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My weekly work, readings & writings

Dear all,

The best-selling British author Martin Jacques became famous for his 2009 book When China Rules the World (you can have an overview by watching Jacques’s TED talk). Today, I want to share ideas on precisely how China could ascend to rule the global digital world—or at least lead a significant part of it.

Following my stay in Shanghai and before returning to Europe, I spent two days in Hong Kong. My first trip there was in 2014, when I was invited by the Hong Kong government to learn more about the territory, its economy, and its political and administrative system.

I find Hong Kong a fascinating place. It is not only a vestige of the British Empire, when Victorian Britain dominated the world following the Industrial Revolution and then the age of steam and railways. It’s also a junction between West and East. Hong Kong is where the largest Chinese companies go for their IPO (although the Shanghai and Shenzhen stock exchanges are rising). It’s also the place where many Westerners settle to live the Asian experience: it’s easier in Hong Kong where more or less everyone speaks English and the way of life is similar to ours in the West.

But Hong Kong is also revealing how fast the balance of power is shifting between the West and China. It is losing ground in certain industries, for instance port facilities and finance, to other sites in Mainland China (notably Shanghai). It is integrating with neighboring Shenzhen through the newly formed Qianhai New District. The creative principle of “One country, two systems” is turning into “One country, one system and a half” as Mainland China is opening up and becoming more like Hong Kong as a place to do business and Beijing is increasing its influence over Hong Kong’s political system.

And now just like power is shifting in Hong Kong, it is also shifting in the global digital space. Here are some hints of how exactly China will conquer the digital world.

The Chinese digital economy is dominated by the three giants: Tencent, Alibaba and Baidu. Like in the case of Amazon, Facebook, and Google, it has become difficult to tell exactly what industry these large Chinese tech companies belong to. That’s because they’ve all diversified in various sectors—both to generate revenue margin when they couldn’t do it on their original market, and to compete with each other and secure a stronger alliance with the vast multitude of 1B+ Chinese Internet users.

While dominated by these giants, the Chinese digital economy remains extremely competitive. The reason why local entrepreneurs are good at surviving in such an environment was once explained by Henry Kissinger: “Americans think a stable world is normal. And so, when the world isn’t stable, then it’s a problem. And if there’s a problem, you solve it, and then you go on to something else. Chinese leaders think that resolution of a problem is an admissions ticket to another problem. So almost every Chinese leader that I’ve ever met has wanted to think in a conceptual way of policy as a process rather than as a program.” Replace “policy” with “business”, and you get the point. As part of the process of doing business in a highly competitive economy, the Chinese giants diversify; they buy out other tech companies; they innovate on a constant basis; more importantly, they seek to expand in other countries.

You may have heard about the famous Belt and Road initiative. As laid out by President Xi Jinping, the initiative is about investing to revive the old trade routes that once linked China to Europe and Africa. As explained to me last week by a prominent Chinese economist advising the government, it’s also about turning certain places such as Djibouti and Vladivostok (and maybe Tehran) into entrepreneurial ecosystems comparable to Shenzhen—all financed by Chinese capital and relying on Chinese infrastructure. As China records a surplus in capital and financial accounts ($39.3B as of June 2017), it has all the resources it needs to push forward such an ambitious plan.

With this initiative, backed by the newly formed Asian Infrastructure Investment Bank, China is becoming more of “a shaper and maker of globalisation”. Not that the Chinese want to dominate other countries: like the Portuguese in the 16th century, China isn’t interested in conquering land and submitting entire peoples to its power. Rather their goal is to pursue a trade-, investment- and connectivity-driven exploration strategy that will expand their economic reach all the way to the West—and support the growth of their business sector in the process, including in the tech industry.

Thus the Belt and Road Initiative is not only a brand to encompass various sorts of investments in tangible infrastructures. My thinking is that it’s also a process by which Chinese tech giants will become able to expand their operations throughout Asia, Africa, and Europe. There are already ways through which popular Chinese applications such as WeChat and Alipay are adopted beyond the Chinese domestic market: mainly the diaspora and the growing number of Chinese tourists travelling abroad. But once the same applications are adopted in Central Asia, Africa and Eastern Europe, with the experience curve that comes from expanding to new countries and adapting to their particular customs, how long do you think it will take for Western Europeans to get interested in WeChat and Alipay, too? Belt and Road could be to China what the Empire was for Britain in the Victorian era: an instrument to secure sustainable global leadership—only this time it’ll be in technology instead of finance (with Djibouti as the new Hong Kong?).

Many people thought that the first step for the expanding Chinese giants would be to try and enter Europe. Few realized that before considering the European market, the Chinese would warm up in Asia and Africa, pulled ahead by the Belt and Road Initiative, the underlying network infrastructure, and the trade and consumption practices that will eventually be deployed along the road. The technological and economic power accumulated in the process will then be harnessed to break onto the pan-European market, which will ultimately lead to a showdown between US and Chinese tech companies in Europe.

This is a challenge for us Europeans. Our continent becoming a battlefield for US and Chinese tech giants, all driven by superior technology, abundant capital, and powerful network effects, will make it harder for European startups to impose their product on their own market. What’s more, if China comes to dominate the global digital economy both in Asia and Africa, then Europe will be one of the last foreign markets left for the faltering American digital Empire. Desperate US tech companies will then tighten their grip, making it more difficult for European tech champions to emerge.

We can draw a very simple conclusion: it’s become all the more urgent and critical to work on Europe’s strategic positioning in the global digital economy—a challenge we at The Family are ready to tackle!

Warm regards (from London, UK),

Nicolas

I'm a co-founder & director of The Family. This is a newsletter on entrepreneurship, finance, strategy, policy...and liberalism. Each week, I'll send insights and ideas related to current events as well as my latest work, including the writing of my new book (code-named ‘HEDGE’) about a new safety net for the Entrepreneurial Age. If you were forwarded this newsletter and you like it, you can subscribe here.