Forget Google: How U.S. Investors Can Play Chinese Internet Growth

by Investment U Research Team
chinese online services

How do you say “Netflix and chill” in Mandarin? It doesn’t really matter, because they can’t do it.

At the end of 2016, Netflix (Nasdaq: NFLX) became the latest online services company to admit defeat in the Chinese market. The video streaming goliath announced that it will syndicate content to Chinese partners. It’s given up on pursuing full service in the country.

Netflix is hardly the first American tech company to run into this problem. Alphabet (Nasdaq: GOOG) has a single-digit percent share of China’s search market. Facebook (NYSE: FB) is almost completely blocked on the mainland.

As we’ve covered in previous Investment U articles, other American industries have done just fine in the Chinese market. American clothes and sporting goods are status symbols there. But time after time, the online services industry has failed to breach the Great Firewall.

These failures aren’t the result of low demand. China is a rapidly developing country of 1.3 billion people. The Chinese love their computers as much as anybody else. But for a multitude of reasons, Chinese people tend to use Chinese internet services instead of their American competitors.

Let’s look at the cultural, political and economic forces keeping American tech companies out of Chinese markets. In the process, we’ll learn how to invest in the homegrown firms that are dominating China’s growing online presence.

Culture Shock in the Chinese Market

As Matthew Carr explained in a recent article on savings habits, your language has a huge influence on how you see the world. And thus, it influences your actions as a consumer.

The Chinese language is one piece of the puzzle in understanding why American internet companies have failed there. Specifically, their writing system is too different.

Americans love to type. Our language is written in an alphabet, which makes it easy for us to rattle off our thoughts on a keyboard. That’s why search is so crucial to the structure of the internet in the West.

But Chinese is a pictographic language with no alphabet. It has thousands of character glyphs. And that makes it tough for a Chinese speaker to navigate the web by keyboard.

Instead, they tend to click around much more than we do. That might seem like a small difference, but it leads to very different website architectures. Just look at this screenshot of a Chinese news site below.

china-daily

Chinese sites have far more links than our sites do and far less text fields. It’s a whole different approach to how you design a website. This is one reason why American sites like Facebook, Google and Netflix haven’t gotten traction there. Chinese websites work best when designed by Chinese people.

Of course, it would be wrong to say that writing systems are the only reason Facebook and Google have failed in Chinese markets. That would ignore the political side of China’s unusual internet culture.

Beijing Doesn’t Approve

Western internet companies tend to use a lot of the same buzzwords. Openness. Sharing. Personalization.

These concepts are all well and good in a democracy. But they’re kind of problematic if you’re trying to run a single-party police state. That’s part of the reason why Beijing has been less than welcoming to Western tech firms. Online transparency and Maoism don’t really mix.

The demise of Facebook in China is the best example of conflict between the Chinese Communist Party and Western online services firms.

Western China is home to the Uyghur people, a Muslim minority that has long suffered under Beijing’s rule. In 2009, Uyghur independence activists staged a series of protests around the western Chinese city of Ürümqi. And they used Facebook to coordinate groups of dissidents.

Obviously, this was user-end activity with no involvement from Silicon Valley. But it rattled Chinese authorities and eventually led to a pervasive ban on Facebook on the mainland.

Google has had similar struggles in China. The government demanded that it remove dissenter websites from its search results. Google wasn’t willing to play along, so Beijing regulated it into irrelevance.

Investing in China’s Home-Grown Online Services

Fortunately, there’s a workaround for American investors who want in on Chinese internet growth. Chinese entrepreneurs understand their culture much better than we do. And they know what their government will and won’t tolerate.

As a result, China is home to many successful home-grown online services companies. With support from Beijing, they’ve managed to outcompete their foreign rivals. And many of them are even listed on U.S. stock exchanges.

Want to invest in Chinese Google? Pick up some shares in Baidu (Nasdaq: BIDU), the country’s No. 1 search engine. Instead of Facebook, try Renren (NYSE: RENN).

The failure of American online services firms in Chinese markets teaches us a valuable lesson. We’re living in the age of the internet - where connectivity is king. But there are still cultural differences between regions of the world. And those differences should not be ignored by investors.

By understanding the unique circumstances of China’s internet market, you can be a more worldly (and profitable) tech investor.

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