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Li Yuan 

China's tech-industry titans can look back at 2016 with pride, having reached significant milestones. They might have to go far, including beyond their home market, to find growth in 2017.

In 2016, the market capitalizations of Tencent Holdings and Alibaba Group Holding swelled to the level of China's biggest state companies, Industrial and Commercial Bank of China and PetroChina. Tencent and Alibaba also rank as the fifth and sixth most valuable publicly listed technology companies in the world, respectively, after Apple, Alphabet, Microsoft and Facebook.

Another marker of ascendancy: Ride-hailing firm Didi Chuxing Technology bested U.S.-based Uber Technologies in the China market. After a bitter and expensive battle, Uber sold its China operations to Didi. Many in China hailed the outcome as evidence that the domestic tech industry has caught up with Silicon Valley.

These were no small feats for an industry that started less than 20 years ago, when a landline phone was a luxury for most Chinese families and the government and public viewed private enterprises with suspicion.

Sustaining its success, however, is leading the industry into unfamiliar territory. After years of breakneck expansion and ferociously tweaking Silicon Valley technologies and business models for the China market, the Chinese tech world is scrounging for new customers and doesn't know what the next big thing is.

"There's no obvious forerunner to guide us, no road sign or direction to follow," Tencent's research department writes in a newly released internet-industry forecast report. Based on interviews with 63 tech leaders, including Didi Chief Executive Cheng Wei and venture investor Kai-Fu Lee, the report says the pathway ahead "is full of unknown possibilities as well as pitfalls."

Huawei Technologies, the telecommunications company and smartphone maker with the largest global footprint among Chinese tech firms, is also feeling adrift. "Huawei is at a loss of its direction," company founder Ren Zhengfei said in a speech this summer. The fast growth the company experienced by following others is slowing down, he said, now that there isn't anyone to catch up with.

Behind the uncertainty is the diminishing growth in the number of mobile internet users. With half of China's 1.4 billion people online and 92% of those accessing the internet on their smartphones, the market is looking saturated. Tech companies will have to look beyond China's bigger cities for growth: to overseas markets and rural China, as well as servicing enterprises.

Unlike Apple and Facebook, which have extensive global operations, Tencent and Alibaba have limited profiles outside China. International expansion is a priority for both. Tencent is pushing its social-messaging app, WeChat, and Alibaba its Tmall shopping platform.

Both have turned to India and Southeast Asia in the past few years, investing in the region's e-commerce, social-messaging and mobile-payment startups. Industry observers say the companies will be more aggressive in trying to reap gains in those markets.

Smaller companies such as Cheetah Mobile acquired hundreds of millions of users in developing markets by offering mobile internet tools that are popular in China. But despite the growth in users, these markets generate limited revenues, and that's unlikely to change soon.

China's hinterlands present similar challenges. Disposable incomes in the countryside are about one-third of those in big cities. The companies look at the bright side: Less than one-third of the rural population uses the internet, compared with two-thirds in urban areas, according to China Internet Network Information Center. They hope that as more people get online, more will adopt their services.

The potential is there. Local smartphone brands Oppo and Vivo built extensive sales channels that include the small towns and villages where people are buying their first smartphones. In the third quarter of 2016, while smartphone sales of Xiaomi and Apple slowed, Oppo's and Vivo's shipments more than doubled, making the latter two companies China's largest smartphone makers by shipments, according to research firm IDC.

Another less-tapped market in China is for software and information-technology services aimed at enterprises. Since 1995, over half of the value generated by venture-backed tech companies in Silicon Valley came from enterprise-facing startups, according to Sapphire Ventures in Palo Alto, Calif. In China, only 10% of venture investment went to enterprise startups this year, according to ITjuzi, a data company.

In the past, Chinese tech firms found easier pickings among consumers, rather than enterprises, which counted on an abundant supply of skilled workers. Investors say that will change in the next few years as labor costs rise further, driving up demand for tech-driven business solutions.

While waiting for these other opportunities to materialize, Tencent is courting a demographic that China's tech world generally overlooks: senior citizens. At its WeChat annual conference on Wednesday, the messaging app's product team highlighted the potential of users 55 years old and older, who currently comprise only 1% of WeChat's 846 million monthly active users. A four-minute-long video presentation about senior WeChat users ends with a 50-something woman saying: "Right now it's the information age. We seniors also need to move forward. Or else we'll get left behind."

--Follow Li Yuan on Twitter @LiYuan6 or write to li.yuan@wsj.com.

Write to Li Yuan at li.yuan@wsj.com

(END) Dow Jones Newswires

December 28, 2016 12:42 ET (17:42 GMT)

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