Welcome back for part two of my musings on China’s digital consumer (r)evolution, with Alibaba and Tencent at the helm.
If you haven’t read the first part, I suggest you do so post-haste, but in case you’re too lazy/busy/both, here’s a lightning round recap:
With stagnating online traffic growth, China’s retailers are leaving the online emphasis in their rearview mirror. Instead, they’re looking towards the horizon of an all-encompassing Online-to-Offline (O2O) customer experience.
Alibaba christened this the ‘New Retail’ strategy, where online and offline are integrated through retail digitalisation, and brick and mortar stores are transformed into experiential hubs.
This blurring of the online-offline boundary cannot happen without big data and AI technology. Both Tencent and Alibaba’s digital platforms aggregate and analyse a data goldmine that brings about a level of operational efficiency we in the West cannot even come within throwing distance of due to our heavily-siloed market.
China’s digital ecosystem is unlike anything we know. It not only brought about a uni-channel on the supply chain side of things but also a uni-identity for the consumer. Every platform user’s daily behaviours can now be recorded and the data stored in a Brand Data Bank, ready to be put to good - and perhaps not so good - use.
Without strict GDPR rules in place and an autocratic government on their side, these colossi can pretty much infringe as much as they want in any way they want, as long as it’s packaged innocently enough (exhibit A: my sweet, virtual Tencent-produced girl band members pictured above). Oh, and name it something as innocuous as ‘Precision Marketing’. Which, granted, is an actual part of it: they do in fact also use the data to make their consumers feel truly pampered. ‘Also’ being the key word here.
This, dear readers, is where we left off. Up until now, I’ve mostly tossed flowers on stage and shouted ‘Bravo!’ in the face of China’s digital tech endeavours and the faster-than-light transformation of their retail industry, both back ánd front-of-house. But let’s call a spade a spade: no matter how much they ‘cutify’ it, they’re playing by an authoritarian and corporatist rulebook we cannot abide by. It is in fact a borderless digital battle we need to arm ourselves for, just as it is a fact that their Data Bank is used both for ‘Precisions Marketing’ and…
#6 …Social Control
Even as I am typing up this article, surfing the interwebs for sources and facts (no #fakenews here, friends), I have to click away an avalanche of privacy agreements before being able to read any of it. And while this irritates about 99% of my brain, the 1% non-lizard brain appreciates and acknowledges how this practice has been put in place for my own good. A bit of that good old General Data Protection Regulation: GDPR. Whether it’s B2B or B2C, all of us have had to make sure our company is compliant or else risk severe penalties of up to 4% of total global revenue of the preceding year. Most would agree that this is a case of ‘Big Brother is watching out for you’.
Not so much in China, where it’s more a case of ‘Big Brother is watching you’. In the olden days (and present-day North Korea), Communist countries used media as explicit Orwellian propaganda tools. The consumers of this media fodder clearly knew what it was they were consuming: a Party doctrine that told them what to think and how to behave. With the dawning of globalisation and the internet, the Communist Party experienced a dictator’s dilemma. Yes, the internet meant an influx of economic opportunities but it also brought the possibility of social unrest unacceptably close. And so they switched gears from a pure propaganda machine to ‘guided communication’, using citizens as more than merely passive targets of mobilisation by asking for their active participation as netizens that co-form the public opinion. As president Xi JinPing himself once stated, the country’s netizens need to be attracted to the Party: “our officials need to go wherever the people go; or else how do we link with the people?”. And where did the people go? Online. And who owns online? Baidu, Alibaba, Tencent - collectively known as BAT.
Delve deeper into China’s new propaganda tactics:
#7 The Dance of Two Giants
Let’s first deep-dive into Alibaba and Tencent’s dual role in greasing the wheels of the Party whilst simultaneously becoming a source of inspiration for companies home and abroad (Baidu will pop up later). But before we do, here’s a fun fact: both founders share the same surname, ‘Ma’, the Chinese character for ‘horse’. I could make another horse pun, but… enough horsing around for now. (PS that one’s for all of you who’ve read part I - if you haven’t, you can still join in on the pun fun here.)
Once upon a time, these two equines played nice (see photographic evidence above), until they began encroaching onto each other’s territory. Tencent started investing in retail and financial services, Alibaba added mobile messaging tools to its repertoire - both doing so successfully, I might add. Alibaba and Tencent have rapidly grown and consolidated the e-commerce space, together holding more than 80% market share. Alibaba has around 552 million active users while Tencent just surpassed the 1 billion mark. Their market capitalisation hovers around half a trillion US Dollars. They have successfully built two ecosystems that are hermetically sealed off from each other and house a vast number of Chinese retailers and suppliers as well as a good chunk of the civilian population. China’s top 5 chained retailers have already fully integrated and there’s a second wave of middle/small business hitting in the near future. This, of course, is great news for everyone's supply chain, which now operates collectively and on the same platform with access to the same data bank, creating a degree of efficiency and visibility that’s hard to beat for non-platform competitors.
While I am a true believer of companies needing to break the silos if their supply chains are to survive in an ever-more globalised market - my company is based on this very principle, after all - we cannot ignore the socio-political landscape within which this is happening. For example, their vast amount of data is not bound by any notion of privacy, leaving consumers’ data wide open for shadier propagandistic practices. The BATs are active purveyors of the Communist Party’s ideology. Alibaba, for example, runs an App called ‘Sesame credit’, which has put a social scoring system in place that is completely based on all the big data Alibaba has stored in their Data Bank. You break the unspoken socially desirable rules, you pay the price of becoming a transactional pariah and are placed on a governmental blacklist. The same goes for Tencent, which has developed an App that lets netizens show their appreciation for Mr. Xi by quickly and repeatedly mashing their phone screens to applaud for his speeches at the Party’s Congress: the more claps per minute, the higher your score. I doubt these types of practices are these companies’ main objective but they most definitely are a mandatory side-effect of their technological successes.
Delve deeper into Alibaba and Tencent's war for online dominance:
"Maintaining the safe operation of the Internet and the secure flow of information is a fundamental requirement for guaranteeing state security and people's fundamental interests, promoting economic development and cultural prosperity and maintaining a harmonious and stable society."
#8 East Meets West
My ethical misgivings in the face of China’s undoubtedly great industrial achievements may seem harsh but need to be discussed for two reasons. First, foreign companies doing business in China need to learn a whole other language, metaphorically speaking, or they might not survive.
The textbook example: Google. As one of the Big Four tech companies, it was presumed they would dominate the Chinese market in no time when they opened their Beijing headquarters in 2006. Then in 2009, they showed footage on YouTube of Chinese security forces beating Tibetans. Oops. Most services got blocked by the Great Firewall and their search market share plummeted from 36.2% in 2009 to 1.7% in 2013. Death by a thousand paper cuts. As Wang Chen of China's State Council Information Office put it: "Maintaining the safe operation of the Internet and the secure flow of information is a fundamental requirement for guaranteeing state security and people's fundamental interests, promoting economic development and cultural prosperity and maintaining a harmonious and stable society." Hello, China? 1984 called: it wants its scary dystopian future back.
Even after Google attempted to save the deal by agreeing to keyword censorship and information blocking, it was too little too late. Baidu was willing to play by the Communist Party’s rules by becoming the most active and restrictive online censor in the search arena. Google could have been China’s Baidu, and they did try to become Baidu at the end but the big question is: can companies that are held to certain Western free-thinking/free-market standards function within such iron borders?
Delve deeper into China's digitalised iron curtain:
#9 East Eats West
That question brings me to the second reason for this ethical pondering. We may not need to understand or agree with China’s autocratic policies but we should try to better understand them on a cultural level if we’re to succeed ánd learn from them as they have from us. Here’s lesson number one: if companies want a piece of the China pie, they join or die. Walmart, for instance, has taken a 10.8% share in JD and is now fully integrated in Tencent’s WeChat app, while Kroger just tied up with Alibaba to sell their Simple Truth line of organic food and eco-friendly household goods on Tmall. Others like Yahoo have sold their lucrative stakes with Alibaba, and a few chose no side by joining both sides. The point is that the only way they could be a relevant player, was to hitch a ride on the Ma express. How else would they be able to compete with their level of efficiency or understanding of the cultural wants and needs. Both our logistics and value systems cannot digest the Chinese pie as is, because most Western companies simply do not have what it takes.
Earlier on, I said companies have two choices, join or die, but there’s actually a third outcome: we either adapt to their ecosystem like Walmart did, die off like Google did or get cloned. I’m talking about intellectual property theft. For decades now, China has not shied away or denied flagrant copyright infringement and corporate espionage. From word-by-word copying of CNBC articles within hours of print to Lego imitators to software theft: these have all lead to international tensions, culminating in the current Sino-American trade war. It would be easy to conclude a lack of innovation and therefore an ultimate lack of threat at the heart of this behaviour, but to do so would not only prove dumb but also dangerous. It is not about a lack of skills or intellect but rather part of a Confucian philosophy that’s best encapsulated in the Chinese proverb “to steal a book is an elegant offence”.
"While the world’s biggest automaker wants access to what one day may become the world’s biggest auto market, China wants the technology and training to build its own cars – and possibly compete with GM."
Do Baidu, Tencent and Alibaba seem any less capable to you than their Western counterparts? Does their speed of change and technological implementation seem inferior to ours? It’s quite the opposite: whether or not certain products, services or technologies have been copied is not the point. They take what they’ve discovered and heighten it to the point where they start running circles around us. The fact that their government provides the necessary growth hormones to make it grow ten times as big in half the time is only part of it. The bigger half is cultural, and it’s the part we’ll need to elegantly steal Confucius style, namely their ability for collectivism and long-term thinking.
Delve deeper into China's not-so-long history with copyright:
#10 West Reincarnated
From all that we’ve talked about up to this point, you might think we’re basically destined to give up or give in when it comes to China. Yet, that is not the glass-half-empty conclusion you’re getting. Nope. It’s more of a ‘we need to be a glass-filled-to-the-brim’ epilogue I am going for.
The drawing above that reads ‘Join or Die’ actually appeared in an editorial by Benjamin Franklin and became a symbol for the disunited state of the American colonies during the American Revolutionary War. It became the symbol for unity in the face of a common adversary. Chinese society runs on this sense of togetherness and so it's logical for Alibaba and others to play into this by providing one platform for everyone and everything. In the West, however, we stimulate and reward individualism, a sense of separateness. Companies remain siloed off from each other, keeping their data firmly pressed against their chests, afraid others might steal their secret formula. We need to band together and realise this protectionist mentality means we run the risk of becoming irrelevant on the world stage.
The Chinese secret weapon of a sense of urgency for certain retail and tech developments, together with their ability for long range planning is what Western retailers and suppliers need to make their own. Good supply chain practices form the backbone of each and every successful retail revolution. Much of the China success stories we’ve covered are about meeting the customer’s expectations and being able to play into their needs and wants via the backdoor. The front-of-house approach is largely based on unifying all the available data on customer behaviour on one single platform in order to find patterns and play into their made-to-measure wishes. This would not be achievable if the back-of-house were in disarray. Digital transformation drives these changes in consumer preferences while providing the means to accommodate a customer-centric shopping experience at the supply chain level, but with just 8% of supply chain executives responding that their organisations are prepared for such a comprehensive system, are these customer dreams a supply chain nightmare for retailers and manufacturers alike? Catering to your customer’s every need and desire requires a fully visible, data-driven supply chain that operate on mega platforms that enable horizontal and vertical collaboration. I promised you in the first blog you’d be saying it in your sleep: a customer-driven, digital supply chain network.
If we combine our inventive, go-getter mentality with a realisation that we’re all in this together and, hopefully, for the long haul, we can become an equally as powerful snake as the powerful dragon we face - minus the authoritarian regime part. Join or Die.
Delve deeper into the hows and whys of supply chain collaboration:
A special thanks to:
Ben Xu, Director at Monitor Deloitte for sharing his two cents on 'New Retail’ in China.
Martin Suter, Head of China Digital Commerce at AB InBev for his vision of brand building in this brave, new digital world.
Nils Van Dam, Global Head Food & Beverage Retail at Duval Union Consulting for his thoughts on China’s retail strategy.
And, of course, Retail Detail’s Jorg Snoeck, Peter Somers, Celine Cassimon and Carole Lamarque for inviting me along for the ride!