Chinese economy thrives in digital industry

Editor's note:Chen Jiahe is a Chief Strategist at Cinda Securities.The article reflects the author's opinion, and not necessarily the views of CGTN.

For those who know the Digital Industry well, they must know there is one important factor that is the key to successful companies: economies of scale.

For those who are not familiar with the Industry, the book "On Top of Tides" written by Wu Jun, a veteran investor and technician in the Digital Industry, explains a lot.

In this book, Wu illustrates the importance of economies of scale.

Take one example: the success of ATT (American Telephone Telegraph) in the 20th century was partly due to the economies of scale that it enjoyed. ATT was the dominant player in the telephone and telegram Industry at that time.

It enjoyed the economies of scale in this way: when ATT expanded its telephone and telegram network, it attracted more customers. More customers brought ATT more profit, which then allowed it to further expand its networks.

Smaller players could never compete against such a giant in the Industry of telephone and telegram. The business success of ATT lasted over a century, until theInternet and mobile networks brought it down in the early 21st century.

Boxes move along on conveyor belts before being put into specific slots where they slide down circular chutes that will be loaded onto trucks at Amazon's Fulfillment Center, Thornton, Colorado, March 19, 2019. /VCG Photo 

A similar economic principle later applied to companies such as Google, Amazon and Netflix.

When more people search on Google, more websites will allow Google to access their contents, which will attract more people to use the search engine. When more customers shop on Amazon, more vendors will open their online shops, which will attract more customers. When more people view videos on Netflix, Netflix will have more money to purchase new TVs and films, which will attract more users.

Even the hard part of the Digital Industry plays well with the economies of scale. To invent a new generation of computer chips, companies like Intel and AMD have to invest tens of billions of dollars.

Once a new computer chip is successfully invented and the production line is built, the additional cost of producing one more chip is almost zero when compared with the initial cost. Therefore, more production of computer chips will further reduce the cost of each piece of chip. This is a typical example of the economies of scale.

AMD headquarters in Beijing. /VCG Photo

Economies of scale prevail in almost every part of the Digital Industry. This creates a problem: it is very hard for small companies to compete against big companies in almost every sub-Industry of the Digital world. If you dig into almost all the Digital sub-industries, you can usually find only one, or maybe two, giant dominant players. You cannot find many of them.

In the search Industry, Google is a dominant player, while Baidu dominates the Chinese market. In the software Industry, Microsoft is unmatchable. For the online shopping Industry, Amazon dominates a large part of the global market, while Taobao and JD dominate the Chinese market. For the Industry of business software service, IBM is the king.

As the economies of scale require a large market, the Chinese market is right there for anyone who wants to make good use of its rule. Compared with other parts of the world, the Chinese market is huge. The country has almost 1.4 billion people and the purchasing power of its citizens is growing rapidly. Any company that gains a dominant position in this country's Digital Industry can obtain long-term growth. Those who successfully invest in these companies can surely obtain a long-term reward.

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