The changing platform economy in China
Social media influencers promote locally produced products through live-streaming in Sanming City, Fujian Province. Photo: CFP
With the arrival of the digital economy era and the prevalence of the internet, the platform economy has taken a significant role in the national economy, growing into a jewel of China’s socioeconomic development. Currently, the size and scale of China’s platform economy has ranked high globally. Both the platform economy and the platforms themselves have entered into a new development stage.
Since 2019, antitrust law enforcement institutions globally have toughened up their legislation and regulation, safeguarding workable competitions in the platform economy. China has issued a series of supervision regulations. In March 2021, Xi Jinping, general secretary of the CPC Central Committee, stressed efforts to promote the regulated, healthy, and sustainable development of the platform economy at the ninth meeting of the Central Committee for Financial and Economic Affairs.
Nowadays, China’s platform economy is encountering deep-seated changes in three aspects.
From data traffic monetization to value creation
Consumers and data traffic are the basis for the survival and development of internet platforms, though the profit models of different platforms vary. In those varied profit models, the simplest one is profiting from advertising on the basis of the online traffic. To realize this, platforms often employ algorithms and online data of individual consumers to personalize the content of their advertisements, so as to extend consumers’ focus time on their platforms. The big data algorithm allows the content received by consumers to be more precise and to their tastes, however, it can also narrow the scope of the content received by consumers, leading to “information cocoons.” In the traditional “online traffic-advertisement” profit model, platforms can hardly highlight the quality of the content, in that the presenting means and the sequencing of information are totally controlled by the platforms. Therefore, platforms only need to satiate the preferences of consumers. The production of high-quality content needs investment at high costs, and therefore, the platform is filled with large amounts of low-quality and false information, leading to the phenomenon of “bad money driving out good.”
The platform profit model of “value creation” requires the internet platform to provide trading opportunities for users at both ends of the supply side and the demand side. Users can complete mutually beneficial transactions that cannot be carried out without the platform. In this process, the platform provides real services as a third party, and its profit is a part of the increase in value. In everyday life, the e-commerce platforms expand the scope of consumer markets. Online social platforms allow people to communicate and connect in a convenient fashion. Takeout platforms facilitate consumers’ daily lives. Online ride-hailing platforms innovate people’s travel modes, reducing the empty-loaded rate. All these are indeed value-creation activities, allowing both the platforms and the users to enjoy a win-win situation.
In the process of platform operation, negative externalities could also be brought to consumers and the whole of society. In view of the inclusion of new industries, business forms, business models and regulatory concepts centered on intervening only when necessary, regulators adopted a more cautious regulatory strategy in the early stage of its development. However, as China’s platform economy has entered a mature stage, the business models of the platform and their advantageous and disadvantageous impacts on all participants have been fully demonstrated. The regulatory concept should be adjusted accordingly to guide platforms from a simple “online traffic-advertisements” model to value creation for users. The technical and data advantages of the platforms should be translated into the improvement in efficiency of real economic activities, so as to realize the high-quality development of the platform economy itself.
From consumer focus to production-marketing integration
Major factors influencing resource allocation includes uncertainties in market activities and information asymmetry between the production end and the marketing end. Internet platforms can create conditions for the effective matching of supply and demand. Depending on enormous data and big data algorithms, platforms can accurately predict market demands, products procurement and storage, logistics and traffic conditions, and delivery route planning.
In April 2020, China officially acknowledged data as a factor of production. Platforms enjoying the advantages of data should shift their focus from the consumer end to the production end, with the business focus shifting from “how to sell” to “production to demand, just-in-time production, and near-shoring production” based on big data, so as to realize the direct match of supply and demand.
At present, China has established a complete industrial system, and has built a moderately prosperous society in all respects, with a large-scale consumer market, which is a vital foundation for the country to continue to maintain stable and sustained economic growth under the new development paradigm. How to effectively alleviate the information asymmetry between production and marketing and guide the sufficient matching between the production supply and the market demand has become the key to enhance economic vitality.
In recent years, China’s major internet platforms have made many explorations, such as the whole process service of agricultural products from planting and picking to terminal distribution, or clothing merchants determining the selling style, amount produced, and pricing based on big data analysis. However, the overall business focus is still concentrated on the consumer side, and the interventions in the upstream production links are far from enough. At the same time, when many large-scale production enterprises build an industrial internet platform for the whole industrial chain, they are often limited to the production field and cannot directly connect with the market demand. Therefore, strengthening the in-depth data-based integration between internet platforms and production enterprises and giving full play to their respective advantages will be the main battlefield for the platforms to “lead a high-quality life and achieve high-quality development” in the next stage, and will also become a new bright spot of economic growth.
From dominating platform to cooperation
With the rapid development of the platform economy, the growth rates of platform enterprises are significantly faster than that of traditional enterprises. It only took several large-scale platform enterprises a little more than a decade to achieve the size and scale traditional enterprises only realized through decades of effort. These large-scale platform enterprises have formed advantageous monopolies with obvious market dominant positions, with related abuse of those positions. Whether in traditional industries or in the platform economy, monopoly behavior guided by profit maximization not only hinders fair competition in the market, but also harms the legitimate rights and interests of consumers and businesses. This is also an important reason why countries all over the world have strengthened the supervision over large platforms in recent years.
China’s platform economy enjoys a sound situation nowadays, in that it is equipped with the following prerequisites. First of all, the huge population base provides the most critical user base for the development of the platform economy. It is easy to realize a scale of 100 million users in China. Secondly, well-developed communication networks and transportation infrastructure are essential external conditions for the development of China’s platform economy. The real tipping point of the platform economy is that users’ internet access mode has transformed from desktop-end to mobile-end, which is inseparable from China’s continuous developments in the field of mobile communication for many years. The development of e-commerce platforms is naturally inseparable from the logistics conveniences brought by China’s transportation infrastructure.
Finally, the platforms and the businesses and consumers in the platforms all are the participants of the platform economy. They jointly participate in the value creation process of the platform economy and should share the achievements of value creation. However, due to the platforms’ own technological monopoly and data advantages, businesses and consumers are in a relatively weaker position, and the profit space is greatly squeezed. This situation is neither fair nor efficient, which is not conducive to the sustainable and healthy development of the platform economy.
In May 2021, an executive meeting of the State Council clearly proposed to “urge and guide the platform to reduce the proportion of excessive charges, deductions, and the proportion of new merchants’ commissions and promotion fees,” which is a concrete embodiment of requiring the platform economy to respect the contributions of all participants and to realize shared development.
The platform economy in China has gone through the stage of user dividends and business model dividends, entering into a mature stage of development. During this period, it is hard for the scale of users to sustain high-speed growth, and the competition has gone from “incremental competitions” to more intense “stock competitions.” As the new business model has become a common industrial practice, the profit space from model innovations is gradually disappearing. The future growth space of the platform economy can only come from real value-creation, that is, the value dividend stage. Therefore, the necessary choice for China’s platform economy to take off again in development and standardization and build a new national competitive advantage is to deeply integrate with the real economy, giving full play to the data advantages, realizing direct connection between production and marketing, reducing the circulation cost of the whole society, and realizing shared development.
Qu Chuang is a professor from the School of Economics at Shandong University.
Edited by ZHAO YUAN