pwc silicon dragonKey takeaways:

  • China has emerged as a key global player in digital innovation.
  • Much of China’s success can be attributed to centricity around a vast audience of digitally savvy customers.
  • Australia’s proximity to China brings many opportunities – but could also be the source of competition.

Australians looking towards Silicon Valley as the chief model for digital innovation may be casting their eyes too far afield. Closer to home, China has emerged as a global innovation juggernaut, combining an entrepreneurial spirit with a customer-centric approach to create a thriving ecosystem of internet-focused business models and markets.

These trends are important for Australia. As China continues to transition away from infrastructure investment-fuelled growth, Australia’s proximity could prove highly beneficial, providing easier connections to a vast domestic audience, opportunities for partnerships, and better access to disruptive new business models and technologies.

However, alongside these opportunities come new rivalries and competition.

Dragons and unicorns

China’s ascendency as a digital heavyweight has been dramatic. A report from PwC China, The rise of China’s silicon dragon, notes that China now has the largest collection of unicorns (startups valued at US$1 billion or more) outside of the United States.

The country is also home to five of the world’s 14 privately-owned ‘decacorns’ – companies valued at more than US$10 billion. Examples include ride-sharing company Didi Chuxing, smartphone manufacturer Xiaomi and peer-to-peer lending platform Lufax.

Although the US still leads in terms of total numbers of unicorns and decacorns, last year China attracted US$4 billion more venture capital investment for internet-based businesses. This was a significant milestone and could be a sign of things to come.

Internet innovators

Why does China have such a strong digital economy? A common perception has been the country’s blocking of many large Western technology services, such as Google and Facebook, allowing for similar services (such as search engine Baidu and social media network Weibo) to gain unfettered access to a relatively untapped domestic market.

But there’s more to the story than simple censorship. The country boasts approximately 720 million domestic mobile internet subscribers – more than twice the population of the US and just 20 million shy of the entire European continent. Because of this, internet entrepreneurs in China have two home advantages: the ability to scale digital offerings to the world’s largest singular demographic, and the simultaneous opportunity to capture up to 10% of the global population.

When this large concentration of internet-and-mobile enabled citizenry is combined with other characteristics, such as private sector entrepreneurialism, intense competition, and opportunities to address inefficiencies within the wider economy, it’s no surprise that China has fostered such a strong digital ecosystem.

According to PwC’s Asian practice leader, Andrew Parker, China’s role as an innovator cannot be underestimated:

“Chinese companies have been innovating at the intersection of mobile, social and commerce to create some of the most valuable businesses on our planet. The biggest players are worth over US$400 billion. To put this into context, that is nearly 50% of the market capitalisation of the entire ASX50.”

Customer front and centre

Another crucial element to China’s digital success is its perceptive customer base. According to the Silicon dragon report, China’s domestic audience consists of many early adopters, with local consumers both highly accepting of beta products (smartphone apps or software released in an early, unfinished form) and willing to provide ongoing performance feedback.

This high level of customer engagement feeds into the flywheel of competition, scale, and entrepreneurship. In order to stay ahead, Chinese digital outfits must out-innovate each other with speed and flexibility, all the while ensuring the product caters to ever-evolving customer preferences to retain market share.

The result is a digital economy that pioneers innovative new features, sometimes years ahead of other regions. Since 2013, for example, Tencent’s popular mobile messaging platform WeChat has incorporated an ecosystem of third-party apps and mobile payment capabilities – features only recently announced by Western equivalents such as Facebook Messenger and WhatsApp.

Drawing digital talent

Already, China’s domestic digital economy has had global consequences. In particular, the country has been using its considerable resources to poach international expertise from the global talent pool. In 2013, Google’s Vice President for Android, Hugo Barra, resigned to take up a position as Xiaomi’s Vice President for International. Last year, e-commerce giant Alibaba recruited former Goldman Sachs executive Michael Evans as President in charge of the company’s international expansion.

This trend of Chinese digital companies focusing on attracting international talent will continue. Within two generations, notes the Silicon dragon report, demographic shifts will see China lose 150 million workers. In that time, the country’s digital economy will only grow larger, placing even further demand for a skilled workforce.

As a result, a race between the Silicon Valley and the Silicon Dragon to draw tech-savvy talent could emerge, with China’s sheer scale and opportunities to tap into the world’s largest digital market a potentially enticing drawcard for ambitious individuals.

Dancing with the silicon dragon

As one of China’s Pacific neighbours, Australia’s geography creates multiple opportunities for local players. Not only does its digital evolution into social and mobile provide a useful roadmap, China’s domestic-first development method, unprecedented consumer access, and broad range of digital assets makes its high-flyers ideal strategic partners.

What’s more, with Asia poised to become home to the majority of the world’s middle-class population – bringing a huge demographic of affluent regional consumers online – Australian companies that look to the East would be well-positioned for the future.

But there’s a flip side to this land of opportunity, says Parker. While capable of becoming a vital strategic partner, China’s digital innovators are equally capable of turning into key rivals across multiple sectors, competing for everything from customers to skilled labour.

“The implications for Australian retailers, financial services companies, and the healthcare industry are really quite profound,” he told the Australian Financial Review in an interview. “We tend to look to North America for inspiration and an expectation our next competitor may come from that part of the world. This report suggests your competition may in fact come from China.”