Conflicting Messages (and Goals) in China Create Increased Need for Preparation by Foreign Companies

"The take-home message is that China will, over the next 5-20 years, eliminate foreign competition from the Chinese market to the extent possible and foreign companies must prepare."

Last week, two interesting developments focused attention on China’s policy regarding technology and freedom.  A week ago, China President Xi Jinping chaired a meeting of high-level officials and top internet tycoons, calling for “greater tolerance and patience” of online criticism, and vowing more support for e-commerce.  But on Friday, Apple’s iTunes Store and The Walt Disney Company’s DisneyLife service were quietly shut down in China under the new Regulation for the Management of Online Publishing Services.  

The two conflicting messages show the mainland authorities’ struggle between using the power of the internet to aid economic growth and exerting greater control over online content.

Ultimately, this fits into a bigger picture issue:  China wants to control every aspect of its domestic market.

Sure, the government wants to control the Internet via the Great Firewall of China.  But why is this?  Partially it is to control what its people see for social reasons.  But I believe the larger reason is to make sure that China's domestic market is dominated by Chinese companies.  Whether it is streaming movies or building semiconductors, the government wants all commerce to eventually be supplied by Chinese companies.  So although the juxtaposition of calls for "greater tolerance" and locking down iTunes appear to conflict, they really do not.  Remember, everything has to be seen in the light of the government's needs.  "Greater tolerance" really means "greater tolerance when it helps domestic industry."  

So if someone starts making noise against the Communist Party, that does not fit into the government's needs for greater use of the Internet.  But getting more Chinese companies online -- and giving them a leg up against foreign competitors clearly does fit.

So this, like everything, disparately impacts foreign companies that are not acting like "friends of China."  Here, Apple was not properly supporting the Chinese movie industry according to the government.  For example, property and leisure industry giant Dalian Wanda, and Internet behemoths Baidu, Alibaba and Tencent (dubbed “BAT” in the Chinese press) are engaged in a race to dominate the streaming movie industry. Wanda, Baidu, Alibaba and Tencent’s assets are vast and powerful, giving them the ability to attract audiences across every major media platform. Wanda owns the largest cinema chain in China; Tencent boasts nearly 800 million social media subscribers, and is the largest online games distributor on the planet; Baidu is China’s leading search engine; and Alibaba is the world’s biggest e-commerce business.  Alibaba and Baidu have major stakes in two of China’s top three online video companies. 
Online video is hugely significant in China. According to official statistics, by mid-2014, there were 439 million people consuming video content in that manner on the mainland.  I will not dive deeper into this sector, other than to say I can see why the government saw Apple as a threat.

The take-home message is that China will, over the next 5-20 years, eliminate foreign competition from the Chinese market to the extent possible and foreign companies must prepare.  One way they will do this is via the Chinese anti-monopoly law (e.g., Qualcomm).  Another is via just banning participation in e-commerce (e.g., Apple).  Finally, China will use patents.  Any companies that plan to stick around China for the long haul must begin significant planning and creative thinking now.  Generating or buying Chinese patents and keeping trade secrets secret can provide some protection.  Further, foreign companies should consider creating joint ventures with important Chinese companies (especially government-owned entities) so make them more "Chinese."  There are ways for foreign businesses to win in China, but you have to be smart, flexible, and creative.  But you cannot watch movies on iTunes, apparently.

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