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China's country-level platform strategy - A detailed teardown
The Digital Silk Road, Alibaba, Huawei, and China's plan for global domination
A key theme of my work has been looking at country-level platform strategies to gain geopolitical leadership. One of my previous works on this topic outlined a platform strategy for Singapore, which has since informed the country’s positioning in several key areas.
This newsletter looks at China’s platform strategy, a grand masterplan involving a public-private cooperation framework around China’s Digital Silk Road, which enables Alibaba, Huawei, and other private firms to operate in sync with a larger national-level strategy. In partnership with the Brookings Institution, I’ve spent the past few months researching this topic and recently published the first part of the analysis.
This newsletter explores the key themes covered in this analysis of China’s platform strategy.
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Platforms vs Countries
As platforms continue to grow, control over the trade in goods and services is shifting from countries to digital platforms. And as trade, labor, and money grow increasingly digitized and are exchanged on platforms, countries need to rethink their positions in the global flow of these goods. If they are to gain a competitive advantage, countries need to increasingly pursue a platform strategy.
No country is doing this as effectively as China, which in recent years has set up a concerted country-as-a-platform strategy,
(1) aggressively exporting its digital infrastructure,
(2) playing a critical role in the development of technical standards, and
(3) developing unique points of control in the digital economy.
China’s National Informatization Strategy calls upon China’s internet companies to go out into the world and support the creation of a “Digital Silk Road”—which refers to the export of Chinese technology alongside the Belt and Road Initiative (BRI), China’s massive global infrastructure investment project. The “Digital Silk Road” is China’s bet on a country-as-a-platform strategy.
Public and private actors in China are working in close cooperation—in a country-level platform strategy—to create digital infrastructure that aligns with the BRI, to promote standards that drive the adoption of such infrastructure, and to strengthen China’s points of control in the digital economy.
This strategy extends across four key themes:
(3) smart cities, and
(4) social credit.
If successful, this strategy could fundamentally shift trade and financial flows toward a China-centric economic order and could even reshape political systems in participating countries.
Let’s get started!
China’s country-level platform strategy is one of the key themes I explore in my end-of-year rundown on the platform economy, out on December 15.
Stay tuned for the launch of this report, it will be announced first on this newsletter.
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Linking up global economies through trade is the first step in China’s efforts to export its digital infrastructure. To do so, Chinese tech companies are building the digital tools to facilitate trade—and to do so using Chinese technology.
In 2016, Alibaba announced it would launch the Electronic World Trade Platform (eWTP), which enables small- and medium-sized business to easily participate in global commerce by creating a global trade network between China and participating countries. First, the eWTP established two central hubs in China: an imports hub in Hangzhou and an exports hub in Yiwu. Next, it set up eHubs with local partners in each participating country, allowing small businesses in those countries to trade internationally. Each eHub provides a centralized logistics and fulfilment facility, as well as digital payment and financing capabilities, supported by local banks. These eHubs are connected back to the central hub in China through Alibaba OneTouch, the company’s global cross-border supply chain management platform. The eWTP worked with governments to create Digital Free Trade Zones (DFTZs), which enable cross-border trade with low or no import duties and faster customs clearance.
These eHubs and DFTZs, when connected globally to each other and to the central hubs, aim to create a global digital trade network. Coupled with the DFTZs, China is also setting up international courts in Beijing, Xi’an, and Shenzhen to arbitrate trade disputes between countries that use this trade infrastructure.
In March 2017, Alibaba helped launch a digital free trade zone in Malaysia, consisting of a regional logistics center serving Southeast Asia, an e-commerce platform, and a digital payments and financing service. Since its launch, three more countries—Belgium, Rwanda, and Ethiopia—have joined. Two more hubs in China complete the eWTP network of six hubs, as it stands today. The creation of these hubs is expected to accelerate cross-border digital trade for small businesses. At the Yiwu eHub in China, small businesses recorded more than $41 billion in international trade, across three million active buyers in 2019-20, with an 82% year-on-year growth in online transactions. The Malaysian eHub expects to manage a total trade volume of $65 billion by 2025. Belgium has invested nearly 100 million euros in hopes of a similar boost in digital cross-border trade.
Growing international ecommerce allows companies like Alibaba and Ant Group to create points of control in the international economy. As countries sign up with the eWTP, Alibaba and Ant are winning customers and growing their ecommerce and financial platforms. And as their platforms grow, Alibaba and Ant are helping to write the rules for how small businesses engage in international trade. Between them, Alibaba and Ant provide key logistics, payments, and ecommerce capabilities to the eHubs, positioning them as matchmakers between the global market and small businesses.
Payments and currency
China’s platform strategy includes an ambition to create an alternative payments infrastructure. China’s leading payment systems—Ant’s Alipay and Tencent’s WeChat Pay—serve 28 million and 50 million merchants, respectively, in China, covering more than 90% of the mobile payments market in the country. These payment systems provide a digital wallet service, an offline payment app enabling instant payments by scanning barcodes or QR codes on smartphones, and an escrow service, among other functionalities.
Both payments players have rapidly expanded internationally to enable merchants to serve Chinese tourists. Prior to the pandemic, nearly 150 million Chinese travelers traveled abroad every year, 32% of them paying for transactions overseas with their mobile phone. By early 2019, WeChat Pay was accepted in 49 countries outside China, while AliPay was accepted in 42. The payment systems have also demonstrated rapid growth, with the number of Europe-based merchants on WeChat Pay growing 350% year-over-year in 2019.
Ant’s ambitions extend beyond just proliferating its payment system to creating a new infrastructure and standard for global payments. To do so, it must solve major challenges related to global payments interoperability. Payments interoperability typically plays out at three levels. First, scheme interoperability involves two or more financial institutions agreeing to work on the same payments system, or scheme, enabling payments to readily flow between them. Check settlements and electronic fund transfers between two financial institutions are examples of scheme interoperability. Second, to enable cross-border payments, network interoperability is required so that payment schemes across countries may negotiate exchange agreements with each other. For example, when a domestically issued credit card is used for international payments, it benefits from network interoperability. Finally, parallel system interoperability allows a seamless experience across different payment schemes. For instance, a store that accepts both Visa and AmEx delivers the same user experience to the customer because of parallel system interoperability.
In order to create an alternative across all three layers of payments interoperability, Ant is providing a common technology backend to financial institutions around the world. By using common backend technology, participating financial institutions are effectively part of the same “scheme” and benefit from scheme interoperability. With one standardized backend, the need for parallel system interoperability is obviated. Finally, Ant manages cross-border settlements within its infrastructure, enabling network interoperability.
Ant also provides traditional lenders with cloud computing and open banking solutions, backed by its AI-powered risk engine and credit scoring models. As more banks around the world get on board, Ant seeks to create a common financial infrastructure powering small to mid-size banks across countries.
One of Ant’s key value propositions to banks is the ability to lend to merchants in the cash economy. Ant’s credit-scoring models have been trained on loans made to merchants in the Alibaba ecosystem, with rich data profiles. These AI capabilities allow banks to extend their loans to cash economy merchants on whom they may have limited data and to whom they would otherwise be reluctant to lend.
Alibaba and Ant have also invested in leading e-commerce and payments companies in countries that have signed up with the Belt and Road Initiative, includingEasyPaisa in Pakistan, Ascend in Thailand, GCash in the Philippines and PayTM in India.As part of these investments, Alibaba and Ant are providing backend technology to their investee companies. The investment terms typically require investee firms to move their technology stack to the Alibaba Cloud. By moving diverse payment firms to the Alibaba cloud, Alibaba is homogenizing the backend infrastructure and the AI capabilities that power these different payment systems, which could create greater interoperability across payment systems and grant a stronger control point to Ant, whose credit-scoring and anti-fraud capabilities power these diverse payment systems.
By exporting its infrastructure but not directly participating in lending and deposits businesses, Ant can expand globally without being hindered by local regulation or needing to acquire local banking licenses. By providing a common infrastructure to banks and payment wallets, Ant is also better set up to define standards for payments between participating countries.
Chinese regulators are closely watching Ant’s transformation into a global financial giant, and earlier this month forced the company to suspend its highly anticipated IPO after regulators rolled out new rules for the financial sector. Draft regulations would require companies like Ant to underwrite loans with their own funds, demonstrating the leverage that Chinese authorities continue to exert over the country’s largest platforms and the regulatory tools at their disposal to wield control.
The intense regulatory scrutiny on Ant may stem from the fact that control of payments infrastructure and standards represents an important foreign-policy tool. American credit card firms process a large portion of global payments, global infrastructure such as SWIFT and CHIPS support the U.S. dollar payments system, and the U.S. dollar remains the international reserve currency. The dollar’s position as the reserve currency allows the United States to impose unilateral sanctions against transactions between other countries, and moving away from a dollar-based international financial system would be a major boon to China by diminishing U.S. control over Chinese transactions. American officials understand this risk. In 2018, the U.S. government blocked Ant’s acquisition of Moneygram, a U.S.-based money transfer company. And the U.S. government is currently considering imposing a ban on Tencent’s communications and payments app WeChat.
China’s ambitions to set up an alternative payments infrastructure are perhaps best manifested in its creation of a state-backed cryptocurrency known as Digital Currency Electronic Payment (DCEP), a centrally managed Chinese digital currency that acts as a digital bearer instrument and obviates the need for settlement through an intermediary. As of July 2020, Didi—China’s largest ride-hailing and transportation platform—is piloting the DCEP with its customer base. The DCEP can be implemented to enable digital devices to directly exchange information and money. Consider, for example, a self-driving truck automatically paying a toll to an autonomous highway tollbooth without any human intervention. The DCEP could eventually be offered for other such autonomous machine-to-machine payments along the Belt and Road Initiative. It could also serve as a low-risk currency for international trade between countries with highly volatile currencies. A decentralized escrow system could let foreign businesses engage in trade while hedging their exchange rate risk.
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Smart cities and urban infrastructure
The third theme in China’s platform strategy is smart cities. China made smart city development a priority starting 2012 and was home to 749 pilot smart city projects by 2019. Leading Chinese firms—Alibaba, Huawei, ZTE, and others—provide technology infrastructure for managing smart cities. These include cloud-hosted services to integrate city management databases as well as central AI capabilities to manage city operations. Huawei smart city systems are active in more than 200 cities around the world. Alibaba provides a similar smart city management system and is currently piloting its “City Brain” project in Kuala Lumpur, Malaysia, where it uses traffic light information and traffic camera feeds, as well as data from the ride-hailing service Grab, to predict traffic patterns and reduce traffic congestion.
Smart city infrastructure needs 5G technology, and Chinese firms have been at the forefront of the 5G race. ZTE and Huawei are key partners to major telecom operators globally and are deploying 5G and related technologies that are core to autonomous driving, industrial automation, and smart cities. In countries where ZTE and Huawei deploy 5G networks, these companies will have greater leverage to promote their smart city infrastructure.
Along with China Mobile, these firms have increased their participation in international standard-setting bodies for 5G. As of April 2019, Chinese companies were involved in 52 5G initiatives across 34 countries, according to the Australian Strategic Policy Institute, which may position them to advance proposals in line with Chinese industrial policy. By setting the standards and providing the infrastructure, China establishes important control points over the equipment, the technical services, and the shape of future technology across participating countries.
As providers of a smart city’s data operations, Huawei’s “Intelligent Operation Center” and Alibaba’s “City Brain” project gain visibility into patterns of citizen behavior and city infrastructure utilization. By aggregating data flows across these global smart city implementations—particularly those along the Belt and Road—Chinese companies like Huawei are well positioned to centralize smart city AI and create control points over cities along the Belt and Road. By creating the best trained and centralized AI brain for city operations, these companies could directly influence city-level governance and decision-making, including by controlling the profiling of citizens, citizen access to city services, and city infrastructure management.
The combination of smart city infrastructure exports, investment in 5G standards, and smart city management AI sets up China’s platform ambitions in urban infrastructure.
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Also, check out the Platform Institute - the most comprehensive online masterclass on platforms, which covers all these topics in depth.
Social credit and national identity
Social credit and national identity constitute the final component of China’s platform strategy. These social credit programs create a national-level reputation system for both individuals and businesses, built on data captured from government programs as well as data-sharing agreements with private actors like Alibaba and Tencent. These scores are used to determine citizen rights and qualify their access to services, including the ability to buy property, access loans, and even book a flight.
China is home to many social credit programs and is now exporting them to other countries after having trained the social credit systems on domestic data flows. China’s ZTE launched the “Fatherland Card” program in Venezuela, a social credit and mobile payments system, which centralizes data about citizen activity and gives the government greater visibility into individuals’ activities. Beyond its borders, China has exported facial recognition software to Zimbabwe to train its AI on a wider range of facial image data. ZTE is working with several other governments on similar projects. These projects raise concerns around the development of surveillance states, especially when such technology is exported to countries with authoritarian regimes and fragile democratic systems.
Chinese firms have trained their surveillance systems and scoring algorithms on millions of data points in China, providing them a unique control point to deliver such infrastructure to other countries. Alibaba’s Sesame Credit system, for instance, is trained on data from commercial and financial activity in the Alibaba and Ant ecosystems. The export of social credit systems allows China to export not just its technology but also its preferred governance model to partner countries. It also enables the export of various AI surveillance technologies that feed data into these social credit systems. By building these systems abroad, China’s AI benefits from a wider range of data gathered across these countries, strengthening it further as a control point.
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More to come…
I hope you’ve enjoyed reading this teardown. Stay tuned for more burning issues in the platform economy, over the coming weeks.