How China’s innovation system really works
As debate grows over whether China is winning the technology race, executives should focus instead on how its innovation system is designed – and what that means for competition....
Asian hub
BATs and other household-name Chinese tech companies focus on transformations while battling other business challenges
Maturing mega-tech companies get to grips with boosting revenues and controlling costs as growth rates plateau. The future landscape could see a reshuffle as long-term investment in R&D by less high-profile companies positions them for expansion.
Chinese tech sector companies, once the darlings of China’s private sector, are facing challenges, as many of them have been battered by strict regulatory oversight and flailing international expansion coupled with data security concerns and lack of chip availability.
How the Chinese tech sector fared in 2023 and what its future might look like are the questions addressed through IMD’s latest China Company Transformation Indicator.
We investigated 37 listed tech companies in key sectors, including the internet, smart home and city, semiconductors and electronic components, and original design manufacturers (ODMs). Top revenue generators are JD.com, Alibaba, and Tencent, closely followed by Foxconn Industrial Internet and Lenovo. The indicator also includes six semiconductor companies from China, which are at least a factor of 10 smaller than the internet giants – and far from their global peers Nvidia, AMD, and Qualcomm. But what is not happening now may come later –especially given China’s drive to accelerate the semiconductor sector.
We looked at the top performers in terms of core resilience versus future readiness across eight factors and 41 variables, ranging from the leveraging of advanced technologies, such as AI, APIs, and edge computing to ESG, business diversity, and success. The results are striking. The Chinese tech sector is still dominated by internet technology firms with the ‘BATs’ (Baidu, Alibaba, and Tencent) in the top five, along with JD.com and NetEase. But it’s also noteworthy that we already see three hard-tech companies in the top rankings, including semiconductor giant SMIC, transformed incumbent Lenovo, and the global security technology leader Hikvision.
BATs transforming, but with an emphasis on the business basics
The “BAT” club members – which went from untouchable in the 2010s to being challenged by competition, consumers, and regulators alike in the 2020s – appear to be undergoing a transformation. Indeed, the time of fast growth is long gone and these over two-decades-old companies are in search of mature management models and growth approaches while rethinking some of their diversifications. Alibaba is strengthening its core e-commerce business, while some observers suggest the company is also reevaluating its offline retail investments. At the same time, it maintains its investments in new technologies. This is apparent in its work in generative artificial intelligence (GenAI), where they are the leading and real contenders from China. The company is also willing to make bold decisions with active founders in the background – or sometimes, leading from the front. An illustrative example is Alibaba’s restructuring and persistent focus on core businesses which continues to give them a sustainable lead over the other tech companies, if only for its expansive reach, data foundations, and access to the country’s top talent.
Tencent boasts the mighty WeChat, recently ranked No 1 in the World’s Strongest Brand ranking (not the most valuable brand, which by far is Apple), which still dominates Chinese consumers’ daily lives. For the BATs, this is far lower, but perhaps based on more realistic valuations and back-to-business basics of revenues and cost which characterize its challenges for today and tomorrow.
Challengers are less visible but aggressive in expansion strategies
Tencent’s less well-known peers JD.com and NetEase, which have followed a different path from the BATs, are also succeeding. With far less visibility but more focused expansion strategies, Liu Qiangdong and Ding Lei have performed strongly in their respective categories.JD.com invests in engaging with customers
JD.com is known for having built a deep digital supply chain and delivery capability, perhaps only outstripped by Alibaba’s Cainiao. Technology has been important for JD.com for many years and it seems to pay off. The use of advanced algorithms for delivery routes and inventory management enhances its logistics effectiveness while simultaneously making significant investments in technology to improve the customer experience. This includes the development of chatbots for customer assistance, virtual reality and augmented reality tools for product visualization, and AI and machine learning to personalize recommendations for customers. Based on these capabilities, the company has established strong partnerships with various companies, including major global brands like Walmart.NetEase shows agility, continues to invest in R&D, and brings gaming tech to real-world use
NetEase has primarily focused on building virtual environments in gaming, digital communities, and communication. Away from the limelight, and despite facing intense competition from Tencent, Alibaba, and JD.com, NetEase has managed to maintain a strong position. The company navigates regulatory challenges and adapts to changes in policies related to market access and licensing requirements, especially in sectors like online education.
Moreover, it is reported to invest 15% in R&D on an annual basis, part of which goes into a range of AI applications for virtual environments. NetEase has committed a substantial annual investment of at least US$1.4 billion for the development of large language models and other technological fields. For instance, in a major move towards applying its AI and gaming technology in practical real-world applications, NetEase’s AI arm, Fuxi Lab, partnered with the China State Construction Engineering Corp to develop smart robots for the construction industry.
Huawei and Bytedance: Missing, but not forgotten
Huawei and ByteDance are both missing from the analysis due to their shareholding structure and private status, which make them difficult to analyze alongside the other listed companies. Needless to say, Huawei and ByteDance are top tech companies in China, and as such would probably rank amongst the top performers in the study in terms of revenues and innovation indicators. Huawei boasted $100bn in revenues in 2023, which makes it a leading global tech company. Despite the ongoing US sanctions, it has managed to find ways to compensate for lost sales, especially in its core businesses. It has also been actively exploring new markets and business areas, including cloud computing and the electric car sector, both of which have shown strong growth and promise as new revenue streams for the company. Without a doubt, its decade-long investments in technologies, deep R&D, and related diversification of its portfolio have created solid foundations for Huawei for the future. ByteDance, however, is facing strong competition outside China from Temu and Shein, while realizing that the company more or less missed the GenAI development wave – recognized by the CEO in a recent comment. While it may not yet be too late, the once disruptive company appears to face the mediocrity of bureaucratic challenges. With $110bn in revenues and 1.5bn global users, the company has buffers and firepower but needs transformative action inside the company to live up to its massive potential.What do the weaker signals from tech giants tell us about the future of the sector?
Being ready for the future is always a work in progress, and leading tech companies are no exception. To this end, hardware companies like Lenovo, Midea, Hikvision, Xiaomi, and SMIC are making significant investments in innovations. Although their business results are more modest than the mega-companies in the sector, these investments today may pay off in the future. Companies like Midea or Xiaomi have been through enterprise transformations before and may leverage such experiences to transform yet again. Digging deeper, it is astounding to see deep-tech specialists like Luxshare (electronic components and connectors), Sunny Optical (lenses and photoelectronics), and Goertek (acoustic components) in the list of top tech firms in China. The future of Chinese tech may well be in the hidden champions of technology. Although they are slower, more focused, and less appealing to the media, they could become global tech contenders in the years to come.The research for the China Company Transformation Indicator (CCTI) was carried out by Wei Wei and Kunjian Li at IMD’s research hub in Shenzhen, China, under the supervision of research director Mark J Greeven, Professor of Innovation and Strategy at IMD. For more insights on China’s business landscape, explore the other articles in our China Company Transformation Indicator 2024 series, focusing on global pharmaceutical investments in China and on how Nike’s dominance in the Chinese apparel market is threatened by the ‘Guochao’ phenomenon.
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