The center of gravity of the internet economy is gradually shifting eastward. The Juncker Commission should seize the opportunity to explore EU-China synergies for growth and innovation.
?Luigi Gambardella is Founder of ChinaEU, a business platform between Europe and China on ICT, which aims at making the most out of the bilateral relationship. By bringing together all major European and Chinese players in the internet, telecommunications and high tech sector, it aims at facilitating business cooperation and boosting mutual investments. Besides regulatory monitoring activities, ChinaEU proposes two very concrete initiatives.
The Juncker Commission started its new term of office on 1 November with a very clear mandate: build a better future for Europe. While internal reforms are urgently needed in order to re-boost chronic-low investment rates and restore a record-low confidence in the national governments, enormous help can also come from external sources. Among these, China stands on the front line, especially when it comes to the potential coming from the digital economy.
Despite a gradual slowdown of its growth rates, China is expected to surpass the US to become the world’s largest economy by the end of the year. But what most probably better depicts the strength of the country is yet another figure: a middle class of half a billion people. Name any category of consumer good and you will find that China is among the leading markets in that category. And of all sectors, the one that is delivering the most remarkable results is internet and Communications Technology (ICT).
If Europe wants to further boost mutually beneficial economic relationships with China, it should focus on all segments of the ICT sector. Here is where Juncker should prioritize efforts to revitalize Europe.
Indeed, the center of gravity of the internet economy is gradually shifting eastward. Numbers explain the concept. Up to 2012, only one website among the world’s top ten websites came from China. Today, four out of the ten biggest internet companies are Chinese. Alibaba ranks number 2, after Google and ahead of Facebook and Amazon, with a market capitalization of USD 278 billion. Tencent (USD 152 billion) and Baidu (USD 88 billion) rank 5th and 6th respectively. JD.com, a major e-commerce platform, is on the 10th position with a market cap of USD 32 billion. If we look at the revenues of these companies, JD.com leads China’s IT market, with CNY 70 billion of revenues (equivalent to roughly USD 11.4 billion), followed by Tencent (USD 9.8 billion) and Alibaba (USD 8 billion).
At the beginning of November, I was in China to talk to some of these “game changers”. I was extremely impressed by the achievements of the BATs, acronym for Baidu, Alibaba and Tencent, which in no more than 26 years of history –only 16 for Alibaba and Baidu– grew from local startups to become direct competitors of the big US internet players. Through Alipay, Alibaba accounts for around half of all domestic on-line payments. Wechat, Tencent’s mobile-based messaging product, known in China as Weixin, boasts an active users base of 438 million people, of which 70 million reside out of China. Baidu, China’s number one search engine, is now present in 9 countries and intends covering 50% of the planet by 2019. Among these three companies, the general consensus was that their very success in China was the result of two main factors. On one side, relatively relaxed regulations of the digital market; on the other side, an ever-improving internet infrastructure.
The EU should learn a lesson here, and the reason is that China’s internet economy –as share of GDP– is already larger than that of US, France and Germany.
According to the Chinese Academy of Telecommunications Research (CATR), the think tank of the Chinese Ministry of Industry and Information Technology (MIIT), fixed broadband penetration reaches 55% of Chinese households. Of the broadband users, 80% enjoy no less than 4Mbps, while 35% have access to no less than 8Mbps. But the biggest driver of China’s internet market is mobile internet.
By September 2014, the total number of mobile internet users reached 871 million people, the absolute largest national number of internet users. China Mobile is the telecom operator with the largest subscriber base in the world (with 799 million subscribers), as well as the highest market value (USD 250 billion of market capitalization). China Telecom is instead the world’s largest broadband network operator, delivering internet connections to as many as 118 million households. China is also home to some of the fastest growing –and increasingly innovative– high tech digital manufacturers. Xiaomi, China’s iPhone, has recently surpassed Apple, placing second after Samsung in China’s lucrative market of smartphones. Huawei and ZTE are among the world’s leaders in R&D, and have been cooperating with several telecom operators worldwide to develop next generation telecom networks.
All these companies are looking at internationalization as a strategic move to become world-leading tech innovators and see Europe as a very interesting target. They are nevertheless uninspired by the continent’s excessive market fragmentation and a general lack of understanding of the complex patchwork of European rules and regulations, whose implementation oftentimes differs among Member States.
Europe would become more attractive in the eyes of Chinese internet players, telecom operators and high tech companies through the creation of a single digital market, listed as number one priority for the Commission for Digital Economy. Up until now, there is no unified Chinese business association to represent the stances of Chinese investors in Europe and, with very few exceptions, no Chinese company is here to fully engage in Brussels policymaking.
If Chinese investments in Europe are limited for these reasons, life is not smoother for their European counterparts, who claim unfair ownership requirements and discriminatory market access conditions in China, especially in ICT. As a result, while EU-China trade volume averages USD 1.25 billion per day, the bilateral investment flows remains comparatively negligible, leaving huge untapped potential to further improve the economic relationship.
As next year marks the 40th Anniversary of the Bilateral Diplomatic relationship, this is the right time to talk about EU-China synergies for growth and innovation.