China is the world’s largest country with more than 1.3 billion people. It is also the world’s largest smartphone market.
For mobile app developers, the impressive figures are enticing. After all, it’s all about reach for mobile apps. The larger your customer base, the more opportunities for monetization, and therefore the more attractive your startup is for investors. In this aspect, China’s huge market seems ripe for the taking — and which firms are better-placed to do so than homegrown startups, especially app developers looking to conquer the mobile market?
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However, the Chinese market is so fraught with challenges that even local startups may have difficulty trying to maneuver their way through the terrain. With these obstacles, it is sometimes smarter to target the US market first, even though you may reach a smaller audience.
CooTek is Chinese but targeted Western consumers first
In particular, CooTek is one Chinese app developer that has chosen to start by targeting the Western market.
Founded in 2008, Shanghai-based CooTek is the company behind TouchPal X Keyboard and TouchPal Contacts, which lets you type contact names directly on your smartphone’s dial pad. TouchPal X Keyboard is an alternative to pre-installed keyboards on Android smartphones. It makes use of sentence and word gesture technology, as well as contextual prediction, touting to save users about 60 percent keystrokes.
CooTek’s TouchPal apps are currently installed on more than 100 million devices worldwide.
Interestingly enough, CooTek’s co-founder and CEO, Michael Wong, who was formerly from Microsoft’s R&D unit, took an unconventional route by launching in the Western market first. TouchPal X Keyboard was first introduced in the English language, and subsequently in seven European languages, before the Chinese language was introduced.
Distribution and cashflow pose challenges in China
Wong says the main reason why he chose to target the Western market first was to secure a stable cashflow. He explains how the Chinese in general are consumers who are less willing to pay.
The Chinese market’s usual segments are different from those of US or European markets. In the Western world, most of the users are middle-class. They have less time but they can afford paid apps and would love to pay for a game or whatever. Time for them is more precious.
On the other hand, in China, most of the users, the majority, are not well educated and in big cities working in foreign companies. The majority of users are relatively lower-end with lower educational background. But on the other hand they have more time. That’s why the free business model is so popular in China.
Jenny Lee, a partner at venture capital firm GGV Capital which has a presence in both the US and China, also observes that in the US, the willingness to pay for an app is pretty high — especially for a utility tool, which is what CooTek’s TouchPal X Keyboard essentially is.
Furthermore, the steady cashflow in the Western market also comes about because of one key factor: the distribution model.
When CooTek started its business in 2008, that was a time when the iOS market was still the largest ecosystem and also the easiest to make money from, Lee notes. She says: “There’s a very direct path: you go through the Apple App Store, and then if your app is a good app you can basically charge directly.” And that is why a Chinese company naturally looked to the US when thinking of leveraging and monetizing a mobile app.
The relatively straightforward distribution model in the US for mobile app developers is contrasted by a landscape in China that is simply put, a maze.
China is dominated by Android devices, and although Google Play is available globally, hundreds of other Android app stores flood the market — from the larger players including Qihoo and 91 Wireless to smaller ones such as Wandoujia. Lee notes that this makes payment a lot more complicated than it is in Western markets.
Being copied is a huge problem in China
Even if a mobile app developer manages to cross the distribution hurdle and starts raking in some revenue, the next challenge is even worse: getting copied.
Lee says: “If it’s a very simple app, the chance of an app being copied (in China) is higher.” She explains that the user interface and user experience can be copied easily if design is your product hook.
In China, respecting copyright and intellectual property is still something that locals do not really practice. There has been rampant piracy in China that has made Chinese consumers unused to paying for legal digital content, and this is particularly obvious in the music and film sectors. This trend is also easily reflected in the mobile app scene — which is so vast and therefore not easily monitored. To this extent, China and the US have had heated arguments over piracy cases more than once.
CooTek’s Wong notes that small app developers don’t stand a chance in China “because those big players like to copy you and they have more resources and they can spend more money on apps.”
This is likely another reason why CooTek had its beginnings overseas. Wong terms the innovations behind its TouchPal apps as an “advantage” but in China it would have morphed into a disadvantage in which competitors could have jumped onto the same boat and flipped it over.
On the other hand, in the Western market, patents have a lot of say. Wong explains:
We have a lot of patents, we build our apps from scratch and didn’t copy anyone else. We are the original inventor of our technology and we are the first one who invented a lot of great features.
This kind of innovation would be hard to find in a traditional Chinese Internet company as usually they are copying others, copying those from the US and UK to bring them back to China. They don’t have a good IP (intellectual property) to defend their technology. They end up infringing other patents when going abroad. This is (also) why it would be harder for them to go abroad.
Don’t threaten the Chinese Internet giants
Yet, overcoming all these obstacles is not the be all and end all for a mobile app developer in China. Success draws attention, and the last thing you would want to do is step on the toes of China’s Internet giants — namely Tencent, Alibaba and Baidu.
GGV Capital’s Lee says that in China, companies have to be very clear of their position relative to the giants. She explains three different approaches to take.
One way to do it is obviously you avoid the giants. Whatever the giants are in, don’t compete head to head because you’re asking for trouble.
Second way is to understand where those three players are. You figure out a way to compete with them, not on the surface but in a different direction… Make a vertical (niche) so good that you own a large market share. It’s not easy, but you have to be very specific in your direction, identify a niche space and be number one in that space.
For the third category, there are these companies that need to grow alongside the giants, because there are certain things the giants will not do (such as providing certain specialized content for their users). Companies like that tend to be great M&A (merger and acquisition) targets, as you cannot repeat it by throwing money or a team as it’ll take time.
Working with the giants is simply unavoidable in China, as they have such a large user base and so much cashflow. This year alone, many deals have been made with the giants purchasing stakes or taking over startups — for example, Baidu’s $1.9 billion acquisition of app store 91 Wireless is a classic example. Basically, Lee explains that the Internet giants “are going to kill you” if you try to compete with them directly, so it is easier to allow them to come in as shareholders and share your strategic resources.
If you disregard the Chinese Internet giants entirely, it’s likely that your company will sooner or later get swallowed up by them — and there goes any chance of succeeding in the Chinese market.
Emerging as better companies with more creativity
With so many challenges, it is little wonder that even Chinese startups may prefer targeting the Western market first — as in comparison, the West has a target audience that is willing to pay for apps, a straightforward distribution model, clear-cut patent protection and fair(er) play for small companies.
However, even if they start with the US market, coming back to the Chinese Internet space is something that all these firms should do — because basically, operating in China’s competitive and complicated mobile Internet space is likely to seriously hone an app developer’s survival skills. As it takes so much creativity and careful management to succeed in the Chinese market, your innovation level tends to be much higher than companies from the Western world.
Lee from GGV Capital notes that it is not even about having innovative products, but rather about how to earn money from the vast market and eventually stand your ground among the myriad of small and large Chinese Internet companies. She says:
Innovation doesn’t have to be the most cutting edge technology, the best semiconductor chip. Innovation is more of monetization and the business model.
Strangely enough, though I spoke with them separately, CooTek’s Wong says nearly the same thing as Lee. He notes that in China “you have to develop a completely different business model and monetize your services… It needs innovation.”
I think that the business model in China is one of the most innovative, or actually it’s a big innovation for the mobile world. Many of those business models in China are quite brilliant and quite innovative.
For example, most of the games in the Western market mainly let you play one to three chapters, then you would have to pay to unlock the rest of it.
For China, you can play the whole game for free forever. But the only thing is, if you want to play better, if you want to compete against others more effectively, you have to purchase. And those tools you purchase are more expensive than what you’re paying for the next chapter.
CooTek is a clear example of how starting with the Western market does not discount a Chinese startup being in the massive country — in fact what it has done is to adopt a business model that gets money from licensing to global manufacturers then fund the Chinese market with that cashflow.
Wong says: “For China, it’s still very likely for startups to succeed, but you (just) have to wait and be very patient.”
Indeed, it seems that staying for the long run and fighting all these fires is the only way to conquer the Chinese mobile Internet market and become a player to be reckoned with.