The labor foundations of China’s consumer-first internet

How cheap labor and flexible employment practices encourage internet firms to build consumer platforms.

Hardworking (2023/24) by Tao Hui

China’s digital economy is among the most advanced globally, second only to the U.S. and even surpassing it on some metrics. Yet missing from China's digital economy are homegrown counterparts to firms like SAP, Oracle, Salesforce, ServiceNow, Atlassian, and Databricks. Instead of building enterprise software, the country's leading tech firms are overwhelmingly consumer-facing, specializing in businesses like e-commerce, digital entertainment, ride-hailing, and food delivery.

To be sure, there are Chinese tech firms that have ventured into enterprise services, especially in recent years. Kingsoft produces office software. And even Alibaba and ByteDance have launched B2B SaaS products and expanded into cloud computing. Still, if we look at SaaS-based revenue or the number of SaaS firms (see graph below), its clear that China lags significantly in this segment.

Why has China’s digital economy, built on the same foundational technologies as the U.S.'s, developed along such a distinctly consumer-facing path?

One reason is protectionism. Since the late 2000s, China’s Great Firewall has blocked many foreign consumer platforms such as Google, Facebook, and Twitter, from China's market, giving domestic firms a clear runway to grow and dominate in China. (This undoubtedly played a role, but it alone cannot explain the pattern. After all, some foreign consumer platforms like Uber and Amazon were permitted to operate in China, but failed to gain a foothold against domestic competitors like Didi and Alibaba.)

Another reason is that Chinese enterprises tend to spend less on IT due to its industrial composition. As Grace Shao and I wrote in a previous post, enterprise SaaS benefits white-collar productivity making it most valuable in knowledge-intensive sectors. The U.S. has a mature knowledge economy with high IT-spending industries like finance, insurance, and professional services making up a large share of its GDP. By contrast, the vast majority of Chinese GDP comes from labor-intensive sectors like manufacturing, construction, agriculture—sectors that are less likely to spend on IT.

Source: The Latka Agency

In this post, we'll turn to a less frequently discussed factor: China's labor regime.

To see the connection, we first need to understand what makes consumer-facing platforms tick. Consumer platforms thrive on rapidly acquiring users and scaling their services. Their success hinges on achieving strong network effects such that the value of the platform increases as more users join it. This dynamic creates incentive for firms to constantly pivot in new markets in search for exponential growth.

Given this model, tech firms must be able to swiftly reallocate its resources and personnel. High employee turnover and employment volatility are thus not merely incidental but central to the consumer-facing business model. These firm benefit significantly from employment flexibility, enabling them to hire quickly when expanding and shed staff when dropping unprofitable initiatives.

Complementarily, consumer platforms also benefit from general rather than firm- or domain specific skills. Laszlo Bock, Google’s former senior vice president of people operations, said that when it comes to hiring, "general cognitive ability" was the top sought-after attribute, followed by leadership skills, humility, and a sense of ownership and responsibility. The least important attribute, according to Bock, was expertise. This preference for general skills is reflected in the way most consumer platforms interviews candidates, focusing not on specific technical questions but on applicants’ ability to solve math or logic puzzles as a way to demonstrate this "general cognitive ability" (e.g., Design an algorithm to sort a list in ascending order). The result is a workforce built for speed and flexibility—precisely the kind of labor engine that consumer platforms need to move fast and break things.

Fast hiring and firing

China’s labor regime is uniquely suited to the needs of consumer platforms. Over the past few decades, China’s employment relations have shifted dramatically away from stable jobs with extensive benefits that the country was once known for (the so-called “iron rice bowl” model) towards highly precarious employment structures that grant firms extraordinary employment flexibility.

This flexibility allows tech companies to rapidly scale up their workforce in boom periods and scale down just as quickly during downturns. For example, Alibaba’s workforce grew from around 20,000 in 2014 to over 250,000 by 2021, while ByteDance exploded from just a few thousand to over 100,000 employees in less than a decade. At the same time, Chinese tech companies frequently conduct mass layoffs, quickly shedding thousands of employees at the first sign of instability. This happened, for instance, during the 2018 U.S.-China trade war or after the 2021 government regulatory crackdowns. As a result, employee turnover is exceptionally high. Between July 2021 and March 2022 alone, major Chinese internet companies shed over 216,800 jobs but also added nearly 300,000 new roles.¹ (As a point of comparison, large-scale hiring and firing is far more difficult under the EU's stricter labor regime, making it more challenging for consumer platforms to thrive there.)

The ability to rapidly hire and scale opens up business strategies that are often unavailable to internet firms in other countries. One example is ByteDance’s launch of Douyin, the Chinese predecessor to TikTok. Douyin started as a latecomer to the short-form video format, which acccording to conventional wisdom about platform firms, should've precluded it from success since it did not have a first- or early-mover advantage.² Being a late-comer, however, did not stop Douyin's user base from exploding.

In the mid-2010s, the main constraint in the short-form video market was not user demand but a shortage of content creators. To overcome this, Douyin hired nearly 20,000 people in 2016 alone to form an ad-hoc "operations" team that would be tasked with cultivating the supply side of the platform. These workers engaged in daily outreach to creators, maintained ongoing relationships with users and promotional partners, and actively scouted new talent across the country. A key discovery was that art school graduates were a rich source of potential influencers.³ The operations team invited them to join the platform and supported their growth—sometimes acting as informal PR agents to help them reached their audience where the platform’s algorithm couldn’t. This ability to creatively make use of China's flexible labor regime gave the platform a competitive advantage, eventually propelling the Douyin to the top of the short-video sector. Douyin's case shows that market deficiencies (the lack of content creators in this case) was remedied by being able to rapidly hire a team of digital foot soldiers that could, through labor-intensive brute-force methods, generate the supply side of their intended market. Today, these "operations" teams are common across consumer platform firms in China.

Preference for general skills

The lack of employment protections in China also encourages young, educated workers to develop broad, transferable skills instead of deep, firm- or domain-specific expertise. Chinese tech companies frequently operate under an unspoken "up-or-out" policy, where employees who fail to attain a particular rank by their mid-thirties (usually 35) are quietly forced out. This practice is intertwined with China’s notoriously grueling “996” work schedule (9am to 9pm, six days a week). Younger workers, often unmarried and without family obligations, are far more willing—and physically able—to tolerate long work hours. Consequently, job security diminishes with age, and companies systematically prefer younger, more expendable workers.

On the flip side, younger workers also tend to leverage their youth to job hop, negotiating for larger compensations with each move. Some also burn out and leave the industry well before hitting their mid-thirties. As a result, employee turnover is high and leaving Chinese tech workers with some of the shortest average employment tenures—2.6 years, compared to 3.65 years in Silicon Valley.⁴

This churn means that there is little payoff for workers to invest in firm- or domain-specific skills, since most won't be able to reap its benefits in the long haul. Instead, workers hedge against obsolescence by cultivating transferrable, general skills to job hop and remain competitive. For consumer platforms, who are constantly pivoting, testing new markets, and pushing employees onto new projects, this emphasis on general skills is ideal.

Labor cost

While consumer platforms greatly benefit from flexibility and general skills among its white collar workers, their greatest advantage comes from the highly permissive labor regime that governs low-wage gig work such as food delivery, logistics, and ride-hailing. These sectors have ballooned precisely because tech companies can tap into China’s enormous migrant worker population, estimated at over 220 million.

The Hukou system further amplifies worker precarity. Migrants in urban centers, without local Hukou status, lack full access to education, healthcare, and other social benefits, forcing them to accept precarious and low-paid gig jobs provided by digital platforms. This source of cheap and precarious labor is indispensable for China's consumer platforms. Unsurprisingly, many of China's largest tech companies leverage cheap labor in some aspect of their business model.

Low labor costs likewise suppress demand for SaaS and other enterprise software in China. When office wages are so low, firms have little incentive to invest in tools that automate tasks or digitize office workflows. Instead, Chinese enterprises may often find it more cost effective to substitute human labor for software, scaling headcount rather than buying or subscribing to costly enterprise software. So as long as labor remains abundant and inexpensive, Chinese enterprises face little pressure to adopt SaaS solutions, preferring instead the flexibility and low capital outlay of cheap office workers.

Concluding thoughts

In 2021, Beijing cracked down on its homegrown consumer tech champions. Alibaba was slapped with a record RMB 18.2 billion antitrust fine, Didi was forced to delist from the New York Stock Exchange and submit to exhaustive data-security audits, and limits on video games sent Tencent into its slowest revenue growth in nearly two decades. These measures did not only rein in the tech giant's monopoly power, but also signaled a strategic move to steer capital, talent, and R&D away from consumer platforms.

Yet nearly four years after the crackdown, China’s digital ecosystem remains overwhelmingly skewed toward consumer platforms, and that's largely because the underlying labor regime has remained unchanged.

As AI becomes mainstream, China’s distinctly consumer-oriented digital economy will have path dependent effects on the diffusion of this new technology. Rather than being deployed to boost productivity and support enterprise upgrading, it may well end up reinforcing the existing logics of China’s consumer giants—maximizing user retention, monetizing attention, and exploiting the country’s low-cost and flexible labor regime.

1. See https://www.cac.gov.cn/2022-04/08/c_1651028527295115.htm

2. See Srnicek, Nick. 2017. Platform Capitalism. Cambridge, UK ; Malden, MA: Polity.

3. See https://m.huxiu.com/article/787280.html, https://zhuanlan.zhihu.com/p/574160217

4. See https://www.scmp.com/tech/apps-social/article/3002533/no-sleep-no-sex-no-life-tech-workers-chinas-silicon-valley-face