I’ve been both intrigued by and enormously skeptical of LeEco’s US market entry from the beginning, as this piece I wrote after its US launch back in October suggests. The company had been successful in China on the basis of a slow evolution from a content to a hardware company, and yet its US launch seemed to have turned that strategy almost entirely on its head without the compelling content that helped it succeed domestically. It also made many of the same mistakes as other Chinese companies attempting to expand into the US by not making enough changes to its playbook when it moved to the US. There have been reports for a few days now about an impending massive cut to the US business, and today has brought official confirmation. There’s no schadenfreude here from me given the large number of people losing their jobs, but hopefully LeEco’s story serves as a cautionary tale for other Chinese companies entering the US market. As the essay and video in the related narrative suggest, this has always been a tough task, and no Chinese company has really succeeded in building a big, successful ecosystem in the US. Even those that have done well more narrowly, such as in low-cost hardware, have taken years to get there and even then aren’t considered in the same class as leaders like Apple, Samsung, LG, or even Sony. Ironically, LeEco’s retrenchment now to serving Chinese-speaking residents of the US would have made a ton of sense as a market entry strategy last year, starting much smaller and more modestly, and slowly expanding out from that core into the broader US market. Instead, that new focus is the result of a somewhat humiliating defeat, caused in equal measures by an overly hubristic and poorly thought out market entry and financial constraints at headquarters that gave that strategy very little time to play out. This could – and should – have gone very differently.
Counterpoint Says Apple has 80% Share of Premium Smartphones in China Despite Overall Fall (May 4, 2017)
Counterpoint, which I’ve referenced previously here as a solid source on smartphone market share and so on, especially in Asian markets, has an update on Q1 smartphone performance in China. The headline is that Apple, Xiaomi, and especially Samsung saw their shipments drop significantly year on year, while local companies Oppo, Vivo, and Huawei did better, in a market that grew just 4% year on year. The Apple drop is worth noting because China performance has been a major talking point on its recent earnings calls (including this week) and there are lots of explanations flying around about why it’s struggling there. I linked to this piece a while back, and Ben Thompson had an interesting piece this week on Stratechery about the role WeChat plays in China and how that impacts Apple. But it’s worth noting the details on the premium market in China in this Counterpoint post. It argues that Apple’s performance in China (as elsewhere) is highly cyclical, but that it consistently takes 80% of the $600+ market. In other words, Apple’s share remains very strong in the segment where it competes, but much of the activity in China is at lower levels where Apple doesn’t compete. In that sense, there’s nothing new here, and the growth of the sub-premium segments is to be expected in a maturing market that’s reaching lower income tiers of the population. But if the premium segment is actually shrinking in real terms rather than just relative terms, that’s more problematic because it would indicate consumers who could afford iPhones are nonetheless choosing to buy the cheaper alternatives. So far, I’ve seen little evidence of that, but it’s worth watching future numbers from Counterpoint and elsewhere to see if that pattern starts to emerge. For now, I’m still more inclined to read what’s happening in China as part of a cycle which is already starting to correct and should do so more meaningfully later this year.
Chinese ride-sharing company Didi Chuxing has raised what Bloomberg says is the largest single funding round ever, apparently to help pay for a long-expected international expansion. Didi now of course owns Uber’s business in China and also received a billion-dollar investment from Apple last year, but has mostly stuck to its home market for now. People in the know have been saying it was going to start trying to build a business outside of China for some time, so this move isn’t that surprising, but it’s almost certain to bump up against its part owner Uber in at least some markets given the latter company’s international reach, which could get interesting. Big Chinese tech companies have mostly failed to expand much beyond China with the exception of those selling cheap electronics, and Didi will face an uphill battle in ride sharing markets internationally unless it partners with local players (possibly including Uber). I’m very curious to see which markets it goes after and how.
Netflix Agrees to License Content to Baidu Subsidiary iQIYI (Apr 25, 2017)
Alibaba is launching a program to help US businesses sell to Chinese consumers through its website. It’ll hold a conference in June at which it will offer training on all the ins and outs of doing business both through Alibaba specifically and in China generally, and all this is by way of fulfilling a promise CEO Jack Ma made to Donald Trump back in January. The US currently has a massive trade imbalance with China – exports from the US in 2015 were $161.6 billion, while imports were $497.8 billion – so rectifying that balance is a key priority for the US administration. But much of the current export volume to China is in categories that would be a poor fit for a platform like Alibaba – soybeans come top, both consumer and commercial vehicles are also major contributors, and much of the rest is made up by other commercial and industrial products. The US sells very few small consumer goods of the kind well suited to a platform like Alibaba, so any contribution made by Alibaba to reducing the trade deficit is going to be far more symbolic than material. In addition, the complexity of selling into China, where foreign-owned businesses are severely limited, will make it a fairly unappealing proposition for most US-based businesses relative to selling into the massive market on their own doorstep. I suspect this will be just another example of a Chinese tech company struggling to bring its model to the US (just as almost all US tech companies struggle going the other way).
via USA Today
Backchannel has a piece out this week which argues that the iPhone’s declining market share in China is due to the poor competitiveness of its services, notably Apple Music and Apple Pay. The piece is well worth reading, but it offers few real answers. It states that Apple fails to compete effectively with its music and payment services in China, but then also says that the music and payments markets in China have been sewn up by strong local competitors, with music rights in particular subject to exclusives from Chinese services. As such, it’s really not clear what Apple could have done differently in these categories. At the end of the day, Apple’s lack of competitiveness in services in China is a symptom of a much broader issue, which is that Apple doesn’t bend much to local custom when it comes to pricing or service structure (see also India). It does localize content stores, and indeed is one of the strongest players in that respect globally, but China is such a massive market, has so many homegrown competitors, and is run by a government which is not afraid to disadvantage foreign interlopers, that it’s hard to see how Apple could compete effectively there on services. As such, I think it’s smart to compete more on its devices, its growing retail presence, and its non-content software and services. But that does mean that the ecosystem Apple has built elsewhere is missing some of the appeal it has elsewhere.
But all that is to ignore the central premise of the argument being made here, that it’s this services weakness that’s at the root of the recent decline in iPhone market share in China. I think that’s debatable at best, and it’s worth remembering that that decline isn’t about ownership but sales, and Apple went through a massive cycle earlier off the back of the iPhone 6 in China, and then came down to earth over the ensuing year, so that change in market share is reflective of cyclical rather than permanent trends, with some signs of recovery recently with the iPhone 7. So overall this piece feels like it makes some interesting points, some of them legitimate with regard to Apple’s services competitiveness in China, but overdoes the narrative about its impact.
Huawei to Create Cloud Business Unit, US Remains a Secondary Focus – Mobile World Live (Apr 11, 2017)
Huawei is holding its annual analyst summit in China this week, at which it offers an update on the different parts of its business. Two notable items are mentioned in this summary of the first day presentation by the CEO. Firstly, the company is creating a cloud business unit, which will sit alongside existing carrier, consumer (device), and enterprise business units. That’s a sign of the growing commitment of the company to the cloud, but also of the close ties between network equipment (and the telecoms operators who deploy it) and the cloud services which run over it. Separating cloud in this way is a public signal to operators that Huawei wants to provide more than just the guts of cloud services and wants to establish more of a partnership relationship, something which may be challenging, especially given its home base of China, which has already created issues in the US and elsewhere for its network business. Secondly, the CEO stated that (partly for the reasons I just mentioned) the US isn’t a focus for the network business, and even for the devices business it’s not a major focus, as Huawei continues to struggle to break into the mainstream here with its smartphones. Lastly, though there was strong growth in parts of Huawei’s business, the CEO didn’t address the lack of margin expansion, something which was reported on previously and was likely due to aggressive growth of the smartphone business at the expense of margins in 2016.
This is yet another sign that LeEco may be struggling financially because of an overly aggressive expansion into the US and into new product categories over the past year. It’s apparently struggling to meet payroll on time, and has also been struggling to close its acquisition of Vizio. It’s still somewhat baffling to me that LeEco pursued such an aggressive strategy in the US, because it’s meant not only stretching its tight finances even tighter, but also launching with quite a different set of assets from those that made it successful in China.
This is a fascinating piece, and well worth a read if you’re interested in the Chinese tech market. It’s a market I follow less closely, but I was struck by Baidu’s recent decline in fortunes and Alibaba’s rapid rise in the ad business when I was doing research for a recent piece on global ad revenue leaders. Baidu has always been referred to as the Chinese Google, and although that’s a horrible oversimplification, it’s hard to avoid the sense in reading this article that part of its trouble stems from pursuing many of the same areas and strategies as Google but with less success. Even the resentment among the successful search advertising employees of higher profile but non revenue generating businesses is reminiscent of the situation at Alphabet, though the latter has been reining in some of its excesses lately. Even outside the Chinese, context, though, this is a good cautionary tale on how quickly seemingly indomitable Internet companies can see their fortunes turn south.
via The Information
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.
Two things worth noting here. Firstly, another big commitment by Apple to China, following its billion0-dollar investment in ride-sharing service Didi last year, with the total of these R&D center investments reaching about half a billion dollars in their own right. That signals again that Apple is very serious about continuing to be a big force in China, and is in fact increasing its investment there rather than backing down. That’s important, because in this piece as in other recent ones on Apple in China, the prevailing narrative is that Apple is losing ground there. At a basic level, of course, there’s truth to that over the past year, with declining iPhone sales, though the picture in PRC as opposed to the Greater China region Apple reports as a segment is a little less clear cut. The reality is that the “super-cycle” driven by the iPhone 6 launch led to unprecedented sales everywhere, but nowhere more than in China, and so the comedown has been that much bigger too. But Apple is positioned to start growing in China again in the coming year, and it will continue to be a crucial market for Apple.
Amazon Plans Air Cargo Service for Chinese Customers – WSJ (Mar 15, 2017)
There have been lots of stories about Amazon expanding in logistics over the last couple of months – see here (chartering planes), here (ocean freight), and here (an air cargo hub in the US), for example. Now it seems it’s investing in both sea and air cargo for Chinese sellers. That should allow Chinese companies to sell more easily and potentially cheaply to US buyers, but another interesting angle would be US sellers who source their goods from China – I know of several businesses which basically scan Amazon’s top seller lists for arbitrage opportunities and then have goods made in and shipped from China. So those would be other potential users of these new services. Overall, though, this is just another investment in unique logistics infrastructure and more of a competitive moat versus other retailers.
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.