How Can Chinese Software Companies take US and EU markets?
Innovations of Infrastructure Software are Happening in China
The tech trend in the past few decades has always been that innovations from US are exporting to the rest of the world, including China, with big impacts.
It’s the same in infrastructure software field in China. Open source software originated from US and EU flourish in adoptions at all sized Chinese software companies. Papers from US have inspired many Chinese companies, large or small, to follow the ideas and build their own versions. Chinese markets are pretty much dominated by original ideas from US in the past 20 years.
As internet and tech industries has exploded and been maturing in China, I’ve seen a new trend in the recent 5 years where Chinese software companies start to innovate with original ideas. Top-notch infrastructure, in both open source and commercial space, emerges from such market to solve its unique challenges. Such innovation and contribution also start to influence the US and EU markets.
One of the best example in commercial area is OceanBase. Developed for AliPay in Ant Financial, it’s designed from ground up to handle extremely large amount of online transactions for the global e-commerce giant Alibaba, at an unprecedented scale. It completely replaced Oracle throughout Alibaba and Ant Financial in 2016. In 11.11 global shopping festival in 2019, Alibaba made $38.3 billion GMV in a single day sales, and OceanBase handles 610,000,000 transactions per second at its peak traffic as the core transaction infrastructure. It also ranked №1 at TPC-C benchmark in 2019 and 2020.
There’s also open source examples. Apache Flink is an open source stream processing framework that was developed by a Germany crew. It was not really taking off until Alibaba adopted it in 2015 and made many fundamental production-critical changes which reshaped it more and more towards a SQL-based scalable streaming database engine.
TiDB from PingCAP is another good example. Inspired by Google Spanner paper, TiDB is built from scratch to tackle distributed transaction challenges and are widely adopted in many of the biggest Chinese tech companies, where it’s battle-hardened at a much larger scale than its US peers CockroachDB and YugaByte.
Apache Kylin and the commercial company behind it, Kyligence, are among the best BI cube solutions on the market.
Going to US and EU!
As these tech companies, from tech giants like Alibaba to independent ones like PingCAP and Kyligence, grow, they are all starting to look at overseas markets in US and EU. As US enterprise customers are more used to pay for services enterprise software and whereas Chinese enterprise customers tend not, they realize that be constrained within China market won’t meet their growth and revenue expectations.
Investors have been pushing PingCAP hard to come to US. PingCAP has recently expanded quite a bit of its silicon valley office, hired a global head of solution engineering, and launched TiDB cloud on AWS and GCP. Square is said to be considering adopting open source TiDB as its current Vitess solution has many hidden bugs and the company cannot bear with it any more.
Kyligence is one of the first Chinese tech companies that set up an office in US. And Alibaba also has AliCloud in US.
We believe one tech trend in the next decade is how innovative technology from China are coming to US/EU and influencing the world.
This phenomenon is already happening in consumer tech field very successfully. Musically and TikTok are taking over the short video space globally like virus. CleanMaster from Cheetah Mobile is among the most popular cleaning app on Android.
However, the reality is that the going-oversea strategy hasn’t played out very well yet in the enterprise domain. Until this point, PingCAP and Kyligence only have a few scattered paid customers in US and EU. Alibaba is not expanding its cloud services and data centers in US and EU any more.
Where are the problems?
I’ll just list 5 problems I observed here.
Politics is definitely among the biggest ones. Infrastructure software is fundamental to companies. Companies, especially those in US, don’t want to have a Chinese vendor hosting their data for security and compliance purposes influenced by the political conflicts between US and China. So having a hosting service under a Chinese entity’s name or its subsidiary’s most likely won’t work. This week US just announced to discourage users using Chinese cloud providers.
Second, these Chinese companies don’t have full footprint in the US and EU market. Selling enterprise software requires a full functional team including not only developers, but also marketing, pre-sales, sales, support, legal, etc. The two factors of 1) the companies aren’t willing to or cannot afford to invest heavily in US/EU and 2) they cannot acquire paying customers, seem to form a negative reinforcement loop, and becomes a chicken-n-egg problem.
Third, Chinese companies are lack of the influence that US companies usually have in their home court. The influence covers a pretty wide range, including developer community, relationship with the tech influencers, ecosystem (especially cloud ecosystem to integrate with US cloud providers’ services), partnership with ecosystem companies, help of introductions from VCs or networks to Fortune 500, etc.
Fourth, enterprise software requires a broader ecosystem integration to function well. Software never works alone, they need to be able to work with all kinds of other software in order to deliver a larger value. Such ecosystem integrations come down both open source software as well as cloud services. The open source software ecosystem is easier to integrate, as it’s basically standard across borders. In big data, it’s basically Hive/HDFS for big data storage, Spark/Flink for big data processing, Kafka for pub-sub, HBase/Cassandra for k-v services. These tools are widely used in Chinese companies, thus the infrastructure software vendor actually can and will integrate with such software well if there’re customer requirements, regarding data connectivity, sharing, ingestion, or migration. On the other hand, cloud services are pretty segmented between markets and thus are totally different. Kinesis is the de facto pub-sub service on AWS, no one uses AWS/Kinesis in China, and a data software won’t work in US if it can’t ingest data from Kinesis. Such cloud service integration are crucial to localizing any enterprise software to US markets.
Last, the requirements of none-core components of the software, like user experience, UI, security, etc, are very different between China and US enterprises. Chinese companies focus more on speed and growth, they are willing to try new technologies, and generally pay less attention to details like UX, UI, security. They can tolerate enterprise software that doesn’t have nice, intuitive UX and UI. US companies, however, demand a lot more ease-of-use. The labor is expensive, they would much rather have fewer people finish more tasks. Thus US enterprise vendors put lots of emphasis on the design, and they are really proud of that. If a software cannot be tried out with a 5-min quickstart, it pretty much claims the end of the deal. Such difference in standards and requirements makes Chinese software, without much rebuilding, almost impossible to fit US market .
Thus, even though these companies have best-in-breed technology that’s better and much cheaper than their peers, they haven’t be able to take a share in the market.
Advantages of Such Software in US/EU market
Better Performance and Scale.
People might argue there are possible solutions.
For example, if US companies aren’t willing to use hosted service from Chinese companies, what about just offering an on-premise version where the users can have full control over the software?
I’m not sure that’s going to play out as it’s comes down to many other factors mentioned above when US companies make decisions. E.g. how well it integrates with the other software to fit into their stacks? what about support services and well-written documentations? Let alone that they have to be willing to and have resources to host the software themselves.
This situation actually reminds me of the challenges that US companies have ran into when trying to enter the China market and their methodology for solving it. It’s well known that US companies have been having a hard time to get into China market since early 2000s, like the failure of Ebay and the retreat of Google. Lessons from lots of failures boil down to not being able to fully localize the business in many areas like policies, user experience, different ways of doing business and keeping relationships. The best way out turned out to be partnering with local companies and set up a joint venture.
There are also some clues in the consumer tech field in US that may help. $20 Wyze Camera, co-founded by Chinese entrepreneurs, is taking over smart home by using out-of-shelf cameras launched by Chinese smart-home startups and localizing its app, cloud services, and user experience to the US market. Wish the online shopping retailer, co-founded by Chinese entrepreneur, thrives by localizing the app and sales channels in US and then helping Chinese manufacturers, who used to only sell on Alibaba or Pinduoduo in China, to sell products in US.
If you think from manufacturing cases, such a re-branding and localization is not a surprise at all. It’s actually so common that it’s happening on a daily basis. Brands from US/EU place manufacturing orders to China factories, have products shipped overseas, and distribute in their own markets.
The recent case of what happened between Tiktok V.S. Zoom in the US also reveals some clues. Tiktok actually has been fully following US laws but is still ordered to shut down or for sale. Whereas Zoom is having almost all its engineering team in China, and even had servers in China a couple years back, and Zoom still flourishes in the US, creating record high stock price everyday. Technology is important, but business aspects are just of the same importance, if not more.
I believe, for such a Chinese software infrastructure company to succeed, the route should be like this:
- Set up a US company with founders being Chinese Americans, even better if there are Americans co-founders, have US VCs fund the company, and thus Americans hold majority of the company. The Chinese company may have a small share in this US company to keep the relationship.
- The US and Chinese companies clearly separate their markets and do not get into the other one’s. E.g. the Chinese company takes care of all Asia, and the US company takes care of US, EU, Australia.
- The US company licenses the technology from Chinese company with a low fee (almost free), and sell the product in the US in its brand.
- The US company is a full functional company, including pre-sales, sales, marketing, R&D, support, etc, to fully address the US/EU market. The R&D may initially include localize the product with user experiences regarding UIs and management flow, integrate it with US/EU technology ecosystem (e.g. cloud services), etc. As the US company grows, it will has more power to ask for source code of the core product.
- The Chinese company can reuse the customer success stories which the US company as its own customer success story, and market the product in China, East Asia, and South East Asia markets, to gain more profits in its home court. Any success story from US Fortune 500 can be very attractive and convincing to customers in Asia, and such success stories are actually strategic assets which offer huge competitive advantage for these Chinese companies competing with each other in Asia market. When you sell a product to Chinese banks, how convincing it will be if you say Chase and CitiBank already use your product? It applied to all industries. I bet the deals will come faster than you can handle.