During the AI class session, Professor Kane mentioned a book wrote by Kai-Fu Lee, the . It turns out to be one of the most fantastic books I have read recently. I highly recommend it to those who are interested in AI, venture capital, and entrepreneurship.
In this book, Mr. Lee explains the exciting social adoption of digital transformation in China in a short amount of time. Businesses are making a tremendous difference in a short time with their “heavy” strategy. I found it quite exciting and wish to share this story with you.
My previous blog discussed how individual digital transformation is about technology and psychology, letting people accept the idea and willing to be active in this transformation. Social adoption is not so different. The major four factors for the successful social adoption of AI in China are; highly motivated entrepreneurs, much data, trained AI engineers, and government support at the policy level. The highly competitive business culture and the fact that any new promising business will have lots of copycats, plus the current government support and subside in technology development, have created entrepreneurs with their unique going heavy strategy different from their silicon valley peers. Abundant data is a result of such business strategy and public adoption of digital transformation. This difference in strategy is very inspiring from a business perspective as well as a digital transformation perspective.
Going heavy entrepreneurs
China has known to be a country full of business copy cats; entrepreneurs copy business ideas from other countries and each other, which created an environment full of competition. Such an environment leads to the Chinese tech business’s heavy approach, which is very different from Silicon Valley businesses’ light approach. “Heavy” and “light” here describes how involved an internet company becomes in providing goods or services and the extent of vertical integration as a company links up the on and offline worlds. Silicon valley internet businesses tend to focus on building the best platform and leaving it there for others to use. In contrast, Chinese tech companies tend to want to control all the related business. One good example is the different growth paths of Yelp and Dianping. Yelp, around 2015, wanted to go into the online ordering and delivery business. It acquired Eat24, however, after acquiring this order and food-delivery platform Yelp took the light approach and have restaurants on this platform to still handle the majority of deliveries and fill in gaps for those who don’t have a delivery team. This approach did not provide enough incentives for restaurants to participate. Yelp end up selling Eat24 to Grubhub.
In contrast, Dianping is the biggest restaurant rating app in China. When it went into the food-delivery business in 2013, it chose the heavy approach. Dianping spent millions of dollars hiring and managing fleets of scooter-riding teams that delivered restaurant orders to door-steps. This delivery army gained extensive coverage in a short amount of time and provided every mom-and-pop shop the option of expanding its customer base without having to hire a delivery team.
By investing a massive amount of money in this heavy approach, Dianping quickly gained economies of scale and improved efficiency. Decided to double down on those economies of scale, Dianping merged with Meituan (one of the largest food delivery companies at the time). By 2017, Meituan-Dianping’s valuation is $30 billion, which is more than triple that of Yelp and Grubhub combined. The combined company did not stop their growth at food delivery but pushed into other areas such as travel booking services, transportation, bike-sharing, etc. Watch this excellent 5 minutes movie explaining features of Meituan Dianping, how it uses AI, and its impact on people’s day-to-day life!
Dianping is only one of the many companies that choose to go heavy. Other examples include Didi (Chinese Uber), which buys up gas stations and auto repair shops to service its driver fleet, and Tujia (Chinese Airbnb). Tujia gives the platform for people to rent their house and takes care of cleaning the apartment, stocking it with supplies, and installing smart locks. The competitive environment trained this heavy approach to quickly build walls around the business; otherwise, copycats would do it and win the game. One side benefit is the data each integrated business can acquire. Data is starting to show its advantage recently as AI and machine learning algorithms become more mature. Vertical integration allowed companies to gain more data across the board and provided a valuable resource for future AI development.
Going heavy is one of the fundamental reasons for Chinese fast digital transformation. As the company willing to provide incentives for both businesses and customers that use their platform. A considerable amount of subsidies are giving to customers to lure them into creating a habit of using the new services. Business customers benefit from a very user-friendly platform that helps them resolve many management issues and provides all different resources. What I found from this story is that incentives are the most critical factor to accelerate digital transformation. However, such incentives are in bed with many risks that a silicon valley public company may not take with limitations from the board and other government policy and legal restrictions. The right side of the story is, I believe this incentive structure and going heavy may also be applied to corporation digital transformation. For example, employee promotion can be based on their digital transformation effectiveness; and in an entrepreneurial culture, how many cutting-edge business improvement ideas an employee can develop. Employee’s performance valuation can be based on peer competition. Outstanding performance should link to bonuses and more opportunities.
Thank you for reading this blog!