The history of technology-driven innovation appears to follow a path whereby new entrants use novel ideas, technologies and/or approaches to wedge their way into the market against existing incumbents, grow rapidly as their business model takes root and where the winners eventually become the leaders and incumbents themselves.
This phenomenon has been represented abstractly through concepts like Gartners’s “Hype Cycle” or the “Diffusion of innovations” theory:
As the innovator or new market entrant journeys through each stage in a given cycle, they tend to have different attitudes towards competition and innovation:
New entrants tend to focus on building the new product or service. They iterate rapidly and are generally supportive of open standards and against regulation. Product-centric staff (product development, product managers, front-line services) dominate. This is typically the stage where the most innovation in the product or service takes place.
As the cycle moves from “Early Adopter” stage to “Early Majority” stage, the company scales up its sales and marketing efforts as the land grab begins in earnest. There is still much innovation in the product as a means of winning the battle against other competitors that are also targeting the same market. Overall impact comes increasingly from the proliferation of technology as opposed to pushing the technology frontier itself.
As the market matures, winners emerge. Weaker competitors fall away or are otherwise “consolidated” and the level of competition begins to fall off. At the end there are a small number of players left or in some cases, a single dominant player. It is quite natural and even rational (from a fiduciary/shareholder perspective) at this stage for a company’s focus to shift from innovation to “maintaining the status quo” because the status quo is so profitable. This is where you have to start worrying about economic rent-seeking and the various negative effects it can have on society.
China is no exception to the cycle of innovation and adoption. The breathtaking ascents of Alibaba and Tencent illustrate how two businesses went from upstart new entrants to become China’s two most dominant businesses across multiple industries.
In the case of Alibaba, its relative dominance of retailing is even higher than its American counterpart, Amazon. In Tencent’s case, it has near-100% share of the attention of Chinese people through Wechat, an app that is linked to many important daily, recurring activities. Both Alibaba and Tencent have successfully leveraged their scale and platforms (e.g. proprietary data, customer database etc.) to invest in emerging markets ranging from bike-sharing to logistics to insurance — sometimes directly entering the markets themselves but more often choosing horses to back in a given market.
For the time being, Alibaba and Tencent are still very innovative from a product and service perspective. Not only are they great at coming up with new products and services all the time, they are also highly competent at execution and proliferating these innovations into the broad economy. They both know how to scale … extremely rapidly. Technology proliferation is just as important as coming up with the original product or service, especially if you are trying to measure innovation in terms of overall societal impact.
I believe Alibaba and Tencent are still intensely focused on innovation because the Chinese economy itself is still a massive opportunity and still in major land grab mode. Alibaba and Tencent have learned that the most effective way to win this land grab game is to be innovative. The rapidity of change in China means that you need to run just to maintain your position in the race.
However, at some point, the rapid land grab phase will end and the temptation to shift focus to “maintaining the status quo” will inevitably increase. It is at this point that Alibaba and Tencent may start to take the eye off the innovation ball and perhaps focus on anti-competitive behavior against new entrants into their existing markets. Competition is the engine that powers capitalism, the fundamental motivating force for entrepreneurs to continuously push beyond the innovation frontier.
With that in mind, there is definitely the risk that Alibaba and Tencent one day become and act like fully fledged monopolists and focus on economic rent-seeking at the expense of innovation. But for China, there are a couple forces that will act as counter-weights to this scenario.
First, no matter how big Alibaba and Tencent get, they will always sit lower in the pecking order than China’s central government and more specifically, the Chinese Communist Party (CCP). While economic power will certainly translate to some degree of political influence, the ability of Big Business to exert influence in its self-interest is lower than the United States and many other developed countries.
Interestingly, the CCP is quite supportive of maintaining competition in its markets; it seems to recognize the power of competition to drive positive change. Its policies tend to support competition at a “Goldilocks” level: Enough to keep market participants motivated but not so much where things get “too crazy” (太亂) and everybody is losing money, wasting societal resources competing against each other. It is also of course easier to exercise control over two to four large players vs. dozens of small ones. This could change of course but for the foreseeable future the CCP has the power to curb Alibaba and Tencent’s more extreme anti-competitive tendencies.
Second, we are starting to see the rise of the next batch of Chinese mega-unicorns. This includes companies like Didi Chuxing, Xiaomi and Meituan-Dianping. While it is true that Alibaba and Tencent are invested in many of these companies, they also act fairly independently and seem to have no qualms throwing elbows and moving into new markets. Out of this next batch, one or more may possibly ascend to eventually compete head-to-head against Alibaba and Tencent and help soften the level of market dominance those two currently hold.
One example of this is the evolution of China’s ride-sharing industry. After a rapid period of consolidation in the ride-sharing space, culminating with Uber’s exit from China in 2016, it looked as if the ride-sharing war was over and had been won decisively by Didi Chuxing (whose predecessors had been themselves backed by both Alibaba and Tencent). With over 80% market share, it seemed inevitable that ride prices were going to go up while drivers’ take rate went down as Didi began to flex its monopolistic muscle. However, last year, Meituan-Dianping announced that it was going to re-enter the ride-sharing market and appear to have the muscle to do so. Meanwhile, Meituan-Dianping itself is taking Alibaba itself (which recently acquired control of Ele.me) in its core food delivery market.
The rise of the next generation of Chinese technology titans is encouraging for competition and for Chinese consumers. I am very interested in seeing how this plays out in the coming years.
This was originally published on Quora in April 2018.