China Releases a Tech Dragon: the BAT

Baidu made a splash at this year’s Consumer Electronics Show in Las Vegas when COO Qi Lu showcased the Chinese internet search leader’s new push into artificial intelligence. Dressed in the requisite jeans and black shirt and cued by a teleprompter and bold slides, he bragged about “innovating at China speed.” Baidu debuted innovations ranging from autonomous driving technologies to a suite of voice-powered speakers, lamps, and projectors dubbed by Baidu as the “Alexa of China.” It was a critical moment as Baidu, itself known as the “Google of China,” faces growing pressures on its command of Chinese search.
Baidu is one of China’s three tech kings, collectively known as the BAT — Baidu owns search, Alibaba leads e-commerce, and Tencent dominates gaming and social communications. The power of these three is daunting and growing, but like their American superpower counterparts — Amazon, Facebook, and Google — they face growing pains. Even as the BAT expand their ambitions to more and more industries, well-funded newcomers threaten to overshadow them, and an all-powerful government is making moves to keep their power in check.
For now, they have entered the rarified ranks of the world’s largest and most valuable companies, right up with America’s tech giants. The market capitalization of Tencent has recently exceeded that of Facebook, which like Alibaba hovers around half a trillion dollars. Apple recently exceeded $900 billion, as Alphabet, Amazon, and Microsoft hovered around $750 billion. Baidu remains substantial, recently a bit below $100 billion, but formidable.
Isolated from American competition thanks to the Chinese government’s ban on Google, Facebook, and Twitter, as well as repeated market failures by Amazon and eBay, the BAT have chalked up remarkable double-digit growth rates for a decade. They have soared to be among the world’s largest networks — Tencent’s ubiquitous communications and payment product WeChat has 1 billion users, Alibaba sold to 515 million retail consumers in 2017, and Baidu claims 665 million mobile search users. (For more about WeChat, see the feature article in Techonomy Magazine’s last issue.)
The backdrop is the Chinese people’s voracious uptake of apps, digital payment services, and social media — and a concerted nationalistic drive to win the tech race globally. Over the past 15 years, China has pivoted its central long-term economic strategy from manufacturing and exports to tech innovation. And it’s working. Today, Chinese internet companies spend less time copying Google, Facebook, YouTube and Amazon, and instead seek to score the next, new thing in emerging sectors like artificial intelligence and fintech.
The ascension of China’s tech titans has been nurtured by their home market’s size and growth. China claims the world’s largest number of users of the internet (about 710 million) and smartphones (663 million) plus the biggest online commerce market — more than $1 trillion in 2017. Spending is projected to grow annually by 23 percent, reports Goldman Sachs. And further huge potential remains untapped, since internet penetration is only 52 percent compared with 88.5 percent in the United States, a report by the Boston Consulting Group notes. And China has way more of the always-on millennials and Gen Z young people who turbo-charge the latest fads. They account for 54 percent of China’s population compared with 37 percent in the U.S. Another advantage for China is that its relentless, entrepreneurial tech industry work ethic and startup culture can make Silicon Valley look downright sleepy. Company teams routinely work 12 hours a day, six days a week.
As tech burgeons, China has emerged as the globe’s second-biggest venture capital investment market — $65 billion last year and closing in on the $76.4 billion in the U.S., according to London-based data tracker Preqin. Four of the six largest venture deals of Q4 2017 were in China: ride-sharing service Didi Chuxing at $5.5 billion, China Internet Plus (the merger of group-buying sites Meituan and Dianping) at $4 billion, bike-sharing startup Ofo at $1 billion, and electric-car maker Nio at $1 billion. No wonder China has nurtured so many unicorns — last year it accounted for 29 percent of startups valued at more than $1 billion, according to Crunchbase.
The BAT companies are powering forward with multi-function super apps and a sprawling reach into new industries. Alibaba seeks to conquer the world’s retail market while powering into related fields such as financial services, gaming, healthcare, and online travel. “The speed and range of new services at Alibaba is as good, or better, than Amazon,” says Hans Tung, managing partner at U.S. & China venture capital firm GGV Capital, an early investor in Alibaba. He adds that Tencent’s super app WeChat, which wraps together chat, shopping, reservations, gaming, and banking, has more advanced functions than do Facebook’s two giant chat services, WhatsApp and Messenger.
But continued dominance is by no means certain for the BAT if they don’t innovate and invest quickly. The next generation of net players that have popped up is so potent it has earned its own local acronym — the TMD. These three companies include AI-empowered news aggregator Toutiao, group-buying giant Meituan-Dianping, and ride-hailing service Didi Chuxing. All are growing quickly.
A more delicate but perhaps even more potent challenge to the BAT’s staying power is a government leery of their growing social weight. “The biggest thing to watch is [whether] the government identifies them as a risk to its power,” says Ann Lee, author of Will China’s Economy Collapse? She says government crackdowns could impair the companies’ credibility, hobble them with censorship, or even shut them down.
As government pressures increase, the BAT are already acceding. Tencent recently limited the hours youngsters can play its smartphone game Honor of Kings after the government became alarmed about the risk of addiction. Baidu labeled paid ads more clearly in search link results in response to concerns about deception. All the sites are spending more time sanitizing politically sensitive content, pornography, and excessive celebrity gossip. And recent media reports suggest the government in Beijing wants even more methodical oversight and plans to demand small equity stakes in China’s social media giants, including Tencent and Alibaba-owned video site Youku Tudou.
The BAT are all eager to grow internationally, and have been encouraged by the government to do so. But they are late. Only 11 percent of revenues for NYSE-traded Alibaba come from international markets, and it’s working hard to change that. In its first corporate ad push outside China, it was a major sponsor of the 2018 Winter Olympics in South Korea. International revenues for NASDAQ-listed Baidu stand at a measly 1 percent while Hong Kong-traded Tencent checks in at 5 percent. By comparison, their American rivals are vastly more international. Non-American revenue in 2017 was 53 percent for Google, 56 percent for Facebook, and 32 percent and growing for Amazon.

So Baidu, Alibaba, and Tencent are using money to expand, investing in tech companies around the world and doing acquisitions. The BAT inked a stunning 95 U.S. tech deals worth $27.6 billion in the past five years, according to research firm S&P Capital IQ. Last year, Tencent invested in Uber at a $48 billion valuation and took a 5 percent stake in Tesla. In 2016, Tencent paid $8.6 billion for Finnish game maker Supercell and a year earlier bought LA-based Riot Games. Alibaba invested in artificial reality startup Magic Leap and ride-sharing business Lyft, and made a string of buys into other Silicon Valley-based tech startups. Baidu invested early in Uber, and lately has gone after startups in deep learning, big data, analytics, and computer vision. It also recently opened its second R&D lab in Silicon Valley for self-driving car research. Meanwhile, up-and-comer Toutiao moved aggressively into the U.S. market last year by buying video apps Musical.ly and Flipagram.
But don’t expect the BAT to go mainstream in the U.S. any time soon. Standing in the way are cultural differences, lack of recognition, and regulation. “Going global is going to be a long, tough haul for these Chinese brands,” says China expert Ann Lee. “There is a lack of trust of Chinese brands in the U.S. It’s psychological and emotional.”
It’s also political. The Committee on Foreign Investment in the U.S. (CFIUS) rejected an attempt by Alibaba affiliate Ant Financial to pay $1.2 billion for transfer service MoneyGram. CFIUS worried the Chinese government might access personal information, even though Alibaba promised the data would remain in the U.S. More Washington constraints could be coming, as a bill to expand the range of CFIUS works its way through Congress. Under the increased scrutiny, Chinese tech deals in the U.S. slowed to $13 billion last year, from a peak of $16 billion in 2016, according to Capital IQ data.
But the BAT remain aggressively on the lookout. All of them have moved into Menlo Park’s Sand Hill Road with their own venture investment units, where they are regarded as premium buyers. “They can have their pick of the litter,” says investment banker David Williams of Palo Alto’s Williams Capital Advisors. “They have a VC-like perspective and are fast-moving.”
And founders of U.S. tech companies often see deals with Chinese giants as an entrée to the huge China market. Kansas City-based security technology upstart Zoloz (previously EyeVerify), for example, was acquired by an arm of Alibaba in 2016 for an estimated $100 million. The American company then became the global center for mobile biometrics used by the Alipay payment service.
China’s tech titans all know that what matters most is their staying power. Baidu is advancing in both mobile search and AI. “Having missed out on the social, mobile, and e-commerce waves of the past few years, Baidu is trying not to repeat the same mistake by going all in on AI,” observes Chris Evdemon, partner at Sinovation Ventures, the influential Beijing-based venture capital firm. Baidu is angling to close a large talent gap with Google.
AI is becoming a geopolitical battleground, with China and the U.S. the world’s biggest rivals. The Chinese government has set the goal of becoming the top by 2030. Last year, 48 percent of the $15.2 billion in global AI funding went to China, surpassing the U.S. Since the size of AI data sets confer intrinsic advantage, China’s sheer scale could give it the upper hand, concludes a recent paper by the Eurasia Group and Sinovation Ventures.
Alibaba, for its part, faces increased competition from Chinese e-commerce rival JD.com, which recently teamed up with Tencent to buy into popular online fashion retailer Vipshop. Forging ahead, Alibaba is going all-in on what visionary founder Jack Ma calls the “New Retail,” a broad strategic concept for digitizing merchandising and shopping using artificial intelligence and data from sensors and smart devices. Alibaba leads the world with its new Hema stores — automated, cashless, cashier-less operations that combine groceries with a fresh food market, a restaurant, and speedy nearby home deliveries. Some 25 stores have opened already in major Chinese cities and Alibaba plans a total of 60 this year. Hema was introduced months before Amazon’s less ambitious Amazon Go cashier-free store, which is so far only in Seattle. “There’s really nothing as advanced as Hema in the U.S.,” says Michael Zakkour, who heads the China/Asia practice at supply chain consulting firm Tompkins International.
Alibaba is also making strides with its Ant Financial subsidiary and its affiliated mobile-payment platform Alipay, now used by roughly one-third of all Chinese consumers to pay for just about anything, including cinema tickets, phone bills and groceries. At a recent conference in Silicon Valley, Hu Xi, VP and chief architect at Ant Financial, detailed how the bank and payments platform has diversified into services like microloans, wealth management, insurance, and internet banking. Another successful Alibaba spinoff, Yu’e Bao, has become the world’s largest money market fund, with 370 million account holders who can open accounts with as little as 15 cents, and $211 billion in assets in just over four years. It promises returns of more than four percent.
At Tencent, the focus is on maximizing WeChat, the super app in China that has become a way of life while continuing a winning streak with online games. Staying on top can be tough in China’s fast-changing market, though, where 43 percent of apps are tried only once, according to Boston Consulting Group. Only 15 percent of apps are used more than 10 times.
What’s next for Baidu, Alibaba and Tencent? They all want to get into huge economic sectors where technology is increasingly central, such as healthcare, enterprise systems, education, and robotics. For example, Tencent recently led a $15 million investment in medical AI startup VoxelCloud in Los Angeles and invested in biotech startup Locus Biosciences in North Carolina. Observes venture investor Evdemon of Sinovation Ventures, “There is no aspect of technology that is not of interest to the BAT.”