A New Mental Model From China’s Unicorns

The concept of generic strategy was first introduced over four decades ago – where firms can choose to either be differentiated or low cost. Differentiation will likely involve innovation, while a low-cost strategy entails high productivity to scale, or from lower wages. Many countries offering lower wages naturally choose the low-cost path of being labor intensive, becoming a factory for others to earn profit. When wages rise or when major foreign exchange fluctuations happen in countries, there will always be cheaper production factories available elsewhere, and so the sustainability of the original low-cost strategy becomes questionable. 

Being uncompetitive may force firms to accept lower profit temporarily, or encourage them to change strategy by competing based on innovation. The innovation route becomes ever more critical when fiercer competition enters an industry and industry players are forced to differentiate themselves, to remain relevant to their target consumers and to own specific brand associations in the marketplace. 

Japan, Korea and China are the three Asian countries that were the first to catch up with the West. They have been branded as imitators or copycats in the past, but have now been called innovators and have established known international brands. Japan has Toyota, Canon, Uniqlo, Nintendo and many others. Korea has Samsung, K-drama and even BTS. China, with a huge domestic market of tech-savvy young users, has many examples of innovators, becoming the trendsetters of the internet age over the last decade. 

One such innovation from China is WeChat, an app that combines the functions of Facebook, Twitter, Skype, WhatsApp, Amazon, eBay, Uber, Venmo and Apple Pay in one super app. WeChat’s voice messenger was already available in 2011 ahead of WhatsApp’s 2013 US launch. Mobike (acquired by Meituan), a station-less bike sharing concept, was a year ahead of Birds or Lime’s 2017 US launch. Alibaba’s 11.11 Singles Day (2021 revenues of US$84.5 billion) was launched in 2009, six years ahead of Amazon’s Prime Day (2021 revenues of US$11.2 billion) in 2015. Even TikTok (A.I. social media), and Shein (real time fashion export), have succeeded internationally and became the world’s biggest in their respectively category, with TikTok’s parent company, Bytedance, becoming the world’s most valuable unicorn (US$350 billion) in 2021 way ahead of the US’s SpaceX (US$100 billion) and Shein overtaking Amazon as the most downloaded shopping app in the US in 2021. 

Many more innovations in China are worth analyzing in-depth – learning from how people live, how they work, how they travel, how they shop, how they study, how they play, and how they deal with money. Our old perception of China as an imitator, and as a cheap manufacturing hub needs to be updated. In a December 2017 interview, Apple CEO Tim Cook shared in a Fortune Global Forum event: “The number one reason why we like to be in China is the people. China has extraordinary skills. And the part that’s the most unknown is there’s almost 2 million application developers in China that write apps for the iOS App Store. These are some of the most innovative mobile apps in the world, and the entrepreneurs that run them are some of the most inspiring and entrepreneurial in the world. Those are sold not only here but exported around the world.”

There are three major types of innovation – (1) Product or service innovation, which creates new revenue streams; (2) process innovation which helps reduce cost and improve productivity; and (3) business model innovation (the rarer type of innovation) which either create or reset an entire industry and is in fact, much harder to imitate. 

An example of this is the Consumer to Manufacturing (C2M) business model pioneered by China’s agritech startup unicorn Pinduoduo. Founded in September 2015, it overtook Alibaba in 2021 in terms of having more number of active users (850 million customers) in China’s ecommerce space. Under the C2M business model of Pinduoduo, which it combined with group buying, social media and artificial intelligence, consumers can buy products at much lower prices bypassing middlemen and layers of intermediaries, by simply inviting friends to buy the same products, while manufacturers cut waste by producing products based on real-time big data access given to them based on consumer demand. 

It is worthy to note the World Bank and IMF data after adjusting for purchasing power parity (PPP), the decline of global gross domestic product (GDP) shares of America (from 25.76% in 2000 to 15.9% in 2021), and Europe (from 26% in 2000 to 21.7% in 2021). On the other hand, Asia has been growing by leaps and bounds, from 32% in 2000 to 47.4% in 2021. Within Asia, China’s GDP market share was at only 3% in 2000, and is a whopping 18.7% in 2021, actually taking over the top spot from the USA as early as 2017. 

It is obvious there will be two major domains with different sources of insights, skills and business models to learn from — the west and increasingly, the east, and businesspeople would not want to miss this shift toward a more innovative Asia.

*****

Mansmith and Fielders, Inc is offering  a half-day Executive Briefing on Business Model Innovation of China’s Unicorns” on January 27, 2022.  Eleven building blocks of a business model will be decoded, and applied to various companies in China that successfully (as well as unsuccessfully) combined technology and entrepreneurship. 100% of the proceeds will benefit the families affected by typhoon Odette through the Inquirer Foundation. Please visit www.continuum-edu.com for details. 

***** Josiah Go is Chairman and Chief Innovation Strategist of Mansmith and Fielders Inc., Innovation winner of the 2021 ASEAN Business Awards.

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