Good morning everyone.
This is the daily update for Jeff’s Asia Tech Class, with two points.
- Facebook is increasingly citing China in their lobbying. Are they behind Tiktok’s CFIUS review?
- Alibaba and Mobike have digital superpowers.
Cheers from the Shanghai airport, jeff
Is Facebook behind Tiktok’s CFIUS review?
In the last week, CFIUS announced that it is reviewing Chinese Tiktok – and specifically their purchase of musical.ly for approximately $1B in 2017. And this follows last week’s calls by US Senators Chuck Schumer and Tom Cottoto to investigate Tiktok on national security grounds.
It’s hard not to notice the timing.
Tiktok is arguably the most serious competitive threat to Facebook since WhatsApp and Instagram. It is one of the most downloaded apps in the USA and is doing very well among younger users. And unlike Whatsapp and Instagram, Tiktok cannot be bought or crushed. Owner Bytedance is valued at $75B and is very profitable. If young Americans are spending more time on TikTok at the expense of Facebook, they cannot use blunt financial power to reverse that. They have to build a better product (Facebook is currently developing Lasso). Or they can play dirty.
And Facebook has definitely been increasingly vocal about China in Washington DC. Mark Zuckerberg has pivoted from his argument that “Facebook isn’t a monopoly because it has competitors” (not an exact quote) to “breaking up Facebook would clear the way for Chinese companies to dominate globally” (again, not an exact quote). And Facebook’s David Marcus has recently been saying that if Libra is not successful then China will have increasingly influence on the global money supply.
Of course, the timing of the CFIUS review and Facebook’s China rhetoric could be a coincidence. But I have a suspicious mind.
I have titled this course “digital combat”. Because I focus most of my attention on the intersection of digital and competition (in Asia). Think Michael Porter meets Jack Ma. And that means lots of competitive strategy and operational back-and-forth. But it also includes dirty tricks. And these Facebook and Tiktok stories have my dirty tricks radar flashing red.
This sort of dirty trick is actually pretty common in China. Companies are routinely hit with government audits and licensure problems. And there is often a competitor behind the scenes. Over the next 20 classes / podcasts, I’ll give lots of examples – which usually go in three buckets:
- Digital competitive advantages. Including digital superpowers.
- Dynamic competition.
- Short-term tactics, irrational behavior and dirty tricks.
We’ll see what happens with Tiktok and Facebook. I’m just speculating but I think it’s a definite possibility.
A final comment. Tiktok has recently moved into the offices previously occupied by Whatsapp. And they are reportedly poaching Facebook employees.
Alibaba and Mobike have digital superpower #1: Dramatically improving the customer experience.
We are in a crazy period, where new digital tools (software, data technology, enabling / extending hardware) are rapidly emerging one after the next. And they are being adopted in industry-by-industry in lots of new use cases, new products, and sometimes new business models. It’s all pretty chaotic, with tons of creativity. A sort of Cambrian explosion with lots of new business species emerging.
The most common result in all of this is a ton of failed experiments. Most of the new use cases don’t work. And customers don’t care about most of the new products. For example, smart and connected toasters with AI aren’t getting a lot of traction.
The second most likely result is a lot of incremental back-and-forth with competitors responding to each other’s new tools. Your competitor uses AI and chat bots to automate some of their customer service, so you do the same. Your competitor opens a WeChat mini-store with mobile payment so you do the same. This is just the normal back-and-forth of dynamic competition (along the axes of operations and technology).
But every now and then, a digital tool creates a new use case, a new product / service or a new business model, and it is a game changer. It makes the existing product / service or business model obsolete. And this is a big deal. You either match the offering or you go out of business. And it can happen really fast with data technology.
I call this a digital superpower. It’s like you are in a fist fight, punching back and forth (i.e., dynamic competition). Maybe your opponent kicks your shin every now and then (i.e., dirty tricks). But then, suddenly, your competitor can does a jiu jitsu take-down and chokes you unconscious. And, as your don’t know jiu jitsu, there’s nothing you can do to stop them.
Note: I do a lot of muay thai in Thailand and I am afraid of people who know jiu jitsu. My only strategy is to run away.
So I keep a list of 8 digital superpowers. And when I hear of a digital tool being used in a new use case, product / service or business model, I check it against my list. And #1 on my list is a “dramatically improved customer experience”. Not just a little improvement in the experience. But an improvement such that customers no longer accept the previous offering anymore.
And this is what Mobike and ofo did in bicycle rentals. They took some fairly basic digital tools (a mobile app, mobile payment, GPS, a smart lock) and applied them really creatively to bike rentals. With their service you could see a brightly colored Mobike on the street, scan it with your smartphone, pay $0.2 via mobile payment, ride it for 4 blocks, and then just get off and leave it. It was so convenient and so liked by Chinese consumers that usage skyrocketed.
Now compare that to going to a typical bike rental office at a fixed location (like in a park), signing a contract, leaving your license, paying for 3-7 hours and then having to keep the bike the whole time and return it to that same location later. That went from an acceptable small business to something that nobody would buy anymore. It became basically impossible to sell that within months. And even buying a bicycle became a kind of unappealing proposition. I have to buy it and store it in my apartment? I need a lock and a pump?
The reason I like the China bike-sharing story so much is because it is such a boring, simple business. It’s hard to think of a less exciting, sexy business that bike rentals. And the digital tools that were used were pretty basic. It certainly wasn’t cutting edge technology. And yet, it was transformed. And it happened really fast. The lesson being that if this can happen in a traditional, simple business like bike rentals, it can happen anywhere. And really fast.
Steve Jobs did something similar with iTunes. When launched, he let you buy just the one song you wanted, at home, on your phone, and immediately. Compare that to having to go down to a CD store, buying a CD with 10 songs just to get the one you wanted and then only being able to play it on a CD player. You can tell a big customer transformation when the previous service suddenly feels ridiculous.
Alibaba’s Hema / Freshippo supermarkets are another example of this digital superpower. They are creating dramatic improvements in the customer experience. For example:
- Sitting in your office or walking on the street, you can use the Hema app to buy groceries and have them shipped home (usually within 30 minutes). Or for you can pick them up on the way home, where you can also browse in person for other products and services. Note: approximately 60-70% of sales in the Hema supermarkets are now made by people not currently in the store (making their sales per square meter outstanding).
- The inventory they offer you is also no longer limited to what is in the store. This inventory is combined with the entire online inventory of Tmall / Taobao, including the digital goods like streaming movies. So while you’re ordering food in the app or wandering in the store, you can also order shoes and movies or whatever – and have them streamed, delivered or picked up.
- You can also combine these purchases of physical goods and digital media with increasing local services – like having your food cooked. Or getting a massage. Or having your hair done while waiting for your food to be cooked.
Hema is basically turning your local supermarket into and online plus offline supermarket that also functions as a logistics / delivery node and a local services center. How in the world does a traditional supermarket down the street compete with this? They should be in panic mode.
Which brings me finally to Luckin Coffee, which was the topic of Podcast #3.
Luckin basically took some new digital tools (mobile app, mobile payment, automated coffee machines, GPS, on-demand delivery) and applied them to retail coffee. Fine. Not bad. And they came up with a new business model that focused on mobile ordering with pick-up. Which let them get rid of a lot of the real estate and staff costs. And the upfront costs, which made them more scalable.
But is this a dramatic improvement in the customer experience? Are they going to have a digital superpower that should really worry Starbucks?
Well, offering a slick mobile app and on-demand delivery was definitely an improvement over Starbucks China in 2018. Starbucks was not offering delivery, which is crazy in China. But I would still put this more in the category of a normal upgrade in operations.
- Yes, the Luckin model is more convenient. No more waiting in lines. But you are still just ordering coffee and then drinking it. That doesn’t change. It tastes the same. The cup is the same.
- The 20% decrease in price is a definite improvement. And a 20% decrease could be powerful in lots of businesses. But customers of Starbucks aren’t going to be swayed by that.
- And, unfortunately, by getting rid of the expensive retail locations, you are probably decreasing the quality of the experience. Starbucks is really selling the product plus the experience.
My initial take was that this was not a digital superpower. It doesn’t make the previous experience of retail coffee obsolete. And I never thought Starbucks had much to worry about with Luckin Coffee. Which was fine because the potential retail coffee market of China is so large that increasing consumption overall was a bigger opportunity than stealing market share.
And within 6 months, Starbucks had partnered up with Alibaba, which got them a nice mobile app for ordering and on-demand delivery with ele.me. So this strikes me normal back-and-forth dynamic competition, not a game changer.
One final point.
I said digital superpower #1 is a dramatically improved “customer” experience. But many of the big digital companies actually have multiple user groups (customers, merchants/brands, content creators, etc). So I could have said a dramatically improved “user” experience. But in an age of abundance, getting demand-side scale (i.e., customers) is usually the most important thing. More on this later.
That’s it for today. Have a fantastic day.
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