Game Over? Lessons from China: Big Tech May be Less Invincible Then We Think

When I was in China last fall, I had a nagging thought meeting with some of the most successful tech companies across multiple sectors. The largest companies are so large – and had such reach and engagement among often hundreds of millions of customers – that it was hard to see any white space available for innovation and entrepreneurs from outside of it.

I had tea with a former fin tech startup entrepreneur whose company was acquired – or as he noted “kind of squashed” -- by a big player that left him with little choice. I asked him if he saw opportunities that would encourage him to start or back a new fin tech enterprise today.

“No chance,” he noted. “Game over.”

He paused and added, “At least for the next three to five years. Something can change in tech; perhaps 5G will offer new opportunities in “video banking.” But who knows.”

 I asked a top venture investor in China the same question and he encouragingly bristled: “That’s ridiculous, there’s always new opportunity.” I asked him directionally what that might be.

He squirmed a little and said, “Well, no one yet owns the space offering credit to gamblers…”

Really? That is where and how we should think about potential disruption in the face of ever larger juggernauts?

What I think is often underestimated in the often emotional conversations about “size” is not merely the advantage that comes with the obvious customer loyalty and access to capital that can spur further growth and squash the little guy. It is that so many of these companies at scale start offering other services that have enormous cost advantages in acquiring and retaining customers (i.e., their additional cost is near zero because they already have the customers).  More importantly they are building ever increasing and proprietary data on customers offering ever more relevant services (payments, cloud services etc.) to their needs. Sometimes, in the name of data building, they can charge little or nothing in order to build even greater data on customer behavior.

Globally, eCommerce seems to fit this conventional wisdom: One player wins big; a second player does well enough and keeps the big player honest; and at best a few niche players for targeted audiences keep moving. Amazon here at home, Mercado Libre in Latin America, Alibaba in China all appears to prove the rule.

At the same time, and it is sometimes hard to remember this, we are still in early days of all this. Remember in the US less than 15% of all retail sales are done online. In most parts of the world that number is much lower. 

And “niches” are being redefined and end up being surprisingly large. In fact, social identity around that niche and brand is suggesting a path of potential disruption.

Back in China, two examples stunned me that many in the West are less familiar with. I have been interested and invested in vertical eCommerce – narrow product needs where expertise and the community of people around those niches liked to gather. But it frustrated me that they often remained narrow and small.

Then female friends showed me XiaoHongShu – or Little Red Book – a social commerce site for fashion and shopping, targeted primarily to 18-35 old urban females in China. While focused on the more high-end market, I found women looking at it daily across many demographics. They have raised over $400 million – improbably from both rivals Tencent and Alibaba – and have 300 million registered users in a matter of a couple of years.

That is one impressive “niche.”

Why did it take off? They offer a four-part new playbook in the face of juggernaut competition: 1) Know and serve a very specific target who love to discover and share shopping lists; 2) Realize sharing is key – make it easy, engaging and motivating for your community to bring others into the fold and buy; 3) Emphasize in all ways a sense of trust, safety and a create a sense that the more interested in your nice who are there, the more others interested want to be there and 4) Data, Data, Data – being on top on exactly what is most effective for each individual on their, and their community’s, terms.

Then in all this, enters Pinduoduo almost out of nowhere – by creating a niche that I’m not sure I ever thought WAS a niche beforehand. PDD is, depending how you want to count it, the third largest eCommerce site after Alibaba and JD.com in revenue, though it now has 600 million users versus JD’s 362 million. It has attracted this audience focused almost exclusively on cheap and low-end products.

THAT is not a niche! Cheap products suggest bad quality, even fakes. To be seen with such a product is, in fact, NEGATIVE social clout. Unlike, say, XiaoHongShu, any one’s status should DECREASE by being a part of this community!

Well, PDD totally leaned into this. The site has this kind of, forgive me, almost “f--- you” vibe – if you don’t like it, don’t buy it. It ran hard not at the top cities in China but many others in what are referred to as “Tier 3, 4 or 5” – each with millions of people – who just want to find the best deal on what meets whatever need they have.

And the team at PDD mastered social marketing. If a customer can put together a group of people buying the same product, the price drops. And if you can’t pull together a large enough group in 24 hours, PDD cancels the group ensuring discounts happen only if the community scales. They have integration in WeChat and have incredible word of mouth, so cost of acquiring new users is very low. They are creating and harvesting a vast and sophisticated set of data that primes the machine to become better and better.

PDD turned their “negative” niche into a positive. And here is the additional mind blow – something like 45% of their gross merchandise value is bought by customers in Tier ONE cities. The kinds of customers that are thought to avoid any service, or social connection, with anything like it.

 Alibaba and JD are hardly standing still. They have launched their own versions. To my earlier observation they have many other services to lower acquisition costs, they have massive amounts of cash, massive numbers of happy users, and plenty of data. And their logistics operations are as sophisticated as anyone’s in the world. 

 Maybe this will be game over for the new players over time. 

But size tends to make companies behave in the exact way they once disrupted. 

And in this new age of data and machine learning, tools are leveragable now by anyone also, who would guessed these upstarts could do so well to begin with?