China’s unique cybersecurity regulations, its separate digital ecosystem, and its digitally savvy consumers set it apart from the rest of the world. As a consequence, MNCs are looking to ringfence their digital assets in China and set up parallel digital platforms – one for China and one for everyone else. Ringfencing presents both risks and opportunities.
Cybersecurity is national security
The most compelling reason to localise digital assets is to stay in compliance with China’s growing cybersecurity regulations. China’s rules for the collection and use of its citizen’s data encompasses national security concerns. This goes beyond the norms established by the EU and the US. A cybersecurity expert explained to China CFO Forum members of IMA Asia,
‘The legal argument for being compliant with China’s cybersecurity laws is the easiest way to be convinced that change is mandatory. China has issued many laws, and stricter ones are set to come. There is a massive push for local data hosting. Cross-border data transfer will become increasingly complicated. MNCs must comply and we have to ringfence certain data in China.’
China’s preference for locking down ‘important’ data is a trend that will continue, and enforcement actions are on the rise. (For more on cyber policy, see Ringfencing Digital Assets in China and Cybersecurity – Navigating the Perfect Storm).
Separate but equal
China’s digital ecosystem runs on a separate digital infrastructure.
‘China has different digital clouds and infrastructures than the rest of the world. The eastern clouds – Ali, Tencent and Baidu – dominate in China. The western clouds that rule almost everywhere else – Amazon’s AWS, and Microsoft Azure – have far less market share in China and their share is expected to decline further. At the application level, the difference is equally stark. Chinese apps – WeChat, Pinduoduo and Alipay – run in a parallel universe to Facebook, Amazon and Apple.’
High customer expectations
China’s customer-facing applications are among the world’s most advanced and allow for rapid testing of new ideas to improve the experience of customers and employees.
‘Frankly, nothing compares with customer-facing apps in China. We aim to create apps in China that match our customer’s high expectations. For example, we created a recruitment app on WeChat where a bot answers before a human being.’
China’s digital-savvy customers, even on the B2B side, have high expectations. They aren’t patient with latency issues that forestall service or product development.
‘Our B2B customers expect us to give them the same experience as they have with B2C interactions. Since they transfer money in real-time on WeChat, our customers expect everything in business also to be in real-time.’
Leverage China’s advantages
Increasingly, China is at the forefront of innovative customer experiences. Heavy investment in advanced technologies has made the China market a proving ground in areas such as AI, 5G, electric vehicles, and industrial internet-of-things (IIoT). As one CFO remarked during an IMA Asia forum meeting,
‘We leverage the Chinese government’s push towards smart manufacturing 4.0 to the point where we build some of our most advanced (digital) products here.’
Another unique advantage is China’s vast store of data. The huge database facilitates the training of algorithms.
‘China data is an important enabler in creating accurate AI or machine learning algorithms. If the data set is too small, the algorithm won’t be as accurate.’
Develop a digital strategy roadmap
MNCs have valid concerns that ringfencing and localisation will undercut the savings that digital transformation is meant to deliver. The investment required in effort, time and money makes it difficult to assess the risks and benefits associated with China’s many software systems. Firms have to weigh the pros and cons of tying themselves to a Chinese tech provider, when the US government is targeting an increasing number of them (such as Huawei).
The experience of companies that have developed successful digital strategies ‘in China for China’ can serve as a roadmap for others embarking on the journey. Some of the lessons that they have learned include:
- Communicate strategically for HQ buy-in. If headquarters is not already on board with a local approach, third-party experts can capture their attention and making convincing arguments.
- Assess whether to adapt or build. Assess whether the global offering works in the local market and is local adaptation necessary. Only rhen decide if is it better to build a local solution.
- Partner for access and speed. Partners do more than develop and provide solutions; they can offer an entrée into new markets.
- Build digital capabilities in China. International tech teams often lack an understanding of the Chinese digital tech stack and ecosystem. Chinese tech talent can fill the gap.
- Leverage regulatory arbitrage. China’s digital regulatory regime and ecosystem is different than Europe’s or North America. MNCs can take advantage of the differences to test innovative solutions that would not be possible elsewhere.
Click on ‘Deep Read’ at the top of the page to learn more about how companies are ‘cutting the cord’ and ringfencing their digital assets in China.