China has its own Silicon Valley success stories
Market attention often focuses on major US technology companies - the so called FAANG stocks.
The growth and scale provided by their Chinese counterparts is not highlighted in the same way but CMC Markets New Zealand General Manager, Chris Smith, says investors and traders should pay attention.
In recent years the global investment community has been mesmerised by the meteoric growth of the US “FAANG” stocks - Facebook, Amazon, Apple, Netflix and Google - and it’s easy to understand why. Between them, those firms are responsible for having driven over 70 percent of S&P 500 gains since 2013.
While the world’s attention remains largely on the US, China’s FAANG equivalent - the BAT stocks (mega-companies Baidu, Alibaba and Tencent) continue to go from strength to strength, and today have a combined revenue of 550 billion yuan (US$87.3 billion). Having evolved over the last 20 years from small start-ups to the internet giants they are today, these firms owe their success, in large part, to the rise of the internet - which has propelled e-commerce to the forefront for Chinese consumers.
Tencent and Alibaba are run by two of China’s richest men, the former by 46-year-old Pony Ma, and the latter by 53-year old Jack Ma - who earlier this month announced his intention to step down from the role of Chairperson in 2019, prompting much debate around the future without its influential founder. Between them, these two men are credited with having changed the face of e-commerce in China – enabling it to leap-frog other developed countries in terms of payments and adoption of online commerce. This is evidenced by the over 600 million people in China who regularly use social media apps to make payments - transactions are largely mobile, and cash is almost non-existent in daily life, as QR codes and WeChat payments grow in popularity. Even facial recognition payment is on the rise.
All told, the Chinese economy now houses nine of the world’s 20 largest tech firms (the rest are domiciled in America) - a figure that’s up considerably from just three, five years ago. And if you were to base predictions on demographic and country growth fundamentals, this is a trend that looks set to continue. China currently only has 55 percent internet penetration across a population of nearly 1.5 billion – so even with 770 million current users (equating to roughly twice the entire population of America) there’s still plenty of room for growth. We will also likely see more Chinese companies list, with firms like ride-sharing giant Didi Chuxing looking to go public - acknowledged as the “Uber of China”, its competitive rates forced its American counterpart to exit the Chinese market. Mobile phone maker Xiamo was this year’s largest IPO, listing on the Hong Kong Exchange at over US$50 billion valuation.
The BAT firms will also undoubtedly continue to extend their influence via their supplementary business interests and investments. The battle for mobile payments in China continues to heat up between WeChat and Alipay as internet penetration continues to rise, and as Chinese consumers become increasingly comfortable with cashless transactions – with the industry now representing US$9 trillion in transactions last year.
Alibaba owns its Chinese logistics network, and, coupled with other consumer businesses like supermarkets and payments, has 552 million active customers shipping goods globally. Artificial intelligence and robotics have also been major future-focused investments for Alibaba, as well as China’s other technology giants, in the race towards automation and growth of the Internet of Things. Tencent has invested heavily in the online gaming sector, as the owner of popular games such as League of Legends as well as e-Sports gaming platforms Huya and Douya. They’re up against Amazon as the owner of main e-sports streaming competitor, Twitch.
Given this outlook, it’s no surprise that American firms are starting to take an active interest in their Chinese counterparts. In June, Google announced its intention to invest US$550 million in e-commerce giant JD.com – a move which will form the basis of a strategic partnership that will see the two organisations working together to build a better global retail infrastructure for consumers. While the ongoing trade war between the US and Chinese governments has undoubtedly had negative implications for the wider Chinese economy – the Shanghai Index entered a bear market at the end of June – JD.com founder and CEO Richard Liu has expressed little concern over the tariffs, arguing that his business (and others like it, including Alibaba) will easily find alternative goods outside of the US.
The biggest ongoing risks for businesses operating in China include government interference - forcing controls on businesses, weakening Yuan, any accounting scandals, changes to taxes and antitrust decisions as they get too large - coupled with maintaining growth rates and effective investments with further tariffs. However, with business leaders such as Jack Ma maintaining close relationships with global politicians, they will undoubtedly continue to promote China to the world with open arms despite trade disagreements.
Disclaimer: CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The author does hold shares in companies mentioned in article.
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