Narrative: Chinese Expansion
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Narrative: Chinese Expansion (Dec 27, 2016)
Written: December 27, 2016
One of the most fascinating trends to watch in today’s consumer tech industry is the separate sets of major players coming out of two major markets: the US and China. US companies tend to be pretty successful expanding overseas, until they get to China. Chinese companies in turn tend to fall into two camps – those making just hardware tend to do well in emerging markets but struggle in the US, while those with more of a services bent tend to struggle outside of China in general. But recently several big Chinese brands have attempted to penetrate the US market with a combination hardware and services approach, notably LeEco, and to a lesser extent Xiaomi, TCL, and others.
Smartphone companies in particular have struggled to gain mainstream acceptance in the US – the carriers act as gatekeepers to the market, and the largest carriers have continued to keep Chinese handsets limited to their prepaid channels. This makes reaching mainstream markets tough for Huawei, ZTE, and others, and will challenge LeEco as it comes to the US too. On the other hand, other hardware categories where branding has traditionally been less important have allowed Chinese companies to flourish in the US – those making battery packs, cables, cheap Bluetooth headphones, and so on have done very well on Amazon, for example.
However, when it comes to services, Chinese companies tend to struggle – the major cultural differences between China and the US are by far the biggest barrier. What sells in China simply tends not to sell in the US (and the reverse is often true too). This is the single biggest challenge facing LeEco and other Chinese companies wanting to bring a services-led model to the US: they have to completely reinvent their bundle of services to make it relevant and attractive in this market.
We’ll continue to see attempts by Chinese tech companies to expand out of China, but they will continue to be most successful in emerging markets and in low-end consumer electronics in mature markets, while their services will flounder in the US and most other Western markets.
China’s Tencent Buys 5% Stake in Tesla – WSJ (Mar 28, 2017)
Tencent has been one of the most active Chinese investors in the US tech industry, and here’s another investment. It already has stakes in both Uber and Lyft, and although Baidu has been making bigger direct investments in autonomous driving in the US, Tencent’s indirect investments in transportation in the US are growing. This is a nice vote of confidence in Tesla at a time when it’s trying to raise money to fund the Model 3 manufacturing ramp, and it also gives Tencent decent exposure to what has been a nice growth stock so far this year.
A.I. Expert at Baidu, Andrew Ng, Resigns From Chinese Search Giant – The New York Times (Mar 22, 2017)
This story is notable for two reasons. Firstly, Baidu especially and Chinese companies in general are often overlooked completely in discussions of who’s making big investments in AI and machine learning, and yet Baidu has made massive investments in this area, and recently hired former Microsoft exec Qi Lu to be its COO and to oversee its AI efforts. Secondly, despite Qi Lu’s recent arrival, the trend of former Silicon Valley execs joining big Chinese tech companies still has fewer long-term success stories than short-term fizzles, as this article points out. Both Hugo Barra and Andrew Ng’s move to Chinese companies were seen as highly symbolic, and as such it’s inevitable that their departures should be too. The big Chinese companies are doing good work, and in some cases pioneering new product and service categories, across a number of different areas, but attracting and keeping high-profile talent from the US (even those with ties to Greater China – Ng was born in the UK to parents from Hong Kong) remains tough.
via New York Times
After Google Phone Fizzles, Huawei Turns to AT&T for U.S. Expansion — The Information (Mar 21, 2017)
Based on the headline, I thought this was about Huawei finally being able to sell phones through AT&T’s postpaid business, because that’s the holy grail for Chinese manufacturers, and remains stubbornly unavailable to them at AT&T or any other major US wireless carrier. Where the Chinese vendors have had some success is in the prepaid business, and AT&T currently carries several ZTE phones on its GoPhone prepaid brand, as well as one Huawei phone in a partnership with Walmart. However, what’s actually happening here is that AT&T is certifying Huawei’s own chipset for use on its network, which is really just a possible first step to getting more Huawei phones onto AT&T store shelves. Huawei’s lack of brand awareness in the US continues to be its single biggest challenge – something that hasn’t really changed over the years. I remember having conversations about this with Huawei executives at CES at least six years ago. Until that changes, there’s very little incentive for AT&T to give over shelf space reserved for familiar brands consumers recognize to a relative unknown like Huawei.
via The Information
The whole framing of this article feels very much driven by its subject, Duan Yongping, who runs the conglomerate which owns Oppo and Vivo, two of the world’s largest smartphone brands. The idea that these brands have somehow toppled Apple in China isn’t really borne out by the facts, and it appears the (unnamed) author rather took Duan’s word for it on this and other points. Apple has absolutely seen falling sales in China, but that’s as much about a saturating market and the drop-off from the huge iPhone 6 launch as about any local competitors. It’s also fairly clear that Oppo and Vivo compete in a very different segment of the market from the iPhone, though many who buy those devices plan to buy an iPhone next, per some recent Morgan Stanley research, suggesting that these are customers which aspire to buy iPhones rather than having switched from them. There’s no doubt Oppo and Vivo have achieved impressive market share in China, and therefore also globally, but it’s far less clear that their strategy is sustainable – after all, we’ve seen other Chinese brands (notably Xiaomi) do very well in the short term and then fizzle. In China in particular, the Apple brand is highly aspirational, and that will continue to drive a lot of sales.
Didi has opened a self-driving lab in the U.S. with famed Jeep hacker Charlie Miller – Recode (Mar 8, 2017)
This seems like a smart move – even though there are lots of talented engineers in China, the nexus for development of autonomous driving today has to be either Silicon Valley or Detroit, so putting a base of operations in the former makes a lot of sense. There’s no evidence here that Didi is otherwise expanding into the US (after all, its new partner Uber is dominant here and that likely wouldn’t go down well), but that’s not to say Didi won’t try to hire from the other companies in the area. It’s already hired Charlie Miller, who came from Uber itself and was best known for having hacked a connected Jeep while it was driving a while back. The competitive intensity in this market, especially over hiring, is only likely to ramp up over time and things will get increasingly nasty as a result (and we’ve already got two lawsuits underway).
This case has been going on for a long time, and is another example of the tensions between US and Chinese tech companies, in the wireless space in particular. Though this case has nothing to do with the concerns about back doors in wireless networks I mentioned in the context of Huawei yesterday, it highlights another concern: that Chinese tech companies have often been willing to sell technology to some of the world’s repressive regimes, and have often had to cover their tracks in order to do so. ZTE got caught doing this in Iran a few years back and the US has taken action over breach of sanctions, as ZTE was incorporating US components. The worst case scenario here was that ZTE would be banned from exporting any US technology to use in its own products, which would have included Qualcomm chips apart from other things and would likely have been devastating. It avoided that outcome, but still has to pay a fine equivalent to its last two years of profits, which is pretty bad by itself. None of this is likely to make US wireless carriers more likely to place Chinese smartphones on their premium shelf space.
Americans Don’t Care About Nokia (or Huawei) – PCMag (Mar 7, 2017)
This is good from Sascha Segan, explaining why “Nokia” (really HMD Global) and its new 3310 are irrelevant in the US, but also in some ways more interestingly why Huawei (and other Chinese manufacturers) have long struggled here. With Nokia/HMD, it’s a long-standing lack of investment in the unique requirements of the US market including CDMA networking technology, whereas with Huawei it’s a more complex geopolitical issue involving Huawei’s networking gear. It’s easy to dismiss the US government’s objections to Huawei equipment in networks covering US network traffic as scaremongering or protectionism, but in a previous job I heard from very reliable sources about Chinese gear (not Huawei’s) in telecoms networks which had backdoors installed – these concerns can’t just be dismissed out of hand. But even beyond that, there are significant other reasons why the Chinese brands don’t succeed here, including notably the fact that those brands simply aren’t known, and in many cases the companies aren’t doing enough to change that. The one place where some of the Chinese brands do reasonably well in the US wireless market is the prepaid segment, were several have made a decent business. But that’s much less brand- and much more price-sensitive than the much larger postpaid market.
Lenovo Reports December 2016 Quarter Results (Feb 16, 2017)
Lenovo continues to be a business in three quite different parts: in PCs, it’s the world’s largest vendor, grew slightly year on year, and is profitable; while in data centers and mobile it’s shrinking fast and unprofitable. Lenovo’s mobile business in China has collapsed by about 90% in the past two years, to the point that Lenovo didn’t even report China shipments at all this quarter, while it’s likely held up a little better outside of China, though it’s very focused on low-end shipments. Lenovo basically focused its whole earnings presentation on the PC business, with much less detail than usual on mobile, and the usual short shrift for data centers. This was a business that looked really good a couple of years ago, but looks much less so now. Another cautionary tale about the challenge of today’s smartphone market, especially for Android vendors, but also about the dangers of expanding too quickly through acquisitions.
There’s a certain irony in a company which was a pioneer in its use of online retail falling back on brick and mortar stores as a way to shore up its business, but that’s what Xiaomi appears to be doing. It apparently wants to build 1000 stores in the next three years – roughly twice as many as Apple has globally, and 25 times as many as Apple has in China, by way of context. That’s a huge investment at a time when Xiaomi seems to be struggling, but physical retail is a good fit for the ecosystem of devices Xiaomi sells including both its own and its ecosystem devices for the home. Building its own chips is another big investment, and one that will likely take years to pay off – though it might establish some independence from current suppliers Qualcomm and MediaTek in the short term, the quality likely won’t be there from day one, so it’ll be interesting to see which of Xiaomi’s devices run its own chips – I’m guessing it’ll start by replacing MediaTek’s and work up from there. But it takes years to get really good in smartphone chips, and without an acquisition of existing talent here, I’m skeptical Xiaomi will do well anytime soon. Though Huawei is the local exemplar of this strategy, Apple and Samsung are still the gold standard for the make-your-own-chips strategy, and they’ve both been at it for years.