all aspects of daily life. Today China has <a href="https://www.cnbc.com/2021/02/04/china-says-it-now-has-nearly-1-billion-internet-users.html">around a billion internet users</a>. </p>
<p>China has made clear it aims to be a global leader in digital infrastructure and technologies. Leadership in digital tech has been deemed critical to China’s <a href="http://www.cac.gov.cn/2017-10/27/c_1121867641.htm">future economic growth</a>, domestically and internationally.</p>
<p>Like Western countries, China has seen the rise of a handful of dominant digital platform or “big tech” internet companies. <a href="https://journals.sagepub.com/doi/10.1177/1329878X221105124">We studied China’s recent efforts</a> to regulate these companies, which may hold lessons for Western nations trying to manage their own big tech problems.</p>
<h2>China’s ‘big four’ tech companies</h2>
<p>China’s biggest tech firms are Baidu, Alibaba, Tencent and Xiaomi (often collectively called BATX for short). Broadly speaking, Baidu is built around search and related services, Alibaba specialises in e-commerce and online retail, Tencent focuses on messaging, gaming and social media, and Xiaomi makes phones and other devices.</p>
<p>Like their Silicon Valley counterparts Google, Amazon, Facebook and Apple (or GAFA), the BATX companies dominate their competitors. This is largely thanks to the enormous network effects and economies of scale in data-driven, online business.</p>
<p>The BATX businesses (again, like GAFA) are also known for gobbling up potential competitors. In 2020, Tencent <a href="https://detail.youzan.com/show/goods?%20from_source=gbox_seo&alias=2oivakrio2iju">reportedly</a> made 168 investments and/or mergers and acquisitions in domestic and international companies. Alibaba made 44, Baidu 43 and Xiaomi 70.</p>
<h2>The tech crackdown</h2>
<p>In the past 18 months or so, the BATX companies have come under increased scrutiny from the Chinese government. </p>
<p>In November 2020, an IPO planned for Ant Group, an affiliate of Alibaba, was effectively cancelled. <a href="https://fortune.com/2021/11/03/one-year-after-suspended-ant-ipo-alibaba-china-tech-crackdown-overseas-listings/#:%7E:text=%22Without%20risk%2C%20no%20innovation%20can,day%2C%20Ant's%20IPO%20was%20canceled">Ant Group was forced to restructure</a> after Chinese regulators “interviewed” the company’s founder. </p>
<p>The following month, Alibaba’s Ali Investment and Tencent’s Literature Group were <a href="https://industry-people-com-cn.translate.goog/n1/2020/1214/c413883-31965875.html?_x_tr_sch=http&_x_tr_sl=zh-CN&_x_tr_tl=en&_x_tr_hl=en&_x_tr_pto=wapp">fined RMB 500,000</a> (about A$110,000) each for issues relating to anti-competitive acquisitions and contractual arrangements. </p>
<p>At the same time, China’s General Administration of Market Supervision <a href="https://www.samr.gov.cn/xw/zj/202104/t20210410_327702.html">opened a case against Alibaba</a> for abuse of its dominant market position in the online retail platform services market.</p>
<p>In March 2021 more fines were issued including to Tencent and Baidu. They were <a href="https://www.samr.gov.cn/xw/zj/202103/t20210312_326737.html">fined RMB 500,000 each</a> for anti-competitive acquisitions and contractual arrangements.</p>
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<p>Then in April 2021, Chinese authorities <a href="https://www.samr.gov.cn/xw/zj/202104/t20210413_327785.html">met with 34 platform companies</a>, including Alibaba and Tencent, to provide “administrative guidance sessions” for internet platforms. That month Alibaba was also fined <a href="https://www.samr.gov.cn/xw/zj/202104/t20210410_327702.html">a spectacular RMB 18.228 billion</a> (around A$4 billion) and Tencent another RMB 500,000 for anti-competitive practices. </p>
<p>In July 2021, Chinese authorities <a href="https://www.samr.gov.cn/xw/zj/202107/t20210710_332525.html">prohibited</a> a merger between two companies that would have further consolidated Tencent’s position in the gaming market. </p>
<p>The government’s efforts are ongoing. Earlier this week, regulators <a href="https://www.reuters.com/world/china/china-regulator-fines-alibaba-tencent-disclosure-violations-2022-07-10/">imposed new fines on Alibaba, Tencent and others</a> for violating anti-monopoly rules about disclosing certain transactions. </p>
<h2>What’s motivating Chinese authorities to intervene?</h2>
<p>The evolution of China’s digital giants shows how data-driven markets work on a “winner takes all” basis in both state-managed and capitalist economies.</p>
<p>The BATX companies now wield significant social and economic power in China. This conflicts with China’s ideological commitment to state-managed social order.</p>
<p>In January 2022, President Xi Jinping <a href="http://www.gov.cn/xinwen/2022-01/15/content_5668369.htm">called for stronger regulation</a> and administration of China’s digital economy. The goal, he said, was to guard against “unhealthy” development and prevent “platform monopoly and disorderly expansion of capital”.</p>
<p>State-orchestrated social order is not possible where there is an excessive accumulation of private power.</p>
<p>China’s digital policy agenda is designed to achieve strong economic growth. However, the Chinese Communist Party also <a href="http://www.gov.cn/zhengce/2020-11/03/content_5556991.htm">seeks to maintain strong state control</a> over the structure and function of digital markets and their participants to ensure they operate according to Chinese values and Chinese Communist Party objectives.</p>
<h2>What can we learn from China’s approach to ‘big tech’?</h2>
<p>How can we regulate digital platforms, particularly to improve competition and public oversight? This remains a largely unsolved public policy challenge.</p>
<p>Australia and the EU, like China, have demonstrated significant willingness to take up this challenge.</p>
<p>In Europe, for example, where the US platforms dominate, policymakers are actively seeking to achieve <a href="https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/651992/EPRS_BRI(2020)651992_EN.pdf">independence from foreign technology companies</a>. They are doing this by improving their own domestic technology capacities and imposing rules for privacy, <a href="https://gdpr.eu/what-is-gdpr/">data collection and management</a>, and <a href="https://ec.europa.eu/commission/presscorner/detail/en/ip_22_2545">content moderation</a> that align with European values and norms.</p>
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Read more:
<a href="https://theconversation.com/chinas-tech-and-finance-crackdown-is-a-challenge-to-western-ideas-that-cuts-across-developing-world-171059">China's tech and finance crackdown is a challenge to western ideas that cuts across developing world</a>
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<p>While the EU and China are aiming at very different goals, both are willing to take a significant role in regulating digital platforms in accordance with their stated economic, political and social values.</p>
<p>This stands in stark contrast to the situation in the US, which has so far had little appetite for meaningfully restricting the behaviour of tech companies. </p>
<p>In theory, China’s centralised political power gives it space to try different approaches to platform regulation. But it remains to be seen whether Chinese authorities can successfully overcome the tendency for monopolies to form in digital markets. </p>
<p>If China succeeds, there may be valuable lessons for the rest of the world. For now we must wait and watch.</p>
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<p class="fine-print"><em><span>Joanne Gray has previously received research funding from Meta Platforms Inc. formerly known as Facebook Inc. </span></em></p><p class="fine-print"><em><span>Yi Wang does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Like the EU and unlike the US, China is trying to rein in the power of big tech companies. Can we learn from these efforts?Joanne Gray, Lecturer in Digital Cultures at The University of Sydney, University of SydneyYi Wang, Early Career Researcher and Sessional Academic in Creative Industries, Digital Platforms and Knowledge Exchange, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1093772019-01-04T14:56:09Z2019-01-04T14:56:09ZWhat is really eating Apple – and why Steve Jobs would not be doing a lot better<figure><img src="https://images.theconversation.com/files/252483/original/file-20190104-32148-il9aoa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Jobs worth?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/christmas-island-australia-may-20-2017-643756204?src=ZjPYK8kUoRO8W7XPDOZuoA-1-39">franz12</a></span></figcaption></figure><p>Apple has started the new year by disappointing investors with <a href="https://www.apple.com/newsroom/2019/01/letter-from-tim-cook-to-apple-investors/">its first</a> profit warning in 17 years. The company said that poor sales of its <a href="https://www.macworld.co.uk/news/iphone/new-iphone-xs-2018-3646340/">latest range</a> of iPhones has helped to weaken its first financial quarter (September to December 2018). Apple now expects revenues of US$84 billion (£66 billion) with a gross profit margin of 38%, having <a href="https://www.bloomberg.com/news/articles/2019-01-02/apple-cut-first-quarter-sales-forecast-on-weak-iphone-sales">initially expected</a> between US$89 billion and US$93 billion. In the same quarter last year, Apple brought in US$88.3 billion on a gross margin of 42%. </p>
<p>This revision <a href="https://uk.finance.yahoo.com/chart/AAPL#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">caused</a> the company’s stock to drop 10% to its lowest level in 21 months. It is time to find culprits, and I will not be surprised to see headlines like, “Tim Cook is not up to the Job(s)” or: “Seven years after Jobs’ death, Apple is starting to rot.” We mustn’t believe them, however. </p>
<p>The reason why is explained in <a href="https://www.simonandschuster.com/books/The-Halo-Effect/Phil-Rosenzweig/9781476784038">The Halo Effect</a>, which was published by my colleague Phil Rosenzweig in 2007 – in my opinion one of the most important books in the history of management. Phil argues that perceptions of performance contaminate the assessments that we make about managers and leaders. He uses several examples, from Lego to Cisco to ABB, to show that a leader’s skills do not affect a company’s performance in a significant way. </p>
<p>When a company performs well, we tend to evaluate its leader in way that is too positive. This induces us to attribute stellar performance to certain leadership skills. So, in the case of Steve Jobs, many will eulogise his visionary perfectionism, and the great risks he took in reinventing consumer electronics categories. Yet the evidence doesn’t back this up. </p>
<h2>The dirty truth</h2>
<p>The one academic paper that has done a decent (econometric) job of identifying and quantifying the effect of individual leadership in corporate performance is <a href="http://faculty.chicagobooth.edu/marianne.bertrand/research/papers/managing_style_qje.pdf">this one</a> from 2003. The two professors, Marianne Bertrand and Antoinette Schoar, from University of Chicago and MIT respectively, calculated that individual chief executives only contribute to between 2% and 4% of a company’s total performance. </p>
<p>In other words, if Apple’s profit margin is 38%, Tim Cook would be able to add or detract 1.5% at most. The same is true in reverse of Steve Jobs’ achievements during his two periods at the helm (1976-85 and 1997-2011). We can’t attribute Apple’s once skyrocketing stock to his tenure because we don’t know what the alternative best-case scenario would have been. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/252492/original/file-20190104-32139-1tzx65o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/252492/original/file-20190104-32139-1tzx65o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/252492/original/file-20190104-32139-1tzx65o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/252492/original/file-20190104-32139-1tzx65o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/252492/original/file-20190104-32139-1tzx65o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/252492/original/file-20190104-32139-1tzx65o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/252492/original/file-20190104-32139-1tzx65o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/252492/original/file-20190104-32139-1tzx65o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Cook who’s talking.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tim-cook-chief-executive-officer-apple-1069919423?src=BdA7WdkbRoQW8G906FtfJA-1-18">John Gress Media Inc</a></span>
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<p>In my view, Apple’s problems are primarily caused by external events. Cook explains in his recent letter that, with the exception of the <a href="https://www.cnbc.com/2018/05/01/apple-earnings-software-and-services-revenue.html">services business</a> – which includes the App Store and iTunes and accounted for 14% of revenues in financial 2018 – all the other Apple businesses will be “constrained”. This means Macs, iPads, iWatches but most importantly iPhones, which <a href="https://s22.q4cdn.com/396847794/files/doc_financials/quarterly/2018/Q4/10-K-2018-(As-Filed).pdf">accounted for</a> 62.7% of total Apple revenues in 2018, compared to 63.4% in 2016. </p>
<p>What is causing this constraint? The increasing competition from Chinese manufacturers such as Huawei and Xiaomi – but also from Google, LG and Samsung – has eroded the once dominant position of Apple in the smartphone market. Competition has been particularly damaging in emerging markets, which Cook is blaming on a strong dollar and weaker macroeconomic conditions – as opposed to any faulty Apple strategy in this part of the world. </p>
<p>With respect to markets where the iPhone has enjoyed a more dominant position – especially the US – Apple recognises that customers don’t replace their devices as often as they used to. A <a href="https://www.wired.com/story/silver-lining-apples-very-bad-iphone-news/">recent report</a> by BayStreet Research estimated that, while the average user upgraded her iPhone every 24 months as recently as 2015, by the last quarter of 2018 this holding period had jumped to 36 months. </p>
<p>This is due to fewer carrier subsidies, according to Apple – but also, in my opinion, to the fact that the new devices do not have much more to offer. I use an iPhone 7, which I bought in 2016, and I am honestly not inclined to spend US$1,000 for I-am-not-sure-which new features on a newer version. I already get much more from my current device than I need. </p>
<h2>Apple’s problem</h2>
<p>It worries me that Apple is a single-product company. Among its other revenues, iPad sales are one-tenth of iPhone sales eight years after tablets were launched. By comparison, Samsung mobile phone sales <a href="https://images.samsung.com/is/content/samsung/p5/global/ir/docs/2018_3Q_conference_eng.pdf">only represent</a> 36.6% of its total revenues. Wearables by Apple are not taking off either – and the company <a href="https://nypost.com/2018/04/03/why-microsoft-and-apple-dont-need-to-sell-your-data/">is not</a> monetising its platform business by selling customer data to the same extent as digital rivals such as Google, Amazon and Facebook.</p>
<p>As I argued in <a href="https://theconversation.com/why-apple-is-no-longer-a-byword-for-innovation-just-ask-the-markets-107529">an article</a> in The Conversation a few weeks ago, the decline in Apple stock in recent months, down 37% since August 2018, reflects a change in market perception about the company’s ability to grow. Apple is no longer seen as a growth stock, but rather a dividend-paying, profitable company whose value is less based on a bright future than what is currently being delivered to its shareholders. The new financials confirm this view. </p>
<p><strong>Apple share price, 2010-19</strong></p>
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<a href="https://images.theconversation.com/files/252491/original/file-20190104-32154-1ibwei8.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/252491/original/file-20190104-32154-1ibwei8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/252491/original/file-20190104-32154-1ibwei8.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=257&fit=crop&dpr=1 600w, https://images.theconversation.com/files/252491/original/file-20190104-32154-1ibwei8.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=257&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/252491/original/file-20190104-32154-1ibwei8.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=257&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/252491/original/file-20190104-32154-1ibwei8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=323&fit=crop&dpr=1 754w, https://images.theconversation.com/files/252491/original/file-20190104-32154-1ibwei8.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=323&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/252491/original/file-20190104-32154-1ibwei8.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=323&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://uk.finance.yahoo.com/chart/AAPL#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">Yahoo Finance</a></span>
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<p>As Phil Rosenzweig explains in his book, Apple’s story is not a new one. Today we blame the current Apple management’s over-dependence on a single product for the problems with investors. Cook and his team will respond by diversifying through acquisitions, or betting more heavily on new territories, or even staying put with its current product offerings. </p>
<p>Whether this works or fails, the management’s style of leadership will probably be disproportionately praised or criticised. It is always easy for analysts to be wise in hindsight. But the reality is that even the world’s biggest businesses are more vulnerable to external forces than we like to think. However the leadership reacts and, whoever is at the helm, the effect is actually quite limited.</p><img src="https://counter.theconversation.com/content/109377/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Arturo Bris does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Some will point to Apple’s lost talisman as the reason for the company’s current woes. They needn’t bother.Arturo Bris, Professor of Finance, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/384972015-03-15T19:30:56Z2015-03-15T19:30:56ZAs China changes from world’s factory to innovator, Australia needs to keep pace<figure><img src="https://images.theconversation.com/files/74584/original/image-20150312-13502-jcsbzz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">China has been the manufacturer to the world on the back of low wages. But authorities are now targeting innovation.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/dcmaster/5236053511/in/photolist-85CsKc-9NLrWq-5xXhC-9YKtGo-nJuLCD-9NMrMQ-bserk8-N6B9f-8YKhk5-7FRcDy-8YG9hF-7FRbfq-dPv85f-9NHECP-9NHGjZ-5orCyA-foL1ED-guNonP-nJtFiz-aGdWA4-ffetYs-dqLhuF-dqLs6G-5orCJy-nJtFft-o1SxHC-66BffH-9nEQ6-aHWPen-8YFdvP-63AQ3h-a8WtWU-9NMy6d-8iwrk9-9NJLY2-5orCVj-duF1ne-9NJK6D-9NMzAf-9NMvdh-7FRbDJ-dpjXDf-9NJr1p-9NJBR2-9NJGmv-9NMtB5-9NJvfz-9NMqQN-9NJpPK-9NMwcY">Flickr/Chris dcmaster</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Australia’s economic future can be bright. </p>
<p>The 2015 Intergenerational Report (IGR) says that in 2055 our pay packets will on average, be able to buy nearly 80% more goods and services than now. </p>
<p>But, as the IGR concedes, whether these happy days come true really depends on what happens to productivity between now and then. Government policy settings that foster a culture of innovation will be crucial.</p>
<p>And there’s the problem. </p>
<p>As it currently stands, the World Economic Forum (WEF) ranks the <a href="http://www.weforum.org/reports/global-competitiveness-report-2014-2015">strength</a> of Australia’s innovation environment in the bottom half of the OECD. </p>
<p>If we are benchmarking ourselves against the likes of Germany, then that may not seem so bad. But how about China, a country that made a name for itself as the factory of the world on the back of millions of workers paid next to nothing?</p>
<h2>China rises up the innovation rankings</h2>
<p>That’s the reality that Australia now faces: out of the 144 countries ranked by the WEF, the strength of China’s innovation environment now lies just seven places behind ours. And don’t forget: per-capita incomes in China are only around one-quarter of those in Australia.</p>
<p>To be sure, it’s not so much that Australia has gone backwards. It’s that China has caught up. The days of cheap labour in China ended more than a decade ago. </p>
<p>Nowadays when utilities and other costs are added to sharply rising wages, Boston Consulting Group says that manufacturing costs <a href="http://www.bcg.com/media/pressreleasedetails.aspx?id=tcm:12-168578">in China</a> are only 4% less than in the US.</p>
<p>That’s put enormous pressure on Chinese companies to innovate and produce higher value-added goods and services rather than try to compete on the lowest price. </p>
<p>It’s hard to argue with the results. According to the World Trade Organization, China’s share of world manufactured goods trade <a href="https://www.wto.org/english/res_e/statis_e/its2014_e/its14_toc_e.htm">leapt</a> from 4.7% in 2000 to 17.5% in 2013.</p>
<p>Some quip that China hasn’t yet discovered its own Apple. That’s true. But it does have Lenovo and Huawei, the world’s largest manufacturers of PCs and telecommunications equipment, respectively. Then there’s smart phone maker, Xiaomi, a company we’ll be hearing a lot more about in the next few years. And what’s unfolding in the digital space is nothing short of revolutionary. </p>
<h2>The world’s fasting growing e-commerce market</h2>
<p>Last month the Harvard Business Review said that over the past five years the digital evolution in China has been more <a href="https://hbr.org/2015/02/where-the-digital-economy-is-moving-the-fastest">rapid</a> than in any of the other 49 countries they studied.</p>
<p>China doesn’t need to find its own eBay or Amazon. </p>
<p>By 2012, China’s largest online retailer, Alibaba, already had sales <a href="http://www.economist.com/news/leaders/21573981-chinas-e-commerce-giant-could-generate-enormous-wealthprovided-countrys-rulers-leave-it">exceeding</a> that of the American giants combined.</p>
<p>Industry researcher, eMarketer, says that the value of retail e-commerce sales in China in 2014 was 40% higher than in the US. By 2018, it will be more than <a href="http://www.emarketer.com/Article/Retail-Sales-Worldwide-Will-Top-22-Trillion-This-Year/1011765">double</a>. Runs on the board in e-commerce are now being leveraged in other areas. </p>
<p>Alibaba just set up its own bank. To decide who to lend to it will tap its own treasure trove of <a href="http://techcrunch.com/2015/01/27/data-from-alibabas-e-commerce-sites-is-now-powering-a-credit-scoring-service/">data</a>: the payments histories of more than 300 million individual users and 37 million small businesses that trade of its online platforms.</p>
<p>In searching for the secrets of Chinese success, don’t look for hordes of state-owned enterprises pumped full of government subsidies. Alibaba and co are privately-owned and profit hungry. </p>
<p>But what the Chinese government has done well is to recognise the high cost challenge and respond with a narrative about how it can be overcome. </p>
<h2>Innovation as the buzzword</h2>
<p>We heard this loud and clear when Chinese Premier, Li Keqiang, delivered his work report at the National People’s Congress earlier this month. “Innovation-driven development” is now the national economic <a href="http://blogs.wsj.com/chinarealtime/2015/03/05/china-npc-2015-the-reports/">strategy</a>.</p>
<p>When <a href="https://agenda.weforum.org/2015/01/chinese-premier-li-keqiangs-speech-at-davos-2015/">addressing</a> the World Economic Forum at Davos in January, Premier Li spoke of innovation and entrepreneurship no less than 20 times. He said that in Chinese eyes they are a “gold mine”. It’s not just words. It was reforms by China’s banking regulator last year that cleared the way for Alibaba to act on its entrepreneurial instincts and branch into finance.</p>
<p>Yet far from the Chinese sense of urgency and mission, Australian governments have appeared content squandering the proceeds of the mining boom - a once in a generation opportunity to reposition the economy for sustainable, innovation-led growth.</p>
<h2>So what about Australia?</h2>
<p><a href="http://www.abc.net.au/radionational/programs/ockhamsrazor/does-manufacturing-have-a-future3f/6140892">Innovation policy in Australia</a> is now focused on establishing five industry “Growth Centres”, which will be designed to encourage business-university collaboration. But these have only been allocated around $190 million, compared with almost $3 billion for the UK Catapult Centres, on which they are based.</p>
<p>Australia doesn’t need to unleash its own Apple or Alibaba, however enticing such a prospect might be. The reality is we account for only 2% of the world’s R&D, and even less of its markets.</p>
<p>But we do need more knowledge intensive “micro-multinationals” that engage in niche production and feed into global networks and value chains. </p>
<p>Already in 2012, before the IGR, <a href="http://australianpolitics.com/downloads/foreign/12-10-28_aust-in-the-asian-century-white-paper.pdf">the Australia in the Asian Century White Paper</a> noted: “Using creativity and design-based thinking to solve complex problems is a distinctive Australian strength that can help to meet the emerging challenges of this century”.</p>
<p>Countries like Germany, Switzerland, and more recently the UK, have shown that being a high cost economy doesn’t mean that manufacturing needs to be abandoned. Nor does it mean that international competitiveness needs to be lost. </p>
<p>But when a country like China starts teaching the same lessons, it really is time to sit up and start paying attention.</p><img src="https://counter.theconversation.com/content/38497/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roy Green has received funding from Australian Government, OECD and European Commission for research on innovation and manufacturing.</span></em></p><p class="fine-print"><em><span>James Laurenceson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Once the world’s factory, China is shooting up the innovation rankings. There are important lessons there for Australia.James Laurenceson, Deputy Director and Professor, Australia-China Relations Institute (ACRI), University of Technology SydneyRoy Green, Dean of UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/344452014-11-21T14:40:06Z2014-11-21T14:40:06ZWhy Apple should watch out with Xiaomi smartphones about<figure><img src="https://images.theconversation.com/files/65192/original/image-20141121-1043-kt5zk6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">China's top smartphone maker has its sights on global dominance.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/worldleaks/14879080703">World Leaks</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Xiaomi might still sound a bit foreign to you, but the Chinese smartphone manufacturer is now the <a href="http://www.theguardian.com/technology/2014/oct/30/china-xiaomi-third-biggest-smartphone">third largest in the world and the largest in China</a>. And they are largely building their market share by offering a cheaper alternative to the likes of Apple. </p>
<p>The latest smartphone they are working on sent ripples around the industry following reports <a href="http://www.ubergizmo.com/2014/11/xiaomi-could-release-65-smartphone/">it would retail at US$65</a>. Xiaomi’s current low-end model, the Redmi 1S, offers similar technical specifications and costs about US$150. </p>
<p>These low prices are achieved thanks to a business plan
where they sell a specific model for a longer period of time than competitors. By selling the same model for 18 months (as opposed to the usual six), they have more flexibility with profits and the ability to make money from selling accessories for a longer period. Alongside Xiaomi’s low overheads due to their not owning any physical stores or engaging in traditional advertising, this means that phones can be sold at an almost bill-of-material price. </p>
<h2>Same same, but different?</h2>
<p>As a result, Xiaomi has been gaining market share since its launch in 2011. In 2013 it sold 18.7m smartphones; <a href="https://www.techinasia.com/xiaomi-sold-26-million-phones-in-first-half-2014/">in the first half of 2014 alone, it sold 26.1m</a>. Add to this its modelling of itself and its products on Apple and the Xiaomi phenomenon becomes an irresistible object of speculation across the smartphone industry. But can this homegrown Chinese brand, which prides itself on its cheapness, knock Apple off the top spot?</p>
<p>Xiaomi’s CEO, Lei Jun, appears to actively cultivate the iconic Steve Jobs image, complete with jeans and dark shirts. And, during product unveiling conferences, he has even copied Apple’s “one more thing …” slide. There is also no disputing the fact that the products look very similar to Apple products. </p>
<p>But Xiaomi maintains that its principles differ from those of Apple as it sells all its products online, has no partners or third-party distributors, and gives customers the ability to customise software. Perhaps more important to understand is the Chinese attitude towards new products that often does not draw the same lines between “innovation” and “copying” as Western legal systems would dictate. </p>
<h2>The phenomenon of ‘shanzhai’</h2>
<p>Shanzhai is Chinese for “fake”. It’s a cultural phenomenon in China where fake brands play on existing (generally Western) famous ones – from “Dolce and Banana” t-shirts to tourist villages perfectly mimicking the Eiffel Tower or the Coliseum. Shanzhai is often not seen as copying, but as admiring and even improving upon, and is hugely popular amongst Chinese youth. This is sometimes due to its ability to provide products not dissimilar to their favourite Western brands, but often as a politic statement in its own right. </p>
<p>Xiaomi, in paying tribute to Apple in its design, may well tap into the feeling around shanzhai as an alternative to the West. Despite the 70 years that have passed since the National Products Movement of the 1930s, nationalistic sentiment is not uncommon amongst pockets of Chinese youth and a more generalised low-key nationalism and support for Chinese brands is never far away.</p>
<h2>Appealing to the Chinese masses</h2>
<p>In fact, Xiaomi’s ability to speak to a specifically Chinese customer base may well make its affordability less problematic for those consumers seeking conspicuously expensive Western brands such as Apple. Xiaomi (小米) is the Chinese word for “millet” – and CEO Lei Jun has previously linked the “Xiao” part of the word (Chinese for “small”) to the Buddhist concept that a single grain of rice is as great as a mountain, suggesting Xiaomi sees value in working from small things. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/65185/original/image-20141121-1055-bhd5l8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/65185/original/image-20141121-1055-bhd5l8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65185/original/image-20141121-1055-bhd5l8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65185/original/image-20141121-1055-bhd5l8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65185/original/image-20141121-1055-bhd5l8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65185/original/image-20141121-1055-bhd5l8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65185/original/image-20141121-1055-bhd5l8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Communist people’s hero Lei Feng.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/thomasfisherlibrary/6813010996">Thomas Fisher Library</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>This strikes a very similar chord to the <a href="http://resources.alibaba.com/article/19867/Interview_with_Alibaba_com_s_CEO_Jack_Ma.htm">“shrimps not whales”</a> philosophy of another of China’s business stars, Jack Ma, the founder of Alibaba. Both have huge resonances with the Mao-era emphasis on small parts – the people as the “trusty screws” of the Party machine. It is entirely fitting therefore that Xiaomi’s mascot is a bunny wearing a ushanka-hat, which in China is associated with the Communist and people’s hero, Lei Feng. He epitomises the idea of the “trusty little screw” and Xiaomi are not the first company to use him to tap into popular sentiment in the Chinese domestic market.</p>
<p>It is difficult not to feel though, that this branding is more appealing to the new rural consumers of smartphones in China than the better-off, upwardly mobile ones in the urbanised coastal provinces. Due to the cheapness of phones compared to computers, internet use on smartphones is a rapidly increasing phenomenon in rural provinces where the typically more traditional citizens feel greater affinity with references to “millet” and Lei Feng. </p>
<p>But perhaps Xiaomi’s plan is, like Mao, to consciously build its revolutionary base among the rural masses before wholeheartedly attempting to win market-share amongst the urban proletariat. If this is the case, Apple will certainly have tough competition on its hands.</p><img src="https://counter.theconversation.com/content/34445/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alison Hulme does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Xiaomi might still sound a bit foreign to you, but the Chinese smartphone manufacturer is now the third largest in the world and the largest in China. And they are largely building their market share by…Alison Hulme, Teaching Fellow, Royal Holloway University of LondonLicensed as Creative Commons – attribution, no derivatives.