China’s slowing economy won’t discourage tech giants


Jon Yeomans

September 15, 2015

Expansion into China could buy Western tech giants half a decade or more of sustained growth

You may have read a little about China recently: inflated equity prices leading to a sudden, dramatic fall in the stock market; reams of discouraging data indicating that the world’s second-largest economy is slowing down, and may only grow at 7pc this year or even less.

China’s tribulations may or may not be the start of a new chapter in the global economy. But at least one sector finds 7pc growth per annum comfortable enough for its needs, thank you very much.

The global tech industry is in the throes of a love affair with China. Those companies that are there want to be bigger there. And those that aren’t there desperately want to be there.

Last week, Dell, the world’s third-largest maker of PCs, announced it would invest $125bn (£81bn) in China over the next five years, setting up a research and development lab and working with partners to encourage innovation and entrepreneurship in the country.

Meanwhile, Google, which all but abandoned China five years ago in a dispute over censorship, is reportedly looking at ways of expanding its Google Play app store there, in a bid to reach more of the country’s 800m mobile phone users.

China, lest we forget, is Apple’s second-biggest market. It made $13.23bn there in the last quarter and chief executive Tim Cook took the rare step of reassuring investors last month, in the trough of China’s stock market plunge, that its performance wasn’t about to go into reverse. “I continue to believe that China represents an unprecedented opportunity over the long term,” he said.

It’s not just the established tech giants seeking a slice of the Middle Kingdom. Rentals platform Airbnb and car hire service Uber have both been working hard in recent months to gain a sizeable toehold in China.

Many of these companies face stiff competition from their Chinese equivalents: Huawei in mobile phones; Baidu in search; Kuaidi Dache in cab hailing; and Tujia in holiday rentals, to name a few. But the Western tech giants, with mature, saturated markets at home, cannot afford to ignore China. As China’s population grows larger and wealthier, its economy becomes increasingly consumer led and digital dependent. The government knows this and has outlined an “internet plus” strategy designed to grow its tech sector and provide the backbone of an economic transformation.

The timing, then, for the Western tech giants couldn’t be better. Expansion into China could buy them half a decade or more of sustained growth – though nothing lasts forever. Already there are signs of malaise setting in, with Chinese smartphone sales falling for the first time in August. More importantly, hunting topline growth in China masks, rather than addresses, the deeper problems these tech giants face: a lack of innovation, and uncertainty over the Next Big Thing.

The big names are at crossroads. Increasingly powerful computing technology, thanks to ever smaller microchips, and universal connectivity, in the form of superfast broadband and 4G, has ushered in a world of mobile computing and the cloud. The pace of change has been dizzying: stop and reflect that the iPhone only launched in 2007; the iPad three years after that. Nokia and BlackBerry stand as testament to how quickly empires can fall in such a compressed time frame. But such pace may not be sustained – or at least, its centre of gravity may change.

The tech giants face distinct yet interconnected problems: some have lost a sense of what customers want (Microsoft); seen sales cannibalised by tablets and smartphones (Dell, HP); are no longer able to deliver ever-smaller microchips at the speed to which we’ve become accustomed (Intel). By contrast, Apple, which has done very well from a small number of blockbuster products, has made a high-profile bet on wearable technology in the Apple Watch.

But hardware and software aren’t enough, and haven’t been for some time. As customers and businesses turn away from upgrading their products every few years, the tech giants have morphed into service providers, chasing new revenue streams through subscriptions, streaming and downloads. In this way, they insert themselves into their customers’ lives on a daily, rather than annual or biennial, basis.

Thus Apple revamps its TV platform and launches a new music service; Google locks you within an ecosystem of apps and tools; IBM and others pour money into software delivered over the cloud, where Amazon is already camped out. It’s why Windows 10 is the “last version of Windows”, according to Microsoft, with future upgrades delivered incrementally over the internet – “Windows as a service” – a far cry from the days when you had to install it on a CD from PC World.

But what happens when China has enough laptops, phones and web services to satisfy demand? Or when its home-grown tech giants start to flex their weight abroad, as they surely will – either through their financial firepower or through their access to patents borrowed from, or, in the case of Dell, developed with, their Western partners? It’s hard to say, but expect to a see a new round of mergers, consolidation and flame-outs in the tech sector. With the pace still so fast, and so much at stake, one wrong move can cause irreparable damage to a company’s fortunes.

In the meantime, China remains the place for tech firms to be – slowing economy or no. Just don’t ask them what comes after.

This article was written by Jon Yeomans from The Daily Telegraph and was legally licensed through the NewsCred publisher network.

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