Business model creation and innovation in China: not just copycats.

In a previous post, we described the Chinese innovation ecosystem: a rapidly growing environment, where the role of the Chinese government is crucial to enable the needed conditions for companies to thrive and innovate. Now we would like to dive into the particular way that Chinese companies innovate by adapting to the specific traits of Chinese society and economy.

What are Chinese innovators trying to solve?

Understanding Chinese customer preferences is essential for creating or innovating business models in China. Therefore, before we can understand what Chinese people need and demand, we should try to fully understand the characteristics of Chinese innovations. There are some particular needs and expectations Chinese customers have that innovators always have in mind:

  • Chinese customers are price sensitive; they will not pay a high price for a service or product if they can save money using or purchasing a lower priced product.

  • They are short-term oriented and very flexible with their planning, so they will care less about the savings acquired or durability of a product over a long duration. They will not buy a product for the promise of savings coming from a more extended durability.

  • They usually do not appreciate over-engineering. If it works, customers will not look for other options with better functions.

  • They look for frugal innovations from local competitors as a replacement for more expensive, imported alternatives.

To create those products and services, Chinese innovators follow some basic rules. Examining the way in which they work is well worth the time required, as we can learn many lessons about innovation and business development.

How do Chinese innovators work?

Chinese innovators work in a swift, flexible and creative way. We can summarize their business approach in the following points:

 The Chinese customers are avid buyers of technology. This fact represent a great opportunity for all those companies that successfully address their needs with new products and services.

The Chinese customers are avid buyers of technology. This fact represent a great opportunity for all those companies that successfully address their needs with new products and services.

  • Bold experimentation and rapid iteration: Business models are quickly implemented and quickly discarded if wrong. Failure is not a problem, but a ladder to success.

  • Innovation through creative adaptation: Chinese innovators are bold enough to challenge former business models, merging different choices and creating new ones.

  • “Lean value” focus: This approach is supported by the nature of the market. It is full of entrepreneurs, customers, markets and capital that happen at the same time. So, probably dozens of entrepreneurs are working on the same idea at the same time; the market will falsify most wrong assumptions quickly.

  • They are ambitious; they want to be global and to reach new markets, growing as much as they can once they achieve the right product-market fit.

The previously mentioned points are a general description of the way Chinese innovators work. It is also interesting, and helpful, to examine in more detail some real examples that will help further explore these points.

Innovation made real in China: Alibaba, eHI, Tencent and NIO

To illustrate how Chinese innovators work we have selected several examples: Alibaba, Tencent, eHI, and NIO. Although the first two mentioned are probably the most well-known companies on the list, all of them are world-class players. Alibaba is a direct rival to Amazon, Tencent’s company valuation is on the same level with Facebook, eHi is probably the most significant car rental service in the world (although it operates only in China), and NIO builds the fastest electric and self-driving cars, directly competing with Tesla in China.

The success cases for every company on this list illustrate the points above: experimentation and iteration, creative adaptation, “lean value focus,” and global ambition.

Bold experimentation and rapid iteration: Taobao and NIO

 Alibaba is currently one of the biggest e-commerce business worldwide, directly competing with Amazon.

Alibaba is currently one of the biggest e-commerce business worldwide, directly competing with Amazon.

Alibaba is a clear example of the way Chinese innovators experiment and iterate.  The company right now is the absolute dominator for the e-commerce C2C business in China with its Taobao platform. But this position did not come for free; it was fiercely disputed with eBay. The American e-commerce giant acquired EachNet in 2003 for USD 180 million, with a willingness to step into the enormous Chinese market. EachNet, founded in 1999, was the number one auction platform in China, with a market share of more than 90%, so its acquirement seemed like a wise move to get into the Chinese market.

At the same time, in 2003-2004, Alibaba invested USD 52 million to enter the C2C market in China through its service, Taobao.com. A year later, in 2004, it occupied over 50% of the market, displacing eBay to the second position. In 2010 Taobao had close to 80% of the C2C market in China, entirely displacing eBay.

There are many factors that brought about the success of Taobao, but we can point to the most important ones:

  • eBay’s listing fees were too high for Chinese customers, who preferred a cheaper service, such as Taobao. In this platform the basic service was free, charging the sellers for extras, following a freemium/add-on business model.

  • PayPal, the native payment app for eBay, did not seamlessly integrate escrow into the sale process. To the contrary, Alipay (the payment system for Taobao) made escrow an essential component of the online buying experience.

  • EachNet did not allow users to communicate directly, while Taobao allowed buyers and sellers to use direct instant messaging.

  • Finally, Alibaba made a significant investment to defeat eBay, even though it meant losing money at the beginning. eBay’s Chinese brand could not subsidize competition with Taobao, as long as the global headquarters demanded numbers and profits every year.

Taobao’s example shows that the same business model that worked in America did not succeed in China not because there wasn't a demand for it, but because eBay failed to adapt it to the Chinese customer’s preferences. By making some apparently minor changes, Alibaba gained a significant advantage that was enough to achieve market dominance. In fact, eBay´s defeat was the birth of the Alibaba global e-commerce business, now worth 436 billion dollars, x10 times the size of its former competitor.

 NIO is a great example of innovation based on customer satisfaction and convenience, adapting existing electric car technologies to the demands of Chinese customers.

NIO is a great example of innovation based on customer satisfaction and convenience, adapting existing electric car technologies to the demands of Chinese customers.

Another example of the way Chinese innovators experiment and adapt is NIO. This company, founded in 2014, is a direct competitor to western car makers in the field of electric and self-driving cars, building high-class models that aspire to change the way people use cars by relying on top-notch technology.

What NIO is doing is benchmarking other car models, especially the Tesla Model X, to create a cheaper version, adapted to the taste of Chinese consumers willing to buy an electric and self-driving car. In fact, NIO defines its product not as a car nor as software, but as an experience carefully crafted to meet driver expectations. For that purpose the company cultivates a direct relationship with customers, something unusual in the automotive industry, retaining all the functions that distributors used to perform, from sales to long-term maintenance of vehicles.

The service that NIO is creating includes every aspect of the user experience, including charging, where nowadays the experience is inconvenient due to China’s infrastructure. The company is planning to develop charging substations, connected to cloud computing and data, as well as mobile charging vehicles to create the best service.  

Much like the case of BYD, explained in another blog post, the Chinese car industry is a great example of how innovators in China quickly adapt to their customer needs through experimentation and iteration, finding the right product-market fit as soon as possible. It is not just about copying, but changing and innovating to match specific market demands.

Innovation through creative adaptation: eHi and Tencent

Chinese innovators are also bold enough to design new business models creatively. eHi Car Service, the most successful car rental company in China with more than 10,000 vehicles, is an excellent example of that: rather than creating entirely new business models, eHi prefers to adapt existing ones to the needs and preferences of Chinese customers, merging and creating new brand services. Its success comes from an effective reinvention and remix of several business models:

 eHI is the most popular car service in China, providing mobility solutions to millions of users all over the country. 

eHI is the most popular car service in China, providing mobility solutions to millions of users all over the country. 

  • The self-drive model of car rental, where Hertz is the most prominent player in China.

  • The chauffeur-driven business model, where every car is driven by a chauffeur, like we see with Uber or Lyft.

  • The car-sharing business model, quite popular in USA and Europe, where companies such as Zipcar or Car2go are changing the way urban dwellers commute within the city.

  • eHi added to the mix some telematic technology, with the goal to track the performance and use of its cars.

As a result, the value given by eHi to its customers is unique, offering at the same time self-drive car rental in a very flexible way (paying on an hourly, daily, weekly or monthly base), together with chauffeured car services. Thus, eHi can serve both individuals and corporate clients, providing a comprehensive and very convenient mobility solution to more than 400 million customers. The company is also actively investing in innovation, exploring new mobility options, such as self-driving cars.

 WeChat is the most used social app in China, displacing Facebook, Twitter and other popular social media companies.

WeChat is the most used social app in China, displacing Facebook, Twitter and other popular social media companies.

Another good example of this mixed approach to business model innovation is Tencent. This company has overcome Facebook in China with WeChat, a hugely popular social messaging platform. Like in the eHI case, the approach taken by Tencent is to remix several business models and its tech applications, looking for the winning formula.

As a result, WeChat combines several services in a single platform that is carefully crafted to address its extensive pool of users:

  • A widely used messaging app, including a voice recognition service. This feature is trendy in China, due to the particular characteristics of Chinese writing, which makes it difficult to type in mobile phones.

  • A payment app, used by millions of Chinese customers to pay for a wide range of products and services, both online and offline.

  • WeChat allows companies to promote their products through the app, acting as a channel for mobile advertisement, as well as loyalty program management. For instance, most global luxury companies have an account on the platform, using it for marketing, customer services and to drive traffic to their offline shops.

  • WeChat has a popular app store, like iTunes and the Google Play Store. In this marketplace users can find hundreds of applications created by third parties, including a wide range of actions within the same chat.

  • Most recently WeChat included AI assistance to the platform, so users can enjoy a voice-controlled assistant to help them engage with other users, companies, and online services.

WeChat is closing the gap between social marketing and commerce across multiple channels, using a conversational interface that can be easily used by millions of users. As a result, it has become a full ecosystem of services, rather than a simple messaging app, successfully mixing business models to fulfill their user's needs.

Innovation through a lean value focus in a crowded market

 The innovators in China work to address Chinese customers needs and behavior when designing new products and services. The huge size of the market helps to validate hypothesis  quickly.

The innovators in China work to address Chinese customers needs and behavior when designing new products and services. The huge size of the market helps to validate hypothesis  quickly.

The companies mentioned before are born in a market where dozens of companies are doing the same and serving millions of clients, so every business assumption is either validated or discarded very quickly to find the right approach. For instance, NIO is not the only company offering electric cars. Youxia Motors and Singulato are also exploring the top tier segment of electric cars, hence helping to validate the preferences of Chinese customers quickly.

Another excellent example of this lean focus is WeChat AI services. Although Tencent is a relatively late player in this field, its vast user database (which includes all their conversations) operates as a fantastic training field, where they can easily and quickly develop, try, test and iterate AI services. Eventually, this user database will be a critical advantage, allowing Tencent to rival other services, and successfully scale this service in China and beyond.

Global ambitions

All the previously mentioned companies are not just playing in the Chinese market, even when it is big enough to grow any business. They are global companies, located in the hottest tech and business spots all over the world. For instance, eHi has a lab for automated driving R&D in California, as well as NIO. This startup is also competing in the Formula E (a global competition for electric cars), as a means to develop its technology.

Additionally, Tencent is playing globally. Rushing to join the AI frenzy, the company opened an AI research facility in Seattle in 2017, headed by world-class scientists with a focus on speech recognition and natural language processing. With this move, the Chinese company is openly competing with already established players in Western countries, such as Amazon, Google, and Apple.

Chinese companies are using their native market to develop their business models and technologies as a first step to enter global markets. As they keep innovating in their country, they will eventually deliver more services and products to global markets, slowly but steadily claiming their spot among the biggest players in the world.

Some insights from the success of Chinese innovators

We usually believe that China is a paradise of copycats. To some degree it was for a long time, but now China is one of the most innovative countries in the world, where entrepreneurs have found their way to success. While trying to address their customer's needs, which are distinctly different from those in Western countries, they have created a unique innovation culture, where quick iteration, flexibility, creative adaptation, and new categories and product creation are core values.

Chinese entrepreneurs also teach us that business model innovation is not a straightforward method. Even if we have a clear understanding of it, we should always do research about the markets and customers we are addressing to understand their particular traits and fulfill their expectations. If we skip this all important step, we might follow the fate of eBay in China.