China's digital economy at the inflection point

（IC Photo）

Chen Yongwei/Wen

In the blink of an eye, 2021 has passed in a hurry. It is said that in an astronomical sense, 2021 is the shortest year ever recorded, because due to the rotation of the Earth, it is 65 milliseconds less than the usual year. However, for China's digital economy, this "shortest year" is incredibly long, and too many things have happened in this year.

Twilight of the giants

In the first half of 2021, PwC released a list of the world's top 100 companies based on its market capitalization in March. At the time, two Companies in China were in the top 10, with Tencent in seventh place with $753 billion and Alibaba in ninth with $615 billion. However, this appearance is almost the last glimmer of glory for China's digital economy giants in 2021. Because before long, the heavily regulated "Sword of Damocles" came down.

On April 10, the State Administration for Market Regulation imposed an administrative penalty on Alibaba for "choosing one of the two" behavior, issuing fines of up to 18.228 billion yuan. From any point of view, this can be called a sky-high penalty. If you compare the history of anti-monopoly penalties in China, then this penalty amount is not only undoubtedly the first, but also half the total amount of all previous penalties (Note: According to the Data of the State Administration for Market Regulation, from 2008 to 2018, the total amount of anti-monopoly fines was 11 billion yuan; and according to the "China Anti-Monopoly Enforcement Annual Report", The total amount of fines in 2019 and 2020 was 320 million yuan and 450 million yuan respectively, which means that before Alibaba was punished, the total amount of penalties imposed by China's anti-monopoly was roughly around 12 billion yuan). Even if compared internationally, the amount of the penalty is second in history after the EU's penalty on Google in 2018. Of course, compared with a specific number, the symbolic significance of this punishment is more important, which means that China's attitude towards the development of the digital economy has shifted from "let the bullets fly" to comprehensive and standardized development. Monopolies and disorderly expansion of capital, which have long been turned a blind eye by regulators, will be completely curbed.

Sure enough, after the punishment of Alibaba, the State Administration for Market Regulation has successively issued a series of fines to major digital economy giants, and tencent, Meituan and other companies have almost not been spared. It is worth noting that in this series of penalties, some of the fines are for current problems, while others are for historical problems. For example, a large number of problems that were not centrally declared were uniformly punished in this year, which can be said to have made up for the old historical accounts.

While anti-monopoly is constantly advancing, the construction of laws and regulations and departmental regulations related to the digital economy are not far behind. The highly publicized Digital Security Law and the Personal Information Protection Law were implemented in September and November respectively, and the Regulations on the Administration of Network Data Security were also open to the public for comments. This marks the end of the days when giants arbitrarily collected and used user data. The Ministry of Industry and Information Technology's intervention in the interconnection between giants shows that the situation of building walls and taking neighbors between giants may not continue. In addition, the regulation of algorithms by various departments has put a tight spell on the behavior of giants using algorithms to attract users, induce consumption, and carry out "killing".

Under a series of anti-monopoly and regulatory combinations, digital giants that have had unlimited scenery in the past have narrowed their smiles in 2021. And their stock prices have collectively opened a diving mode. By December 31, 2021, Alibaba's market value had shrunk to $322 billion, almost half of what it had seen at the beginning of the year; Tencent's decline was relatively small, but it was also down 1/4 from when it was on the list, leaving only $562.8 billion. In contrast, in the United States on the other side of the ocean, the value of digital giants is soaring. On the first trading day of 2022, Apple's total market capitalization once exceeded $3 trillion. It was followed by Microsoft, Google, and Amazon with market capitalizations of more than $2.5 trillion, $1.9 trillion, and $1.7 trillion, respectively.

In the face of the collapse of China's digital giants and the widening gap with U.S. competitors, "where is China's digital economy going?" has become a concern. It is not difficult to see from the major media that many people are now pessimistic about this attitude. In their view, China's digital economy will falter in the coming years as regulations tighten, an area that would have been enough to compete with the United States is likely to collapse. So, is this really the case? I think the answer to this question depends on how we see the digital economy.

Re-understand the digital economy

Over the past two decades, the Internet has been at the center of China's digital economy, so when we talk about the digital economy, we always unconsciously equate it with the Internet economy. As we all know, the Internet economy is a "top two, not three not four" economy, in the state of free competition, only one or two giants of the head can survive, so we subconsciously equate the Internet economy with a small number of head giants. Under such a logical chain, the concept that the digital economy is equal to the giant, and the digital economy development is equal to the growth of the market value of the giant is unconsciously implanted in our minds.

But in fact, the digital economy is certainly not just the Internet economy, but also not just the economy of the giants. Broadly speaking, the digital economy can be divided into many different areas. With the classification method of Bukht and Heeks, which are more famous in the academic community, it can be divided into three levels: the first level is the core layer, which refers mainly to the traditional IT/ICT department, including software and hardware manufacturing, telecommunications, etc.; the second level is the digital economy in the narrow sense, which includes electronic services, digital services, and platform economy; the third business is the digital economy in a broad sense, including e-commerce, industry 4.0, precision agriculture, algorithm economy, etc. According to the more popular saying in China, then the first level here can be roughly reduced to "digital industrialization", while the second and third levels can roughly correspond to "industrial digitalization".

Whether it is in nature, status, or the way of development, the above three levels of the digital economy are very different. Among the three levels, the core layer is undoubtedly the most hardcore and the most important. In a sense, it can be seen as the basis for the development of the second and third levels. The development of this level mainly relies on the research and development of technology, and only by mastering the corresponding core technology can the core layer be developed better. The second and third levels are based on the first level, which is the application of the first level of products. Unlike the development of the first level, which mainly relies on technology research and development, the development of these two levels mainly relies on the application and diffusion of technology.

At the second and third levels, there are some models that are extremely dependent on scale. For example, the platform economy, such as e-commerce, the development of these models mainly relies on digital technology to open the demand side, so its development is strongly dependent on the size of the market, only if the market is large enough, the platform economy can grow, and the market value of the enterprises operating the platform can soar. The current business of China's digital giants is mainly concentrated on these models.

But at the same time, there are still some models in the second and third levels, and their scale benefits are more difficult to reflect. For example, Industry 4.0, such as precision agriculture, although digitalization can also help them greatly improve efficiency, but this efficiency improvement is mainly reflected in the supply side. Although from the perspective of individual enterprises, the introduction of digitalization can greatly reduce their costs and greatly increase their profits, but because there is no strong scale effect and network effect, the overall benefits of digitalization are relatively low in these areas. It is also for this reason that these areas are not too favored by digital giants so far - the reason is also very simple, since you can make quick money by doing large-scale, why spend effort to gnaw hard bones and earn hard money? As a result, the penetration level of digitalization in these areas is difficult to improve.

With the above concepts in place, we might as well compare the digital economies of China and the United States. In September 2021, the Chinese Academy of Information and Communications Technology released a "White Paper on the Global Digital Economy", which compared the development status of the digital economy in various countries in the world. The results show that among the countries of the world, the largest digital economy is the United States, whose digital economy size in 2020 is $13.6 trillion; China ranks second, with a digital economy size of $5.4 trillion, and Germany, Japan, and the United Kingdom rank three to five, with their digital economies of $2.54 trillion, $2.48 trillion, and $1.79 trillion, respectively. In terms of proportion, Germany's digital economy is the highest proportion of GDP, at 66.7%, the United States is second, at 66%, and the third is the United Kingdom, at 65%. Compared with these countries, China's digital economy is much lower, at only 38.6%.

At first glance, this is a shocking conclusion. For a long time, we have believed that China's level of digital economy development is at the forefront of the world, even if it cannot be compared with the United States for the time being, it is more than enough to surpass Europe. From various news, we can often see all kinds of reports that can support the development of China's digital economy higher than Europe: for example, Europeans will lament that an app in China can complete many functions at the same time, while an app in backward Europe will only have one function; in Europe, people have to go out with cash, which is very troublesome, and in China, as long as there is a mobile phone is enough; in Europe, it may take a long time to make online shopping, and in China, online shopping is not only more convenient, but also less expensive ...... And if you want to compare enterprises, then China has Alibaba, There is Tencent, there is Meituan, even after the plunge in 2021, their market value can easily compare all the digital companies in Europe. How can it be that in statistics, the proportion of the digital economy of European countries such as Germany and the United Kingdom exceeds that of China?

What's the problem? The mystery lies in the structure of the digital economy as we talked about earlier. In fact, if we look back at the digital economy sectors that we have just identified that prove that China has more advantages than Europe, we will find that they all belong to the second and third tiers of industries that can quickly grow by scale. In terms of scale, Europe cannot be compared with China. Although europe's population size is not small in terms of total, these populations are scattered in dozens of countries. It is difficult to support a platform as large as China's digital giant from any country in Europe alone, and its similar business is certainly difficult to develop. But because of this, European countries have paid more attention to supporting small and medium-sized enterprises when developing the digital economy, which makes them the first to popularize digitalization in many areas where it is difficult to make quick money (such as industry, agriculture, etc.). Therefore, in terms of the total proportion of the digital economy, they are better than China.

Then let's look at the first level of the digital economy. By comparison, we can see more clearly that compared with the United States or Europe, China still has a very significant gap in this field. Needless to say, not only the source of the major revolutions in the digital economy can almost be traced back to the United States, but also from the reality, from chips to operating systems, to major application software, American enterprises have occupied a dominant position. Although Europe can not compare with the United States in terms of overall technical strength, it also has many key technologies, such as as ASML in the Netherlands is the most important manufacturer of lithography machines, if we want to produce our own chips, it is almost impossible to bypass ASML. In contrast, China's mastery of key technologies is much weaker. Although our digital giants are not inferior to their counterparts in Europe and the United States in terms of the number of patents, our patents are almost all application-level, and many technologies that require them are also easy to be stuck by them. Until now, we are still subject to people in the most critical technologies such as chips and operating systems. Not only that, but even the main industrial software, we have to use foreign products. The magnitude of the gap is self-evident.

Well, after the above analysis, it is not difficult to know that although From the perspective of the total amount of the digital economy, China is the second in the world, in the entire digital economy map, China's main development is those application-level industries, relying on the main development force is also scale, not technology. If this development model is allowed to continue, then although the scale of our digital economy may continue to be huge, and even surpass the United States one day, the problem of large but not strong will continue. And everything will be as fragile as the castle on the beach, and once the external environment changes, it will quickly collapse.

In 2021, China's supervision in the field of digital economy is tightening, although there are various reasons, but one of the important considerations is to guide China's enterprises to abandon those low-end games of "making quick money" through supervision, and gradually shift to the development and technology of china' digital economy, so that China's digital economy can develop healthily and sustainably. Only by understanding this can we see the possible development direction of China's digital economy in the coming period.

Where the future holds

So, after the inflection point, where will China's digital economy go? The answer to this question, I am afraid, must start from four aspects. First, from the technical point of view, what kind of breakthrough will we make? Second, from the perspective of business model, what kind of innovation can we achieve? Third, from the perspective of supervision, what kind of changes will there be? Fourth, how will the international environment change?

(1) The direction of technological change

Fundamentally, technological change is the most essential driving force for determining economic development. This is particularly clear in the digital economy. Looking back at the past few decades, the ups and downs of the digital economy have actually been greatly related to the cycle of technological change. The popularity of the Internet has directly led to the development of this round of digital economy from the end of the last century to the beginning of this century, and the great development of the digital economy in the past decade or so has been driven by the development of the mobile Internet. Then, if the digital economy is to achieve great progress again, there should first be a round of technological breakthroughs.

Speaking of which, one might argue that in the digital economy, technological innovation happens almost all the time. Almost every day, a large number of technologies are developed, and a large number of technology patents are applied for, will technology become a problem in the development of the digital economy?

In response to similar questions, I think we must first have a deeper understanding of the classification of technologies. There are differences between technologies and technologies, some technologies can be applied to all fields, and some technologies can be applied to specific fields. In the literature, the former type of technology is often referred to as "General Purpose Technology" (GPT), while the latter type of technology is called "Specific Purpose Technology" (SPT). In general, only GPT is likely to be a key leading technology in major technological changes. Only they can produce enough "creative destruction" to allow the whole social production to come out of the existing paradigm and completely rise to a higher level. SPT, on the other hand, can only add icing on the cake to it, promoting efficiency improvement in one direction.

Compared with this standard, we can see that whether it is the Internet or the mobile Internet, they all have a large degree of GPT nature, and their influence is enough to penetrate into all fields, and with them as "locomotives" to pull, other SPTs are useful. But the question now is, where is the next big GPT?

Regarding the next big GPT, we have already had a lot of speculation before. Artificial intelligence, blockchain, and 5G, for example, were once thought to play a possible role. But so far, at least, none of these alternatives seem to have worked as intended. For example, the scope of use of artificial intelligence is quite wide, but its role in the "creative destruction" of the existing technical foundation is not obvious, and it still plays the role of SPT. In addition, because the current artificial intelligence is mainly taking the path of machine learning, its dependence on data is very strong, so it is foreseeable that when the regulations related to data become more and more stringent, the development of artificial intelligence is likely to usher in a bottleneck. In this sense, AI should be less likely to become the technology to lead the next major round of technological change. Blockchain, in recent years, has also developed to a certain extent, but in general, the popularity of its application is lower than people expected. Its influence is mainly concentrated in the "chain circle", and it seems that it is difficult to popularize the whole society in a short period of time. As for 5G, it still needs to be further popularized, and its effectiveness needs to be further tested. Years ago, the economist Taylor Cowen predicted that now that people have plucked all the "low-hanging fruits" from the tree of technological development, it may be difficult to find the next key technology. While we are reluctant to acknowledge Cowan's pessimistic prediction, after examining the development of several important technologies, we seem to have to admit that this is indeed the case, at least in the digital economy.

Of course, there is also the possibility that although it is difficult to find a single key technology to lead technological change in the short term, we can rely on a technology cluster to do all this. For example, the concept of "metaverse" is now hotly discussed by all parties, which is the concentrated embodiment of this idea. From a technical point of view, to achieve the metacosm, there is a need for the coordinated development of many technologies. Many commentators believe that all these technologies will encounter various bottlenecks in their respective development processes, but if they are concentrated under one concept and developed together, they can produce very good spillover and synergy effects and achieve common advancement. This idea sounds good, but whether it can work or not may be seen for a while.

In the case of China, the question we face may not only be whether we can find the key technology, but also whether this key technology can be used by me. Take the current metacostem heat as an example. Of the technologies that underpin the metacosm, several are critical. The first is the extension of reality technology, which is XR (including virtual reality VR, augmented reality AR, and mixed reality MR), which is the entrance to the metaverse. On the surface, this type of technology may not seem difficult, but when it comes to application, there are a lot of technical details to deal with. For example, VR's processing of time delays and the quality of VR peripherals will affect its popularity. From now on, the most advanced XR technology is in the hands of several major technology giants such as Apple, Facebook, and Google, while the technological accumulation of Chinese companies in this regard is relatively weak. Although to some extent, this gap can be partially solved by mergers and acquisitions (such as ByteDance's acquisition of Pico), some core technology gaps are still difficult to completely resolve. Of course, compared with XR technology, chip technology has actually played a more essential role in the development of the metaverse. Because in the metaverse, a lot of 3D modeling and real-time rendering are required, the computing power requirements of the chip are very high. In fact, this is the reason why chip giants like Nvidia can become one of the main pioneers of the metaverse. Unfortunately, the current chip technology is still in the hands of developed countries in Europe and the United States, while China is still subject to people in this field. If this situation continues, that is, the idea of using a technological complex such as the metacosm to drive a new round of technological change is feasible, but whether China's digital economy can have autonomy in this round of change and whether it can share enough benefits in it will still be a problem.

(2) Business model innovation

In the past two decades, a very important reason why China has been able to give birth to so many world-class digital economy giants is to make full use of the advantages of the platform model. With the help of the platform connection, China's huge population advantage has become a strong demand driver, and it is this force that supports companies with a market value of more than 100 billion.

It should be pointed out here that although China's digital giants and the United States' digital giants almost all use the platform model to make them bigger, a careful comparison will find that there are great differences between the platforms of China and the United States. On the whole, although the giants in the United States are also diversified, they will basically only have a main business direction - Amazon mainly does retail, Google mainly does search, and Apple mainly does mobile phones; in contrast, the business of Chinese giants is more dispersed, especially the head of several companies, almost all areas can see their shadow, these two years are often mentioned "capital disorderly expansion", to a large extent, this phenomenon is.

It should be said that if viewed separately, the diversification of China's platform has many advantages, and it can make good use of the synergy between various fields to promote the development of its own business. However, if all platforms opt for diversification, then they will fall into an awkward "prisoner's dilemma." Since every enterprise hopes to achieve a breakthrough in all fields in a short period of time, "heavy quantity, heavy scale" will become the main idea of development, and in contrast, the accumulation of technology becomes less important. It is for this reason that while many of China's digital giants were once close to those of the United States in scale, they were far fewer than hard-core technologies.

In addition to the above phenomena, there is a more critical issue that needs to be paid attention to. That is, while all the digital giants are obsessed with making quick money, some areas that require slow work are ignored. It should be said that china's application in the C-end is now quite sufficient, and even quite internal. However, on the other hand, the B-side application, especially the application for industry and agriculture, is a completely different situation. Not long ago, it was reported that a large number of industrial software in China are European and American, and the digitalization of industrial enterprises is still highly dependent on Europe and the United States. Why? The reason is simple, that is, in the industrial field, the scope of application of each application is very narrow, it is difficult to form a scale, and the platform model is difficult to be useful, so digital giants are less willing to enter these industries.

Based on the above reasons, in the future development of China's digital economy, the platform model may face certain changes. On the one hand, the phenomenon of one platform doing all areas in the past is likely to become a thing of the past, and a relatively specific model similar to that of the United States may become the choice of platforms. On the other hand, in addition to the platform model, China may also brew up some new models to promote the digitization of real economic fields such as industry and agriculture.

In my personal understanding, this new model is likely to be a modular combination model. Although each specific industry's demand for digitalization is different, these demands can be disassembled into a series of specific needs of subdivisions. The needs of these segments are often generic and can create scale advantages. Therefore, if each segment can form an industry independently, there are several representative small giant enterprises, respectively, to produce a variety of digital components, then when an industry is digitized, it is easy to buy the components they need to meet their own needs.

(3) The trend of supervision

When considering the direction of the digital economy, regulation is certainly a factor that cannot be ignored.

After a series of anti-monopoly blows, anti-monopoly in the field of digital economy may enter a certain period of relaxation in 2021. But the main reason behind this is that many important cases have been dealt with in 2021, related monopolistic behavior has been corrected, and the stock of problems has been greatly reduced. However, jumping out of the specific law enforcement level, China's anti-monopoly rules and regulations have been far more standardized and meticulous than a year ago, if there is no accident, the amendment to the Anti-Monopoly Law will also be passed this year, which determines that if you want to return to the past relaxed stage, it is impossible from the system.

The above is only the antitrust level. In fact, as mentioned earlier, in the past year, the Data Security Law and the Personal Information Protection Law related to the field of digital economy have been introduced one after another, and the supporting systems of various departments have also been introduced, and the entire framework of strict supervision has been locked. Therefore, from a comprehensive point of view, if there is no particularly big accident, the strict supervision of the digital economy should be the main tone of the next few years.

It should be pointed out here that for the entire digital economy industry, strict supervision is not necessarily unfavorable. Of course, it may cause some digital giants to suffer huge setbacks in the short term, but in the long run, it is conducive to helping these giants better understand the direction and get out of the low-quality inner volume. Not only that, after the power of the giants has been curbed to a certain extent, some newer enterprises are more likely to grow up, which is also good for the prosperity of the entire industry ecology. Most importantly, in an environment of lax regulation, everyone expects that corresponding regulatory measures may be introduced, so they will be afraid to do things. And now, the boots of supervision have finally landed, and all enterprises have stable expectations, which is crucial for the development of the industry.

(4) Changes in the international environment

When considering the trend of China's digital economy, the external variable of the international environment cannot be ignored.

On the one hand, this factor will greatly affect which technologies can be used and cannot be used in the development of our digital economy. As mentioned earlier, many key technologies of China's digital economy are still in the hands of developed countries in Europe and the United States. For example, there is a famous saying in the industry that the development of China's digital economy is "lack of core and soul", where the "core" refers to the chip, and the "soul" is the operating system. In addition, the key technologies that support the metaverse, such as XR, as well as various industrial software, are also subject to people. In this case, if the international situation really changes, then China's digital economy will face an extremely severe test.

On the other hand, this factor will also affect Chinese enterprises to a large extent. Now, many Chinese companies have actively chosen to take overseas business as their important development goal in order to avoid excessive domestic involvement. For example, Alibaba and Tencent's investments in Southeast Asia, as well as byte's expansion of Tiktok around the world, have all achieved good results. However, these performances are premised on the relative stability of the overall international environment. If there is really any "black swan", then the losses suffered by the relevant enterprises may be huge.

Combining the above two points, I personally believe that China must also be prepared for the development of the digital economy. At the national level, it is necessary to make a plan to deal with the possible "card neck" of foreign countries at any time; and from the perspective of enterprises, we should weigh the proportion of domestic and foreign resources and strive to do a good job of freely.

epilogue

From any perspective, China's digital economy now stands at a historical inflection point. After this inflection point, will the digital economy usher in a new round of strong development, or will it temporarily fall into a trough? This may also depend on the combined effects of technology, business, policy and the international environment. But one thing is for sure, China's digital economy after the inflection point will be completely different from what it was before the inflection point.