On September 19, Alibaba, a Chinese firm that performs retailing services and business to business services, was listed on the New York Stock Exchange. The enlisting has been a huge financial success for the firm overall; the stock price of the firm was over 90 dollars, way over the initial offering price of 60 dollars. Contrary to the common belief that Chinese firms are generally flimsy firms that produce imitation products, the recent developments of some Chinese firms are astonishing, and are of threat to leading IT companies in the world.
▲ Chinese IT industry is developing, threatening companies in other nations. Provided by ampersandtravel.com
The recent developments of Chinese IT firms are worth being mentioned. The sales of Xiaomi, one of the major electronic firms in China, have surpassed that of Samsung Electronics in the second quarter. Xiaomi’s market share has been increased to 14 percent, while Samsung had to satisfy with 12 percent market share. Although Samsung had the biggest market share till the first quarter, with over 18 percent, it has now been surpassed by Chinese firms. Thanks to their increased share, Xiaomi has now risen up to the fifth largest smartphone producing company in the world. Other firms such as Huawei and Lenovo are also accounted for the same share as that of Samsung in the market, which is 12 percent.
One might think that such work is possible and obvious because the Chinese firms are doing business in their domestic market. The phenomenon, however, is not restricted to China. In such areas like Middle East, India, and Africa, Chinese firms are emerging, whereas the market share of Apple and Samsung are decreasing.
Strengths of Chinese IT Firms
When looking at the devices produced by Chinese IT firms, it is not easy to tell the difference between them and those of Samsung’s. It is true that many Chinese firms have started off by imitating the advanced technology of Samsung and designs of Apple, but their recent products are more than just coarse imitations.
Of course, the biggest strength of Chinese products lies in the prices. With over 13.5 billion population and rich labor supply combined with supports from the Chinese government, Chinese firms are able to supply their high-tech phones with low prices. Mi 3, one of the latest Smartphone produce by Xiaomi, is being sold at a price of 379 dollars. When compared with Samsung or Apple, the price is less than half the price of their products. Samsung Galaxy Note 4 is being sold at a price of 825 dollars, and Apple’s new iphone 6 is being sold at the price of 849 dollars.
Supplying with such low prices is possible for several reasons. The most important factor that is in work here, of course, is the cheap labor force and the support of Chinese government. The Chinese government is lavishing financial and technological support when dealing with IT firms. Restrictions on starting businesses are being lowered, and aid from the government is also substantial. In addition to the financial supports, they are also not hesitating to limit access to some internet sites and firms, so that the Chinese firms can take advantage of it. The exemplary company that had damage from it is Google. Due to the major censorship issues and frequent shutting down of access, the percentage of Google in Chinese market has shrank; in fact, it only has about ten percent of market share in China. In the meantime, Chinese companies like Alibaba and Baidu took the advantages and gained market share, for they did not face situation of shut-down like Google.
One example of the Chinese government supporting IT business industry is Zhongguancun. Zhongguancun is a district in Haidan, Beijing, which works as a technology hub in China. The origin of Zhongguancun can be traced back to 1980s, when a venture company called Center of Applied Technology Service was founded. Although giving out dividends and performance related payment incentives were forbidden at that time, the Chinese government rather praised the firm, claiming that the company is an exemplary case for all Chinese business. After this incident happened, Chinese IT companies started to gather up in the Zhongguancun, and it was later designated by the Chinese government as the national high-tech development zone.
After that, the Chinese government has been generous when it comes to supporting firms in the Zhongguancun district. China aims to develop the district just like the Silicon Valley of America, and is implementing diverse works to make that possible. The most noticeable one is the government’s efforts to attract the people with overseas experience of education and to recruit foreign talents to Chinese firms. They are not only giving out scholarships and financial support, but are also simplifying foundation processes and is offering various benefits, including tax deductions.
▲ Recently, smartphones produced by Huawei seem to overwhelm the ones produced by Samsung or LG. Provided by hauwei.com
▲ 110 inch smart television produced by Hisense. Provided by global.hisense.com
▲ Xiaomi's biggest strength is the low price. Provided by mi.com
Taking Different Perspectives
Another strength of Chinese firms is that they are not taking a different approach to success-that is, they are not trying to catch up with the existing firms. Rather, they are trying to make the most based on their current situation-by targeting the niche market. For instance, rather than focusing on the Business to Consumer (B2C) market, they are focusing on Business to Business (B2B) markets. B2C market is a conventional market targeting regular customers. In this market, finished products and services are traded, and the role of advertisement is crucial. On the other hand, in a B2B market, unfinished products and components are traded, and the relationship between buyers and sellers are also more direct. It is for this reason that personal selling skills are more crucial than advertisements. For instance, Xiaomi, the firm with most market share in Chinese smartphone industry, does not allocate a single dollar for advertisement. In an interview with Hankyung, Fei Ryu, head of the international cooperation and customer support bureau in the firm, claims that they resort on the viral marketing and other means to promote, rather than commercial advertisements.
For example, a semiconductor producing firm, SMIC, claims that they are not trying to produce the high quality semiconductor just like what Samsung is now producing. In an interview with Hankyung, Pung Eun Lin, a SMIC vice president, said that they are trying to produce middle and low quality semiconductor, which can be used in building “Internet of Things” (IoT) network. IoT is a project that aims to construct the network between household appliances, and thereby sharing information. Due to their different strategies, SMIC has been making profit for nine consecutive quarters, and is confident that it will continue to do so in the future.
Other companies, like Huawei or Xiaomi, also have acknowledged of the fact that they cannot outperform Korean or American firms if they are to focus on premium and luxurious high priced smartphone. So, they are targeting the niche market-the developing nations by putting lower priced smartphones. Although their potential demands are extremely high, they cannot currently afford to buy Smartphone produced by Samsung or Apple. As a response, Chinese firms are in, preoccupying the new market; the act is so far successful.
Another factor that contributes to forming the bright future of Chinese firms is that the fact that they are Chinese firms. With over 13.5 billion population and fast developing economy, China is regarding as one of the largest domestic market in the world. Although the purchasing power of Chinese consumers is not as high as the other nations, the potential it has is higher than any other nations.
Just like the saying “Imitation is mother of creation”, Chinese firms started off by simply copying the existing products. However, they did not resort in simply copying them, although they were making profit by imitating from developed firms. They are now expanding their industries and is preparing for the new future. For instance, Alibaba and Baidu are expanding their business to South Eastern Asia district and other Asian nations, based on the massive capital and experience they got from the Chinese market. Alibaba has also launched an online shopping mall “11 main” in America, confronting Amazon and eBay.
Brand extension and entering related areas, is also another strategy Chinese firms are taking. Xiaomi is seeking ways to enter the household appliances market in India, by supplying low-price ultra high definition (UHD) televisions. SMIC is also trying to enter the IoT industry and is preparing for it by investing heavily in the research of integrated semiconductors, one of the key elements in IoT. Alibaba is also launching a new messenger industry to confront Tencent, a Chinese messenger service providing firm. So far, such efforts have been successful. In fact, the firms such as Huawei started their business as a company that supplies components to firms-that is, B2B, but now they have expanded towards smartphone industry, B2C, and is performing well. By enlarging their businesses, Chinese firms are gathering investments and preparing to leap to become the global brands like Samsung.
What are the Responses?
It is apparent that China is on the verge of catching up to Korean firms in IT industry. As a matter of fact, some specialists claim that a technological gap between Korea and China is less than a year. According to the technological gap theory, China can and will outperform Korean firms in less than a year, due to the technology imitation and low income prices.
Then, what is Korea doing, and what should Korea do? Currently, companies such as Samsung - the leading runners in the industry- are not taking any noteworthy actions. Right now, Samsung has been reacting the matter in its usual way-producing more high tech and high end Smartphones, thereby seeking to regain its market share, such as producing the new Galaxy Note 4 and Galaxy Note Edge. It is true that constant release of new models can serve as a mean to regain its market share in developed nations, but certain fundamental actions needs to be taken in order to target the new, emerging markets in the developing nations.
▲ What are Samsung and LG Electronics's responses? Provided by news.sbs.co.kr
It is apparent that these emerging Chinese firms would not overtake the leading companies in the industry, like Samsung or Apple just yet. However, that does not mean that these companies are of threat, and is worthy of attention. Nobody expected Samsung, which started as a sugar producing company, would become leading company in IT industry. No one can tell that Chinese firms would not take over Korean IT firms and become global brands. To prepare for this matter, rather than putting restriction on IT industry, which is what the Korean government is doing, especially on game industry, it is vital that the government should put efforts to foster IT industry once more.
Nobody can be in the first place forever, and certain actions are vital if one wants to make that possible. Even the firms like Coca cola and International Business Machines Corporation (IBM), which have been global brands much longer than Samsung, have become insensitive to changes and are suffering from sales reduction. No one can affirm that such incidents would not happen to Samsung, and certain innovative actions are needed to make development of Korean economy stable.
▲ Chinese companies are casting off their former negative images and are preparing to jump up to leading companies in the world. Provided by Huawei.com, mi.com, and global.hisense.com