Why Foreign Tech Vendors Should Carefully Consider China

By Tim Lindeman and Michael Bragen


Going global is a survival strategy for many tech companies, and China is too big of the global market to ignore. This article explores past, present, and possible future aspects of China’s tech market that foreign tech company leaders should be aware of when considering whether to enter the China market.


The China Growth Story Is Not Over
While past growth is no guarantee of a bright future, experts contend that there is still significant room for China’s economy to grow. Urbanization, innovation, and continued globalization may lead to a rebalancing of the world economic order, where China becomes the world’s largest economy.

State of Market for Foreign Firms Is Stable
Although many challenges remain, foreign companies on the ground remain cautiously optimistic about China’s business environment.

Opportunities for Foreign Tech Companies Are Mixed
China is still a developing market for technology. While Chinese competitors dominate the applied technology space, many opportunities remain for foreign firms that provide core technology, especially in the enterprise tech space.

Going Global Is a Survival Strategy

In today’s hyper-connected world, it has never been easier to access international markets. And even if your firm is based in the United States, which is a huge technology market, it is important to consider that more than 70% of the world’s purchasing power is outside of the US. (see endnote 1) Regardless of where your firm is located, you are in a race to acquire customers as rapidly as possible, so you can scale your business and acquire resources to invest in the development of future technologies. In addition, by expanding your business territory, you will also be widening the field of potential business collaborators, who have the potential to contribute new ideas and energy to your solutions. For these reasons, “going global” is a survival strategy for many tech companies.

Tech Firms Should Carefully Consider China

In this context, does it make sense for technology companies who are seeking to expand internationally to target the China market? We believe the answer to this question is yes. Technology companies should carefully consider China in their global expansion plans. In this article, we will explore some of the reasons why China is a market that deserves careful consideration, including:

  • China’s enormous economic and demographic scale
  • China as a hub for urban development
  • China as an emerging center for innovation
  • And China’s position, situated in the heart of Southeast Asia (which is the world’s fastest growing region, and projected to be home to two-thirds of the global middle class by 2030) (see endnote 2)

At the same time, China is a very challenging market, especially for technology companies. Therefore, the decision to go to China does require careful thought. In particular:

  • China is still a developing market, and not all tech products and services are a good fit
  • China is very different culturally and politically
  • And China’s remarkable growth in the past is no guarantee of a bright future

Brief History of Tech Companies in China

We would like to begin our analysis of the opportunity for foreign tech companies in China by taking a quick look at how China got to where it is today.

After a long period of poverty and isolation, China’s leadership changed course and embraced reform. At the same time, globalization was just beginning to ramp up, and China greatly benefited by providing inexpensive and reliable labor to companies in the developed world looking to increase their profits. China’s economy exploded as a result, and during the 40 years of reform up to today, China’s economy grew 40-fold from US$305 billion to US$12.7 trillion. (see endnote 3)

As this was happening, foreign tech companies saw the opportunity of providing technology to support the growing Chinese economy. Leading global firms like Microsoft, IBM, Oracle, SAP, and Apple all invested in China, building up sizable Chinese marketing organizations as well as research centers. But not all tech companies who invested in China have been successful. This is particularly the case in the internet space, where notable losers include Google, eBay, Uber, and arguably Amazon. (see endnote 4) And many other internet companies such as Facebook, Twitter, and Dropbox, haven’t formally entered the China market yet. There are many reasons for these successes and failures. One overarching challenge is the protective nature of the Chinese Communist Party, and its ambitions to control the flow of information.

Current State of Business for Companies on the Ground in China

The American Chamber of Commerce in China (AmCham) publishes an annual “China Business Climate Survey Report” that provides a high-level look at the performance and concerns of US companies doing business in China. This report also looks at important sectors of the economy and provides stats on the technology sector. The report is a great source of information because its data comes directly from member companies, instead of relying on data from the Chinese government.

A Mood of Cautious Optimism

The January 2018 report summarizes the climate as having a “mood of cautious optimism.” And while the growth rate is considerably lower than in the previous decade, the “new normal” rate of growth is still faster than in developed countries, and is “sustainable for the foreseeable future, providing opportunities for business to expand.”

In general, American companies operating in China are healthy, with a large majority reporting that their businesses are profitable and growing. Across all of the industries covered, the report is most optimistic about the tech industry. 96% of the surveyed companies expect increased growth, and many expect rapid growth to occur.

Slow Improvement in Investment Environment

The companies surveyed think the investment environment has improved consistently over the last decade, and there is a muted but growing confidence in the Chinese government’s commitment to open its economy. However, there is still a very long way to go, and the progress has been much slower than hoped for when China entered the WTO, and companies flooded into China, making huge investments.

Reduced Investments

Since that period of peak interest around 2006-2010, foreign companies have been gradually reducing their investments in China. One reason is that the world has not been standing still, and other fast-growing and low-cost international markets have emerged as an alternative to China. A small but significant percentage of the companies surveyed have moved some of their capacity out of China or are considering doing so. The recent tariffs have made costs of importing goods from China even higher, providing greater incentive to move.

Improved Intellectual Property Protection

It is impossible to write about tech business in China without addressing the thorny issue of intellectual property rights and protection. There’s some good news about this: virtually all of the AmCham China members agree that IP rights enforcement has been stable or improving in recent years. Nevertheless, risks of IP leakage and data security threats in China remain more common than in developed markets.

Foreign Companies Feel Less Welcome Than Before

Another long-standing issue is fair treatment of foreign entities: a strong indicator of how easy or difficult it is to do business in a country. It’s a fact that foreign companies report feeling less welcome in China today than in the past. This sentiment is especially strong with technology companies, whose biggest concerns are:

  • Restrictions on market participation
  • Unbalanced enforcement of rules and regulations
  • Government financial support to domestic firms
  • Licensing requirements
  • And public procurement regulations and behaviors

While the AmCham report shows that investment plans are declining, it also makes clear that the majority of firms surveyed are continuing to invest in China, though at a slower rate than in the past. This long-term commitment makes sense given the overall growth and profitability of American businesses in China.

Top Opportunities and Challenges for Tech Companies in China

We’d like to conclude our summary of the current state of business on the ground in China by looking at the top opportunities and challenges for tech companies reported in the AmCham China report.

Top opportunities:

  • Digital technologies, in particular e-commerce and “Internet Plus” (“a new business model where traditional industries align themselves with technology and the Internet”) (see endnote 5)
  • Expanding business to cover more of China’s domestic market (much of which has been overlooked as foreign companies have focused on the more developed coastal cities in China, but there are many opportunities to expand inland)
  • Growth in domestic consumption and the rise of an increasingly sizable and affluent middle class (this trend will feed into the growth of business-to-business sales opportunities to support the growing consumption in all sectors of the economy)

Top challenges:

  • Inconsistent regulatory interpretation and unclear laws
  • Rising labor costs
  • Increasing Chinese protectionism
  • Regulatory compliance risks
  • Difficulty obtaining required licenses
  • And a shortage of qualified employees

The Current State of Business Is Stable

In short, the overall state of business for foreign tech companies on the ground in China is stable. China remains a very challenging market, and the tech companies that are successful there have a long-term view. China may not be the number one priority for international expansion, but tech companies continue to make investments in the market and are growing rapidly.

The Significance of China Today

The China Growth Story Is Not Over

Given the substantial evidence showing that China is a difficult market for tech companies, why then do we contend that China should be on the radar for tech companies looking to expand globally? At the top of the list is the sheer market size, both in population and economic activity. An article published by the research firm McKinsey highlights these superlatives:

“By 2017, China accounted for 15 percent of world GDP. It overtook the United States to become the world’s largest economy in purchasing-power-parity terms in 2014 […] and in nominal terms, China’s GDP was 64 percent that of the United States in 2017, making it the second largest economy in the world.” (see endnote 6)

Furthermore, McKinsey argues that “China’s growth story is far from over.” The authors draw comparisons between China in 2017 and Japan in 1995 (when Japan was the world’s second largest economy). McKinsey writes:

“Since the mid-1990s, Japan has struggled to achieve significant growth momentum. China is different. It has a large population on relatively low incomes, and plenty of room for further urbanization and productivity gains enabling further income growth. If realized, these gains could propel China to become not only the world’s largest economy and manufacturer, but also its largest investor and market.”

The fact that China has a lower urbanization rate than high-income economies is somewhat counter-intuitive to foreigners who have spent significant time in China. When you are in China, it is very easy to become enamored by the megacities with skyscrapers that rise higher than those in developed countries, and transportation systems and telecommunication networks that have leapfrogged what we have in the West. This urban development is a large driver for the economy and requires sophisticated information systems to support all aspects of urban life.

Due in part to the size of the economy, its rapid growth, and superior infrastructure, China has attracted many multinational businesses who have made big investments in the country. China serves two primary purposes for many of these businesses, first as a global manufacturing hub, and second as a large consumer market to realize new sales growth.

These multinationals also require sophisticated technology platforms to run their businesses. And many of the foreign tech vendors who have entered the China market focus on selling to these multinationals.

China Is Becoming a Center of Innovation

The story of China as a large and growing market with excellent infrastructure is yesterday’s news. What is interesting today is how China is beginning to create a future for itself based on innovation. Chinese entrepreneurs have borrowed many of the features from Western Internet technology and calibrated them to meet the needs of Chinese consumers. In some ways, this has advanced the penetration of emerging technologies far beyond what we have seen in the West.

The most pronounced examples of Chinese innovation can be seen in e-commerce and mobile payments. Cash has become a thing of the past. Almost any product or service can be delivered in a matter of hours, not days, and apps provide a seamless extension of the physical world. Mobile payments is a formidable area and is creating its own significant “infrastructure”. Close to 700 million users in China rely on mobile payments, and the number of daily mobile transactions on WeChat and Alipay have exceeded 300 million. (see endnote 7) This has been and continues to change the landscape of commerce across the country.

Tim Lindeman, one of the authors of this article, personally can remember traveling to China two years ago and going to a restaurant he frequently visited when he used to live in China. Everything about the restaurant was the same as it always was, except there was a QR code on every table. Instead of ordering from a waiter, you now were expected to use a WeChat mini program on your phone. When Tim attempted to call over a waiter, there was an awkward moment when he felt like a visitor from another planet, being taught how to download the program, order the food, and make the payment through the app. He later found out that this switch to app-based ordering wasn’t just at this one restaurant, but at almost every restaurant he visited in the city of Guangzhou.

China’s Strategic Location in Asia

Another reason that China remains significant today is its strategic location in the geographic center of the Asia Pacific region, arguably the most significant region of the world in the 21st century. Graham Brown at asiamattersinstitute.org has focused his career on connecting the world to what he believes is the “Asian Century”, and recently published a presentation outlining why “Asia Matters.” Some of the impressive statistics in his presentation include: (see endnote 8)

  • More people live in Southeast Asia (including India) than the rest of the world combined
  • This region has a $27 trillion-dollar economy, which is 50% bigger than the EU and US together
  • This region’s GDP growth rate is on average twice as fast as the West
  • And by 2050, it is projected that 4 out of 5 of the world’s largest economies will be in this region (including China, Japan, India, and Indonesia)

China understands the opportunity of a growing Asia and is investing in its Belt and Road initiative, looking to bring know-how and investment capital to build modern infrastructure throughout the region. Greater Asia is also the first destination for innovative Chinese firms that are looking to expand internationally, including tech giants like Alibaba, Tencent, and Xiaomi.

China in the Future

We have covered many reasons why today’s China is a significant market worthy of careful consideration by tech companies looking to expand their business internationally. But when companies consider the possibility of investing their time and money to enter this market, they should also consider the China of tomorrow. Of course, predicting the future is incredibly challenging, and is not something that we believe ourselves qualified to do. However, there are a couple of trends that are very persuasive to us when thinking about the future.

Ongoing Benefits of Globalization

Humanity’s advances in technology have made the world a very small place, and the cost of doing business in the far reaches of the world continues to decline. Thomas Friedman of the New York Times argues the forces of globalization have made the world flatter, and it is becoming a level playing field in terms of commerce, where all competitors have an equal opportunity. (see endnote 9) China has benefited greatly from globalization, and unless Western governments fundamentally restrict opportunities to capitalists, money will continue to flow to regions of the world where there are greater opportunities for growth. China with its lower per-capita income and lower level of urbanization remains an attractive growth market for these global capitalists.

Re-Balancing of the International Economy

Globalization feeds into a second megatrend. Observers of the world’s long-term economic activity refer to a phenomenon they call the re-calibration of the international economy, with the projected return of China and India to their historical positions of international leadership. The website visualcapitalist.com presents a fascinating “Economic History” chart, (see endnote 10) which compares major powers by their share of global economic value over the past two thousand years. For most of that time, China and India made up the majority of the world’s GDP. During the subsequent two hundred years, driven by the Industrial Revolution, the bulk of this power shifted to the United States and a few other industrialized nations. What is striking is that over the last fifty years, with the rise in globalization, the pendulum is swinging back to China and India. Through the middle of the last century, new technologies gave huge advantages to a relatively small portion of the world’s population. Today, in this much flatter world, equilibrium is returning. Much of the world’s economic opportunity is in Asia, which has the greatest concentration of population.

The tectonic changes brought about by globalization, and the re-balancing of the international system are of great concern for countries in the West that are accustomed to being in a position of control. It remains to be seen how far governments will go in attempting to maintain their positions of relative power. Reactionary policies, tariffs, and heavy-handed tactics are part of today’s trade landscape. But conventional wisdom indicates that the tide is turning. The world is very different than when the US was the single dominant superpower. The leading companies that drive the world economy are truly global, belonging to no particular country or region. It is unlikely that this trend will reverse anytime soon.

Opportunities for Tech Companies

We have covered many compelling aspects of China’s economy, but what does this all mean for technology companies in particular? In order to understand the opportunities for foreign firms in China’s tech market, it is useful to break the industry down into smaller segments. One way to do this is to divide the industry into four quadrants with end users (consumer tech vs. enterprise tech) on one axis, and technology depth (core tech vs. applied tech) on the other axis.

Figure 1: China Technology Market Quadrants

The consumer tech side of the market is especially challenging for foreign firms because it is highly regulated and is extremely costly to go after such a vast market. The segment where foreign tech firms have done moderately well is on the core tech side of the consumer market, with successful examples including Microsoft Windows, Adobe, Google Android, and Apple. Applied consumer tech, on the other hand, is dominated by Chinese firms, and includes the internet giants Baidu, Alibaba, and Tencent, as well as hardware companies like Xiaomi, Huawei, and Lenovo. In general, the consumer tech market is really hard for foreign companies, unless you have tons of money to spend, and have excellent relations with the various Chinese government agencies tightly regulating and censoring consumer tech.

Here’s the good news for foreign vendors: Great opportunities in China abound for enterprise technologies. China is still very much a developing market when it comes to these. A Gartner analyst that we spoke with thinks China is at least five years behind the US when it comes to enterprise tech. Certainly, this advantage is eroding in some sectors. For example, China is on par with and may exceed more developed markets in artificial intelligence, public cloud, 5G, and autonomous vehicles. But by and large, Chinese adoption of enterprise technology lags behind other markets.

We see the greatest opportunity in the core tech side of the enterprise market. The West, and in particular the US, maintains a leadership position in operating systems, databases, middleware, programming languages, development tools, and frameworks, as well as microprocessors. Chinese competitors prefer to focus on the application side, where they can add value to foreign core technologies through customization. They win business by tailoring applications to the special requirements of Chinese businesses, the emerging regulatory environment, and their workflow habits. Chinese firms have a natural advantage on the application side because they understand the customer better than foreign competitors. Focusing here is also less risky because it doesn’t require the substantial research and development needed to produce underlying core technology. Also, Chinese firms typically have more limited access to world-class computer scientists and the engineers needed to develop core technology.

In short, there are good opportunities in China’s tech market for foreign technology vendors, particularly in the core enterprise tech segment. There are also opportunities for IT service companies who possess specialized capabilities built around core foreign tech.


We would like to conclude by returning to the original question we started with: Does it make sense for technology companies who are seeking to expand internationally to target the China market?

We believe the answer to this question is a clear yes. China is a market that technology companies should consider carefully when going global. China is simply too big a piece of the global market to ignore. At the same time, China is a very challenging market, requiring careful consideration and expert guidance.

Suggested Reading

Choosing the Best City in China for Your Tech Company
A Disciplined Approach to China Market Entry


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