China’s Disruptors: 7 startup tips from the rise of Alibaba, Xiaomi, Tencent, and other innovators

Emerging digital companies from China such as Alibaba, Xiaomi, and Tencent are not just shaking up business in China but are reaching out across the world as well through their self-assurance, speed, agility, and energy.

Insights, tips and lessons from these innovators are offered in the new book, ‘China's Disruptors: How Alibaba, Xiaomi, Tencent, and Other Companies are Changing the Rules of Business,’ by Edward Tse, Founder and CEO of Gao Feng Advisory Company, and author of ‘The China Strategy.’ See also my reviews of the related books ‘Startup Asia’ (by Rebecca Fanin) and ‘China Fast Forward’ (by Bill Dodson), and YourStory’s curation of quotes by Alibaba founder Jack Ma.

The 256-page book is a good mix of storytelling, case studies, economic history and business tips. Despite the current economic downturn in China, entrepreneurship will remain a strong force and the leading digital players will continue to have a powerful influence overseas as well.

Four decades of entrepreneurship in China

Tse divides the history of entrepreneurship in China into four decades. The economic liberalisation of the 1980s led to the birth of Huawei, Haier, Legend (now Lenovo), Geely, Broad Group and Wanda; many of the founders had no prior experience or even a high school education, but built global brands.

In the 1990s, further economic liberalisation led to more entrepreneurship by the so-called Gang of 1992 or well-educated founders from government and academia (eg. Vantone Holdings in real estate). In the early 2000s, WTO membership along with the rise of the Internet spurred the growth of digital giants with internationally-minded founders: Alibaba, Tencent, Baidu, Sina, Youku, Qihoo, DHgate and JD.com.

Over the last decade, founders who grew up in the reform era have created startups riding the mobile Internet wave, such as Xiaomi, VIPshop, Meituan, and Yihaodian. The GDP contribution of the private sector accounts for around three quarters of China’s economic output, far outstripping the incumbent government and public sector. Entrepreneurship is booming in Beijing’s Zhongguancun, Wenzhou, Dalian, and beyond.

Players to watch

Jack Ma’s Alibaba dominates e-commerce and electronic payments in China, and its $25 billion IPO in 2014 was the largest to date. Its various sites account for around 80 per cent of e-commerce in China, and are worth more than those of eBay and Amazon combined. On November 11, 2014 (‘Singles’ Day), its transactions were three times bigger than CyberMonday in the US (the first Monday after Thanksgiving). Alibaba has also launched TMall, an online shopping mall.

Pony Ma’s Tencent dominates messaging (WeChat) and online games. Robin Li’s Baidu accounts for over 60 per cent of Chinese search engine activity. Together, these three companies are sometimes referred to as the ‘BAT’ companies.

Ren Zhengfei’s Huawai is the world’s leading manufacturer of mobile and fixed-line telecom network equipment, competing against Ericsson and Cisco. Lei Jun’s smartphone company Xiaomi is taking on Samsung.

Yu Gang, formerly with Dell, founded online supermarket Yihaodian. Geely Auto, founded by Li Shufu, acquired Volvo in 2011. Xu Lianjie’s Hengan International competes with P&G and Kimberly-Clark in diapers, tissues and sanitary napkins. Diane Wang launched and sold online bookstore Joyo.com to Amazon, and then launched B2B website DHgate.

Chen Haibin has launched a chain of private medical labs, and Wang Jingbo launched private firm Noah Wealth Management. Zhang Yue branched out from air-conditioners to pre-fab homes and wants to construct the world’s highest building in Changsha, Hunan province.

These players offer useful tips to other startups and growing companies with respect to quality, focus, growth and innovation. Here are my seven takeways from the book, on what other startups and entrepreneurs can gather from their Chinese counterparts.

Focus on quality

Zhang Ruimin is the founder of Haier, the world’s largest maker of washing machines, air conditioners and other appliances. He has set a high bar for quality by once famously smashing a faulty refrigerator with a sledgehammer, and then asking his employees to do the same. ‘Good enough’ products also have to be ‘good’ products, and many Chinese companies are moving up the quality and value chain.

Continuous reinvention

Successful entrepreneurs don’t bank on just one good idea, but a steady pipeline of transformative ideas. Haier has an eye for innovation, via small refrigerators for cramped homes, extra-tough cabling to be rat resistant, and freezers that could stay cool even when electricity was cut off for 100 hours. Haier is now reinventing itself for the Internet age via e-commerce, and fires employees who do not contribute to performance or innovation.

At age 26, Wang Xing sold his first startup, social media site Xiaonei (later renamed as Renren) and then launched message service Fanfou, followed by group discount site Meituan.com. Lei Jun joined Chinese word processor giant KingSoft, then launched a series of startups, including Joyo.com and video sharing platform YY – and eventually created Xiaomi with former Google engineer Lin Bin.

Treat challenges as opportunities to innovate

A challenge should not be seen as a reason to lose market share. For example, when eBay entered China, Alibaba’s B2B network was only five years old. To combat eBay, Alibaba launched Taobao, a C2C site (but without transaction fees) and the Alipay online payment network. Today Alipay processes half of all online transactions in China. By converting a challenge into opportunity, Alibaba innovated in new ways to its long-term advantage.

Go global

It’s not just Chinese government firms which are going global, but entrepreneurs as well – via geographical presence and investments. For example, Mindray Medical has bought US firm Datascope Corporation; Geely bought Volvo from Ford; Hanergy acquired Alta Devices and Global Solar Energy in the US; and Fosun bought Portuguese insurance group Caixa Seguros.

Lenovo has set up dual headquarters in Beijing and North Carolina. Tencent has bought US video game publisher Riot Games. Alibaba has taken stakes in US messaging firm Shoprunner, luxury e-commerce site 1stDibs and travel sharing service Lyft. Many Chinese firms are also targeting other emerging economies in Asia and Africa and then moving into Western markets, using their deep experience in dealing with complexity and hyper-competitive changing environments.

Aim for Number One

“We don’t want to be Number One in China. We want to be Number One in the world,” Jack Ma told the South China Morning Post during the early years. His vision and marketing skills have attracted a number of investors, including Goldman Sachs and Softbank. In addition to e-commerce and payments, the company offers consumer finance products like Yu’e Bao (‘extra treasure’).

The ‘Jump’ strategy

Mobile and the Internet connect a number of diverse firms, industries and ecosystems together, thus allowing companies to ‘jump’ into other sectors. Chinese companies use the ‘jump’ strategy to enter markets beyond their industry and even geography.

For example, Lenovo used to sell only one product, the PC, in China. It saw an opportunity in buying IBM’s money-losing PC division, and vaulted into the global league. It also moved into the server business. Its first mobile foray did not work so well, but it bounced back with new products like the Yoga IdeaPad.

Challenge incumbents

Even in sectors which are dominated by heavyweights, nimble players with creative business models can disrupt the status quo. Xiaomi, founded by Lei Jun (the ‘Chinese Steve Jobs’), competes with the mobile handset giants; it makes most of its sales online in batches, and crowdsources product ideas.

The Road Ahead

“At the heart of China’s entrepreneurial spirit lie three core elements: pride, ambition and a shared cultural heritage,” Tse explains. Chinese are proud of their ancient history of innovation, which includes papermaking, printing, the compass and gunpowder. Many Chinese companies are now moving away from just ‘copycat’ mode, and innovating beyond ‘derivative’ offerings across the chain: product, service, practice and process.

The government is also increasing R&D spending (overall and as a percentage of GDP), and China is now the world’s second largest investor in R&D (over $200 billion annually). China’s scale, speed, digital infrastructure and talent make it ripe for international players as a local market as well as base to launch new global products, though many analysts have concerns over media control, loose IP laws, corruption, and political controls.

For international players to succeed in China, they will need to find the right local talent as well as groom managers from overseas in the local ecosystem. Local acquisitions and equity stakes are another option, as shown by WalMart (invested in Yihaodian), Hershey (buying Golden Monkey) and Nestle (buying Yinhu). They can also sell products on Chinese e-commerce sites, eg. Nike and Adidas on TMall.

Many entrepreneurs are now addressing issues of environmental sustainability as well, and while they do have suggestions to politicians for better governance, they do not want to get involved in politics. Some sectors like telecom service and healthcare, however, are still dominated by government.

Trends to watch include the new wave of disruption via mobile apps (which are now blurring the earlier demarcation between the BAT players), manufacturing innovations like 3D printing (eg. airline parts by CACC) and the rise of innovation incubators and funds (eg. Innovation Works incubator; China Smart Device Innovation Fund).

“China has embarked on a renaissance that could rival its greatest era in history – the Tang dynasty of 618 to 907,” concludes Tse.

About the author: Edward Tse is Founder and CEO of Gao Feng Advisory Company, a global strategy consulting firm. His previous book was ‘The China Strategy: Harnessing the Power of the World's Fastest-Growing Economy,’ and Tse has also written for Harvard Business Review and South China Morning Post. He lives in Hong Kong and Shanghai, can be followed on Twitter at @Edward_Tse.