Threat to US IT Giants

 

 “If eBay is a shark in the sea, Taobao is an alligator in the Yangtze River. If the two fight each other in the sea, the alligator will lose. But we will win in the river,” said, Jack Ma, executive chairman of the Alibaba Group. Indeed, Alibaba defeated eBay in the Chinese market by optimizing Taobao.

Alibaba's listing on the U.S. stock market is therefore like an alligator going to the sea. Hence, the penetration of the largest Internet company in China into the U.S. is considered to be like a declaration of war that heralds Chinese IT companies' full-scale expansion into the global market.

“Alibaba's growth means an upheaval in a new world order,” remarked David Chao, a Managing General Partner at Doll Capital Management (DCM). He added, “So far, Alibaba has focused on the Chinese market. However, it is evident that the company will build an incredible war chest and target the global market.” Alibaba is not alone in global market entry. Other Chinese Internet companies like Tencent and Baidu and hardware manufacturers such as Huawei, Xiaomi Tech, and Lenovo are also making great inroads into the global IT market.

Kim Sung-ok, a junior researcher at the Korea Information Society Development Institute, explained, “Chinese IT firms' innovation and speed are frighteningly fast.” Kim added, “They will eventually dominate the global market through their financial strength, the construction of an ecosystem for IT, and endless innovation.”

With Alibaba's IPO Google, Facebook, Alibaba, Tencent, Amazon, and Baidu have become the world's top six Internet companies. Competition between the U.S. and Chinese IT giants appears to be neck and neck. Alibaba's business model is widely acknowledged to be similar to that of Amazon and eBay, Baidu with Google, and Tencent with Facebook.

Global IT companies like Google, Facebook, Apple, and Tesla Motors were created and grew in the U.S. based on the innovation and capital of Silicon Valley. Chinese firms, on the other hand, grew rapidly, helped by the gigantic domestic market and capital.

In fact Alibaba, Tencent, and Baidu have been growing fast over the last 15 years to become companies worth nearly 400 trillion won (US$387 billion) in China. The reasoning behind their rapid growth is that China has ideal conditions for the fast growth of the IT industry. China's Internet penetration rates increased from around 10 percent to 50 percent for 8 years. And the number of Internet users in the country has already surpassed 600 million people, which is more than twice as many as the U.S. The number is expected to reach 800 million people next year. In addition, smartphone users in China have been growing so fast that the number is likely to exceed 500 million people soon.

This phenomenon is leading to the rapid growth of Chinese IT companies. Alibaba Group accounted for 95 percent of the local C2C market and 52 percent of the B2C market last year, totaling US$248 billion in business transactions. The figure is twice as many as Amazon and three times as many as eBay. The number of items distributed via Alibaba is 5 billion per year, more than the 4.3 billion of the UPS.

Baidu, which makes up 80 percent of the Chinese Internet search market, grew nearly 11 times from 2008 to 2013. Tencent, the company behind QQ with 650 million users, also saw its sales increase more than 9 times over the same period. The two companies are gearing up to compete in the market. Baidu is trying to create a smart ecosystem based on its competitive advantage in the Internet, while Tencent is making an effort to build its own payment system and an Internet ecosystem based on its mobile SNS platform.

However, there are a few hurdles left for Chinese companies to surmount before they achieve their goals. Alibaba is the largest e-commerce company, and it is among the top 10 global rankings in the number of visitors. Nevertheless, the Chinese e-commerce company is less known in other countries. More than 90 percent of traffic comes from China, with the U.S. representing merely 1 percent. Low name recognition is a hurdle that most Chinese IT companies, including Baidu and Xiaomi, have to cross. Although China has tremendous growth potential, companies inevitably stop growing when the local market becomes saturated. That is the reason why Chinese firms need to sharpen their competitiveness in overseas markets, rather than the local market.

Between Chinese and American companies, it is not easy to predict who will win the competition to gain market dominance. For example, Alibaba has connected small and medium-sized enterprises in China so that they can find each other and supply each other with necessary parts, free of charge. Thanks to this strategy, it quickly absorbed customers, and thus eBay and Amazon were defeated in the country. However, it is unclear whether or not this strategy will work in the global market.

A source in the local IT industry remarked, “The relevant data hasn't been revealed, but Chinese IT companies are the next largest investors in the M&A market, following U.S. firms.” The source concluded by saying, “I'm not sure how long China will achieve remarkable growth. But what is certain is that the global IT market has entered a new era of competition between the U.S. and China for market dominance.”

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