Edward Tse's Blog

June 2016media

WSJ | China’s Tech Leaders Try Teaching Dinosaurs to Dance

By BRIAN SPEGELE and ALYSSA ABKOWITZ
Updated April 24, 2016 10:28 p.m. ET

BEIJING — China’s domestic technology firms are linking arms with unlikely new partners: struggling state-owned enterprises.

Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Baidu Inc. are among the Internet companies teaming up with and in some cases even taking stakes in state-controlled companies that Beijing is pressing to modernize.

Inefficient state enterprises are an increasing burden on China’s slowing economy, and Beijing has encouraged them to learn from the country’s technology pioneers — pushing a new industrial strategy of boosting the country’s mammoth manufacturing sector with Web-driven efficiency and other gains.

In one tie-up being closely watched as a potential model for collaborations between the state and private sectors, a venture-capital unit of Alibaba is investing about 300 million yuan ($46 million) in the e-commerce arm of Minmetals Development.

The flagship unit of state-owned China Minmetals Corp. is looking to Alibaba’s Taobao platform as a model for a fledgling steel-sales site.

Minmetals Development, which lost around 4 billion yuan ($618 million) last year as commodities demand plunged, called the project “an important testing ground for Minmetals to deepen state-owned enterprise reform.”

For Alibaba, the deal is a way into a struggling but still hugely important part of the Chinese economy, offering new sales platforms and potential new revenue. The company said it hopes its technology “can empower a wide range of industries and businesses at home and abroad.”

The market for upgrading state-owned enterprises’ technology is huge, industry forecasts show. Forrester Research projects China’s government and businesses could buy $147 billion in tech goods and services this year, up from $124 billion in 2014.

“As digital transformation becomes the new imperative for Chinese organizations, I think we will see more of these SOE-and-tech-company partnerships,” said Frank Liu, an analyst at Forrester.

China’s tech pioneers, launched in the years after China’s market-oriented reforms of the 1980s, unleashed a long-suppressed entrepreneurial spirit.

Companies such as Alibaba and search-engine company Baidu are a contrast with the inherently political state-owned enterprises, guided by government priorities.

But as their profits sag, the state enterprises “need to find other ways to generate new business and new revenue,” said Edward Tse, CEO of Chinese consultancy Gao Feng Advisory Co. “The old model doesn’t work anymore.”

Having seen online marketplaces like Alibaba’s reshape how goods are sold in China, they are trying to copy the Internet giant’s nimbleness in hopes of similar sales success.

China’s biggest oil refiner, China Petrochemical Corp., known as Sinopec, last week launched an e-commerce platform that it dubbed China’s “Taobao of industry,” after the Alibaba platform. To get the site — which links oil-and-gas and other suppliers with manufacturers — up and running, Sinopec enlisted Alibaba’s help on cloud-computing functions including big-data analysis and storage.

“Sinopec wants to borrow Alibaba’s successful experience in e-commerce,” the refiner said.

The companies haven’t disclosed financial terms, but Sinopec says it is eager to work more with Alibaba in fields from big-data analysis to information security.

Such partnerships let companies like Alibaba show Beijing they can help it achieve top goals. And state-owned enterprises or even government agencies can serve as labs for testing new technology — as when the regional Guizhou Traffic Bureau in southwest China used Alibaba’s cloud computing to build a transportation-data platform to monitor traffic and check drivers’ safety records.

“The public-cloud service is still an emerging market in China, so Alibaba Cloud needs a good case study for other potential customers,” said Forrester’s Mr. Liu.

In November, Baidu announced it would team up with China Citic Bank to launch a bank that could use Baidu’s location and behavior data to help evaluate customers’ credit profiles and fraud risk, complementing Citic’s own traditional risk assessment. Under the name Baixin Bank, it will have a registered capital of 2 billion yuan, with Citic Bank as majority shareholder.

A direct-banking license and application are pending.

In another case, Nasdaq-listed e-commerce site JD.com took a 12.5% stake in an e-commerce unit of Shanghai Pharmaceuticals Holding Co. — controlled by the city’s municipal government — for around 150 million yuan.

According to the annual report of Shanghai Pharmaceuticals, the two are cooperating on a business-to-business platform for retail pharmacies and small and midsize medical institutions. A license approval is still in the works.

Mr. Tse of Gao Feng Advisory called technology companies forces of disruption.

“They are in many cases redesigning business models and how business ought to be done. It affects the full range of other companies, [state-owned enterprises] included.”

 

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Founder & CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in China. —learn more
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