Chinese Tech Giants Are Now Among World’s Most Valuable. Here’s Why

By Hans Tung & Zara Zhang

In 2003, when GGV invested in an online shopping platform started by a little-known English teacher in Hangzhou called Jack Ma, it was seen as a reckless bet. China’s e-commerce market was unproven, and any local company would need to contend with the big boy from the US, Ebay. Never one to fear competition with Americans, the ambitious Ma told Forbes in 2005 that “We want to be the world’s largest consumer site.”

This may have sounded funny at the time, but it’s not any more. On August 18, Alibaba emerged as one of the world’s most valuable companies with its market capitalization surpassing $400 billion – on track to rival that of Amazon’s. Tencent, which owns the ubiquitous WeChat (which gobbles up over a third of all mobile time in China) and numerous popular online games, also saw its value surge past $400 billion last week. Doing business in China can be a high-risk enterprise, but those willing to take a leap of faith are often rewarded handsomely.

Source: Bloomberg

The rise of Alibaba and Tencent reminds us of how times are changing: the world’s most valuable tech companies are no longer just American. The chart below, showing the world’s largest companies by market capitalization a decade ago and today, encapsulates what happens when the rise of China meets the rise of technology and the internet.

Highlighted: Chinese companies; Source: CapitalIQ. Capitalizations are in Millions. Data as of 8/18/2007 and 8/18/2017.

The soaring value of Chinese internet companies underlines several realities in China that have been informing GGV Capital’s investment thesis since 2010: the rise of the urban middle class, the great consumer upgrade, and Chinese people’s enthusiastic adoption of mobile internet.

Since China embarked on its “Reform and Opening Up” program in 1978, the rural-dwelling Chinese have been flocking to cities for economic opportunities. Already, 57% of Chinese people live in cities, and two of five of the world’s most populous cities are in China. By 2030, one billion Chinese people (up to 70%) will be living in cities. Urbanization has and will drive explosive growth in the volume and efficiency of businesses in Chinese cities.

Recognizing that an increasing number of Chinese people now live in crowded, sprawling cities, GGV has invested in several new-retail companies in China that aim to make urban life more convenient and pleasant, such as Citybox (a smart vending machine) and Bingobox (a staff-less convenience store), as well as smart transportation companies like Didi Chuxing.

Concurrent with urbanization is the rise of the Chinese middle class, whose wallets are thickening and tastes are becoming more sophisticated. No longer satisfied with cheap, uniform goods, they now demand high-quality, unique products; their purchases have evolved from necessity-driven to lifestyle-driven.

One way of understanding today’s Chinese middle-class consumers and their tastes is by looking at its East Asian neighbors that share similar cultures yet modernized earlier: Japan and South Korea. Chinese male pop stars increasingly look as androgynous as their Korean counterparts, many Chinese women are enamored with Korean drama and Korean cosmetics. Similarly, Japanese brands like Uniqlo and Muji are wildly popular in China; KFC now sells a popular Hokkaido ice cream; an increasing number of Chinese households are installing Japanese-style warm toilet seats at home. The popularity of Korean and Japanese cultural imports can teach a lesson about Chinese people’s consumption habits and the kind of brands that appeal to today’s middle class.

It is true that almost none of the consumer brands favored by the Chinese middle-class today are domestic. Compared to the US and Japan, China has had a late start in brand development. However, many in China are learning fast and catching up. We think there will be huge potential for domestic Chinese brands to emerge in the next decade, and we will see more high-quality, creative products that are not just made in China, but also conceived and designed in China.

Thus, despite the dominance of e-commerce giants like Amazon and Alibaba, there are still many opportunities for innovative brands and businesses to succeed, particularly those that prioritize the “3C”: community, content, and commerce. This is the reason we invested in refreshing brands like the Shanghai-based 73 Hours (which is both a shoe label and a fashion-themed restaurant), as well as vertical e-commerce platforms like Xiaohongshu (Red) and Meili, which are not just shopping sites but also thriving communities.

Another often under-appreciated trend is that China has embraced mobile internet much more enthusiastically than America had. If you visit China today, you would realize that most Chinese people are even more glued to their phones than the average American teenager. In Chinese cities, WeChat Pay and Alipay are accepted pretty much everywhere you might use money, from the sleekest malls to the cheapest-looking road-side food stalls. Even the homeless have gone mobile by collecting money with a QR code. A recent study found that 84% of Chinese people surveyed said they feel “at ease” when they go out without any cash on them. China’s mobile payment market is 11 times that of the US.

Source: The McKinsey Global Institute’s China’s digital economy: A leading global force

Currently, e-commerce in China is a trillion-dollar market, and accounts for around 15% of all sales in China (8% in the US) – a number that we think will double in the next two decades. As shown in the graph below, China now accounts for 42% of global retail e-commerce transaction, while the US accounts for 24%. (Although it is true that China has a much bigger population base than the US, it is also important to note that China was able to largely avoid the “population trap” – where population growth leads to a decline in living standards – through its one-child policy.)

Source: The McKinsey Global Institute’s China’s digital economy: A leading global force

When you have 130 million (and growing) consumers who are smartphone-carrying, urban-dwelling, and middle-class, betting on Chinese internet startups feels like a no-brainer.

China’s unicorn count is now on par with the US. (Source: The McKinsey Global Institute’s China’s digital economy: A leading global force)

GGV’s global view has enabled us to take lessons we learned in China and apply it to the US, as well as help US companies go global. We are excited to back entrepreneurs with ambitions on both sides of the Pacific, especially in an age where converging consumer values across U.S. and China are creating “millennials without borders.”

Going forward, we see China growing from an imitator to an innovator, from playing catch-up to leading or even changing the game. We look forward to partnering with entrepreneurs worldwide to build the market cap leaders of 2027.

Hans Tung is a Managing Partner at GGV Capital. Alibaba, Airbnb, Dirty Lemon, Function of Beauty, Lively, Poshmark, OfferUp,and Xiaohongshu/Red are GGV portfolio companies.

Zara Zhang is an analyst at GGV Capital.