ZTE’s troubles point to China’s tech dominance

Image copyright AP For most people, China’s internet market looks like a zero-sum game: the bigger you are, the worse it is for competitors who are smaller. Take ZTE . The Chinese tech firm…

ZTE's troubles point to China's tech dominance

Image copyright AP

For most people, China’s internet market looks like a zero-sum game: the bigger you are, the worse it is for competitors who are smaller.

Take ZTE . The Chinese tech firm shut down its main network network operations in April after the US banned it from buying from American suppliers over accusations of illegally shipping US technology to Iran and North Korea.

This left ZTE very short of the chips it needs to keep its network running – and just as it was stepping up efforts to try to grow internationally.

By the end of this year, the ban will have been lifted after it pays $1bn in cash and lifts a $1bn “death penalty” on the executives it blames for the past sanctions violations.

But this episode could yet have a lasting impact on ZTE.

After all, the company’s troubles were a big part of a wider shift in China’s internet market – one of the largest in the world – that has hurt many global tech companies.

The truth is, China’s rising star in technology is still far smaller than that of the dominant US companies in the same arena.

China’s stocks

Revenue generated from online advertising in China has risen fivefold since 2010 – hitting $41bn in 2017.

And, like any consumer market, the more robustly China’s internet market is, the more companies it attracts.

Image copyright Shutterstock Image caption China’s internet market is larger than US Internet revenue

While most parts of the world are struggling to keep up with the technological advances of the Asia Pacific, China’s internet companies are still significantly smaller than their global competitors.

It is less than $50bn: China had $186bn of internet ad revenue last year, compared with the US’s $150bn.

But it is quickly catching up. China had more than one trillion views a month on video sites Tencent and Alibaba in 2017, while US search giant Google has less than one in ten of those users.

This lack of competition is one of the main drivers of the company’s success. Online ad revenue from social media and messaging has more than doubled since 2014, to account for 41% of the overall market.

But even if Google does stay relevant in the US, it will face huge competition from tech companies that are already much bigger in China.

Alibaba dominates from mobile devices, which, unlike the internet advertising market, only account for a small part of the overall business. And, thanks to its dominance of online finance, it is already far bigger than Google in that space.

New stars

Image copyright AFP Image caption Alibaba has become the first company to go public on a stock exchange in its home market

Alibaba is a better example of how China’s internet giants have fared.

The company had its biggest year yet last year, raking in $56bn (£43bn) in revenues and more than $14bn in profits. That was up 61% and 99% respectively compared with the year before.

To be sure, Alibaba’s growth in Asia – many observers blame China’s trade war with the US for leading to the company’s troubles in the US – has not made it immune to competition.

But, at home, Alibaba is growing even faster than Tencent.

In September 2017, the duo snapped up Japanese virtual reality company DeNA, which was one of the biggest players in Japan’s game industry. They paid more than $5bn for it.

Then, in the first quarter of 2018, Alibaba closed its purchase of Didi Chuxing , which is expected to take its valuation from $47bn to $100bn.

Of course, Alibaba and Tencent are just two of many major players in the e-commerce and finance sector – and the state is still making real moves into both of those fields.

Chinese authorities launched a wider investigation into digital currency trading in April, which could lead to further crackdowns on platforms that are perceived to be influencing the country’s financial markets.

But, overall, the regional dominance of Tencent and Alibaba will continue to grow as their ad-based business model allows them to keep growing faster than global peers.

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