James Governor's Monkchips

Some thoughts on China’s digital transformation

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Image result for china railway logo

It can be difficult to get your head around big numbers – 2 Trillion Dollars? Gee Whiz, pass the salt. China scale brings us into this realm of head scratching. Take China Railway – 2m employees is bigger than the population of quite a few countries. It’s about the same as Slovenia, Latvia or the Gabon. We tend to think of digital transformation in terms of companies, but the idea is also relevant to countries. Estonia is the game changing exemplar in case you’re wondering, with its digital e-residency available to anyone in the world. Singapore and South Korea have explicitly invested in becoming digital-first economies.

Meanwhile China scale plus digital transformation is creating incredible networks effects and associated economics. In a story in the Financial Times today, according to analysts Honour of Kings, a “free” online fantasy battle game made by Tencent, with in-game purchasing of digital goods, had generated a staggering $876m from its 50m users… In the last quarter. So Tencent should generate around $3.5bn in 12 months. From one game.

The FT compared this performance with numbers from App Annie, which tracks the gaming industry –which estimates that Monster Strike, the top grossing IoS and Android app earned $300m in the same time frame.

“China’s gaming sector, the world’s largest, is projected to account for $27.5bn of industry revenues this year – a quarter of the global total, according to consultancy NewZoo.”

Another piece in the FT that caught my eye looked at the MCSI Emerging Markets index, which has just opened up to Chinese companies. The makeup of the index is thus changing dramatically. Rather than being weighted to commodities and commodity manufacturing, it is suddenly being led by tech companies. Australia suddenly looks like a laggard.

The West has long argued that China needs to start moving to a more consumption based economy, rather than being based heavily on exports. South Korea is currently being lectured with the same argument. No wonder America is annoyed – Samsung is apparently about to overtake Intel as the biggest chip maker.

But seemingly the transition to consumption is actually happening, but probably not in the way Western companies intended, but with Chinese Web companies and consumers buying virtual goods. A national transformation based on digital economy consumption would also be ironic given how long the West has moaned about a lack of protection for digital IP in China. As RedMonk has long argued though, the value is in the services not the “code”.

The Chinese government is of course supremely activist – it supports its own, and simply pushes away those it views as a threat. While the EU levies a fine against Google for alleged anti-competitive practices, which former president Obama labelled protectionism against US companies, China simply banned Google from trading within its borders. Shutting it out from massive additional scale, as much as anything else.

What about the tech underpinnings of China scale, given Weibo, Tencent and Alibaba are running at the same order of magnitudes as we see from Amazon Web Services, Apple, Facebook or Google? I shall be looking at that over the next few weeks. If you have any links or insights on the subject please let me know.

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