MITSUI & CO. GLOBAL STRATEGIC STUDIES INSTITUTE
China’s Thriving Service Industry Led by Local Innovative Companies
Nov. 8, 2016
Industrial Studies Dept. II
Mitsui Global Strategic Studies Institute
Growth of Chinese Companies in Service Sector
Among the top 5,000 companies worldwide by market capitalization as of 2015 end, Chinese (excluding Hong Kong) companies account for 1,107, a significant rise from 326 back in 2000. The share of these Chinese companies’ aggregate value out of those 5,000 firms also grew from 1.3% to 13.6% during the same period. By industry, in 2000, the major players were companies from resources and materials industries such as oil and metals, and after the mid-2000s, they shifted to financial businesses, for which the Chinese government made privatization efforts (Figure 1). By the end of 2015, various Chinese service providers have appeared, from real estate, retail, digital contents/media/advertising, recreation to education, and the Internet-related service companies particularly increased their presence, following Alibaba’s IPO in the previous year (Figure 2).
The rapid growth of the Chinese service industry can be attributed to its huge market of 1.3 billion people, and also to its fast-growing economy and wage level. China’s GDP per capita reached $14,0001 in 2015 from $4,000 or less in 2000, while auto sales rose to 24.6 million from 2.09 million, and retail sales increased to 30.1 trillion yuan from 6.7 trillion2 during the same period. The growth of the service industry is proven by the upsurge in movie attendance (1.26 billion in 2015, grew by 7.9 times in a decade) or the number of domestic tourists (4 billion in 2015, a 5.4-fold increase in fifteen years).
The government policy is also a driver of the Chinese service industry growth. While the government restricted market entry of foreign capital firms in various industries, including retail, logistics, entertainment facilities, visual or game contents, indigenous service providers made a great leap, represented by e-commerce giant Alibaba, or conglomerate Dalian Wanda Group, which also runs commercial properties like movie theaters. In addition, in the 2000s, the government phased in measures to bolster the ICT industry and developed communications infrastructure, resulting in the explosion of Internet service businesses. Helped by the spread of mobile devices, the penetration rate of Internet usage exceeded 50% in 2015, amounting to 688.3 million users, and that was only 22.5 million in 2000. Also, the government censorship on Google or Facebook turned out to provide a boost to search engine Baidu or SNS operator Tencent.
Rise of Chinese Entrepreneurship
In addition to economic development and successful government policies, the emergence of unique Chinese-born entrepreneurs also helped the service business boom in China. Early entrepreneurs appeared back in the 1980s, in the manufacturing and real estate sectors, irrespective of their academic or business backgrounds. Zhang Ruimin3 (born 1949), the founder of electrical appliance manufacturer, Haier, used to be the deputy manager of the Household Appliance Division of the Qingdao municipal government and was then promoted to Director of the Qingdao Refrigerator Factory4 in 1984 to rebuild the ailing company and made it into a global major home appliances brand. Another pioneering entrepreneur is Wang Jianlin (born 1954), the founder of the aforementioned Wanda Group. After 16 years in the People’s Liberation Army, he made his real estate business into the multinational conglomerate, and he himself was named the richest person in Asia in 2016 by Forbes. Having acquired the US theater chain AMC in 2012, the group has become the world largest theater operator, and is also made inroads into the movie production business. The group also owns resort facilities and theme park businesses, widely ranging from hotels, shopping centers, golf courses, ski resorts, to theaters and hospitals.
Chinese entrepreneurs in the 90s are mostly represented by former government officials or academics, inspired by Deng Xiaoping’s famous southern tour. Former English professor at Beijing University, Yu Minhong (born 1962) founded New Oriental Education & Technology Group in 1993, an English school focusing mainly on TOEFL preparation. With 3.6 million students studying at 748 sites across the country, the group is now the largest cram school operator in China.
Compared with those pioneers, Chinese entrepreneurs around 2000 tended to target overseas development of their business in the early stages. China’s WTO accession in 2001 is one of the major factors that changed their mindset toward global operation. Typical examples are found in Internet businesses, including those of Pony Ma (born 1971) of Tencent (founded in 1998), Jack Ma (1964) of Alibaba (1999), and Robin Li (1968) of Baidu (2000). Although only a few of those entrepreneurs studied in the US or worked abroad, they actively recruit experienced businesspersons from the US and elsewhere as their company executives, and gain business know-how.
Since the mid-2000s, the number of business startups in the Internet/mobile service sector in China has increased ever faster. Given the growing number of tertiary education participants and those who study abroad, entrepreneurship seems to have been cultivated in China. As of 2013, the number of students at higher educational institutes reached 34 million (enrollment 30%), which reflects a five-fold increase in just thirteen years, while the number of Chinese students studying abroad exceeded 700,0005 during the same period, similarly a five-fold increase.
From Imitating Business Model to Creating Innovation
Most of such service businesses have emulated successful business models in the United States and evolved themselves in China. In addition to those mentioned above, many local providers of lifestyle or entertainment services (many are equivalent to the existing models in the West) are enjoying remarkable growth; namely, Youku (Chinese-equivalent of YouTube, acquired by Alibaba in 2015), Didi Chuxing (Uber), LeEco (Netflix), Ctrip (Expedia), Tujia (Airbnb), Dianping (Yelp, 20% ownership by Tencent).
Their business models are often said to be copied from the US companies, but some are successfully offering distinctive services of their own. For example, Alibaba’s annual Singles Day event brought it 91.2 billion yuan in sales in one day in 2015. Prior to Facebook, Tencent succeeded in connecting its messaging application with various lifestyle services such as games, e-commerce, taxis, delivery, and payment, thereby creating social infrastructure of 900 million consumers. Neck-and-neck competition between Alibaba and Tencent over incorporating payment application with financial services such as asset management, loans, insurance products, resulted in the world’s highest number of Internet financial service users, over 500 million in China.
In the meantime, a Silion Valley-like system of encouraging entrepreneurship is being developed in China. In the US Silicon Valley, a network of supporting entrepreneurs has been established together with the help of academic or research institutes, excellent human resources with technological expertise, venture capitalists, and angel investors. Also, once they have succeeded, entrepreneurs often come back to Silicon Valley as investors. In China, successful entrepreneurs are encouraging entrepreneurship of younger generation, major players such as Alibaba and Tencent support startups, and a Silicon Valley-like network is taking root not only in major cities like Beijing and Shanghai, but also Shenzhen, where Tencent is headquartered.
According to OECD (Organisation for Economic Co-operation and Development), China’s R&D spending in its industrial sector reached USD 248.8 billion (PPP, nominal) in 2013, approaching that of America, USD 278.1 billion. As the scale of R&D is also on the rise, in China, and more startups emerge in the areas where consumer needs cannot be met only via the Internet, such as the healthcare and entertainment sectors, it is expected to accelerate upgrading of China’s industrial structure and also spread Chinese innovation worldwide.
- GDP based on PPP per capita GDP, current international dollar, 2015
- Adjusted by current prices of 2015
- Mr. Zhang earned his MBA degree at University of Technology and Science of China in 1995
- A predecessor of Haier, founded in the 1920’s
- UNESCO statistics