Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
GT: You have written three books: The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia, The End of Cheap China: Economic and Cultural Trends that Will Disrupt the World, and The War for China’s Wallet: Profiting from the New World Order. Does the end of “copycat China” and “cheap China” mean that innovation has become major trend happening within Chinese companies? How might this affect other major technological powers, especially the US?
Rein: In 2014, I published The End of Copycat China, where I predicted that China was going to become an innovation powerhouse. At that time, Silicon Valley criticized me heavily. They said I was crazy. They said that the Chinese were not creative, were culturally unable to innovate, and that the Chinese government stifled innovation.
But six years after I published the book, it’s quite clear that China is an innovation powerhouse. When it comes to mobile services, it’s three-plus-years ahead of the US, and maybe five years ahead of Western Europe. Because of China’s lead in mobile services innovation, we were able to better contain COVID-19. For example, in China, almost everybody uses WeChat Pay or Alipay. It’s a cashless, contactless society. In the US, people are still using cash and credit cards, which may also spread COVID-19. The US still has a lead in semiconductors, with platforms like Android and IOS.
But that’s not because China can’t do it. It’s because there are so many low-hanging fruits. Why would China invest in semiconductors when it could just buy American semiconductors and focus on making money with mobile services innovations? China clearly was looking for a win-win trade policy with the US. Chinese companies were not stealing IP. They are willing to pay for American technology. It was easier and a win-win situation for everyone.
But because of the Trump administration’s trade war and containment policy, China has now begun to focus on innovation with semiconductors and operating systems. It’s not easy. It will take five to 10 years. But we see China has set up a semiconductor fund of about $30 billion. We also see that Huawei is focused on its HarmonyOS. Chinese companies now have to focus on self-reliance. And it would be stupid for the US to think that Chinese cannot innovate with semiconductors or operating systems.
I think the Trump administration is shooting the US in the foot. American tech companies are now not able to sell to their biggest customers in China. My firm works with many American tech companies, and we develop their strategies. They are furious about Trump’s policies because they are now losing their biggest market. And they are scared to openly criticize, because they worry that Trump will attack them on Twitter and get his hawkish American politicians to boycott their products.
The plan to ban immigration by US President Donald Trump will be mostly hurt US tech companies who cannot recruit talents anymore, says business analyst Shaun Rein to the BBC. "Now, with the immigration ban, more top Chinese, Indian and other foreign talents will seek jobs in tech hubs globally like Shenzhen, Seoul, and Bangalore rather than Silicon Valley," Shaun Rein adds.
The BBC:
According to Pew Research Center, almost half of immigrants live in just three states - New York, Texas and California, home of Silicon Valley, where tech giants such as Google, Facebook and Cisco are based.
"Trump's immigration ban will hurt US tech companies' ability to recruit the talent necessary to remain competitive and focus on innovation," said Shaun Rein, managing director of the China Market Research Group.
"Instead of staying in America and building America's tech prowess, top talent will return to their home countries and build the next round of innovation powerhouses."
US companies are battling it out with Chinese internet giants such as Alibaba and ByteDance in the field of innovation.
"Now, with the immigration ban, more top Chinese, Indian and other foreign talent will seek jobs in tech hubs globally like Shenzhen, Seoul and Bangalore rather than Silicon Valley. They will push invention and innovation in software, hardware and in semi-conductors," Mr Rein added.
In the search for answers to the question why Chinese companies do so well, corporate analyst William Bao Bean sees one key difference with Western competitors: many Chinese companies skipped the middle management and organized internal structures fundamentally different, he explains in VentureBeat.
VentureBeat:
On the ground level of management, according to SOSV’s William Bao Bean, “China has performed well without middle management because they have innovated a distributed management model within a company as opposed to the hierarchical western model. Companies like Tencent aren’t run top-down: they are made of hundreds of ‘small companies’ within a large platform, each with its on product manager that acts as a CEO. Western companies are a giant pyramid while Chinese companies are many pyramids grouped together to make a larger one.”
Innovation, and its related funding, did get a solid footprint in China over the past few years, making even startups in Silicon Valley jealous. And we can expect more, tells William Bao Bean, managing director of China´s largest incubator ChinaAccelerator, in the New York Times.
The New York Times:
Twice as many Chinese investors have participated in $100 million or larger fund-raising rounds in China than American investors have in China. Already, that money has helped numerous start-ups reach valuations of $1 billion or more; these companies are now called unicorns. In 2014, 13 new unicorns were created by private investment in Asia compared with 30 in North America, according to CB Insights. So far this year, Asia has generated 11 unicorns to North America’s 19.
“Industries that will be huge are e-commerce and the sharing economy, and you’ve got people writing huge checks in order to be big players in the years to come,” said William Bao Bean, a partner at SOSventures and managing director of Chinaccelerator, which invests in and mentors software start-ups.
China-investor Marc van der Chijs visited Shanghai for a board meeting of Dianrong, a financial internet firm, and summarized a few observations on his weblog. Company valuations are going through the roof and how they start to buy R&D outside China.
Marc van der Chijs:
Company valuations are going through the roof, especially private company valuations. When Tudou raised its first round in late 2005 valuations were probably 10% of what they are now. At one time Tudou raised the largest round ever for a Chinese company, which was $57 million at that time. Now that number is just peanuts and many companies have raised hundreds of millions in later stage rounds.
Although in Silicon Valley valuations are also extremely high (e.g. Uber @ $40 billion and Snapchat @ $19 billion), I have the feeling that Chinese tech companies tend to get ever higher valuations based on the same numbers. I have no data on this, but that’s just what I hear when talking to local VCs. One reason may be that the Chinese market is potentially much bigger than the US market, although most Chinese have a lot less earning power. And for Chinese companies it may be easier to go abroad (with the right management teams) than it is for US companies to enter China.
A relatively new trend is that Chinese companies are now actively buying R&D from outside China. With growth rates going down to about 7% this year they need to find other ways to grow faster, and foreign intellectual property is a good investment for that. We see it a lot at CrossPacific Capital and several of our portfolio companies are in discussions with Chinese buyers. Chinese companies are especially looking for companies that can deliver revenue right away, so products that can immediately be integrated or sold in China.
The valuation of these companies mainly depends on the current product portfolio and less on the value of the IP for future products. Chinese business men want to see results now, nobody knows what will happen in 4-5 years so that’s less important. Generally valuations for these companies are a lot higher in China than in North America, meaning that if you can identify the right products or technology you can make a good return on your investment. However, valuations are not as high as Chinese Internet and tech companies.
Q: Talk to me about the changes that are afoot in the Chinese economy.
A: It would be a mistake for Silicon Valley companies and American companies in general to underestimate the rise of innovation in China. It's true that over the past 30 years, China had mostly been a copycat nation. A lot of people have said it's because the Chinese culturally can't innovate or the government stifles innovation. Those were factors, but it was really concerns about intellectual property protection and a lack of funding for research and development that stopped innovation. And there was so much low-hanging fruit -- either manufacturing something for export or copying something from the West -- that you didn't need to focus on innovation in order to get wealthy.
Now that the economy has changed and it's getting harder to make money in China, a lot of companies are being forced to innovate just to survive. And what we've seen in the past six months is that some of the early innovators, like Tencent or Alibaba, have made a ton of money. That's created a wholesale change among VCs and entrepreneurs. They're now saying, "We can make more money by being innovative than by copying."
Q: What role have venture capitalists played in the shift?
A: Ten years ago, the VCs didn't know how to operate in China. They were scared of the country. They would say, "Let's invest in the Google of China or the Groupon of China." They wanted to minimize risk and basically recreate what worked in the U.S. and back Chinese entrepreneurs who spoke English well. Now, in just the past two years, Chinese entrepreneurs have become VCs for the first time, and they're looking to invest in innovation.
Q: Will Chinese entrepreneurs' new approach help or hurt companies in the valley?
A: There's a threat in the mobile space because some Chinese companies are light years ahead of what a lot of the players in Silicon Valley are doing. Many of the dominant players in Silicon Valley were made for a PC environment. When they shifted to mobile, they had to transport the experience, and the result wasn't always great. In China, companies like WeChat (a messaging app) were built with the mobile interface from the very beginning because many Chinese have never accessed the Internet through a PC. You'll find a security guard who makes $100 a month, and he's accessing the Internet all day from his mobile device.
However, there are also great opportunities for Silicon Valley companies. Some Chinese tech companies that originally were copycats are cash-rich and looking to buy innovation by investing in and acquiring Silicon Valley and Canadian startups. And the valuation they'll pay is often higher than an IPO.
VC William Bao Bean started as managing director of ChinaAccelerator, one of China´s most active breeding place for startups. ChinaAccelerator offers an international bridge for those mostly overlooked starting, smaller tech firms, he tells TechinAsia.
TechinAsia:
A lot of people around the world are now taking notice of Chinese web giants like Alibaba and Tencent. But China’s startups are generally overlooked and have little chance of breaking out onto the world stage. China’s most active startup accelerator, dubbed Chinaccelerator, is trying to change that. “It’s a bridge, internationally,” says Chinaccelerator managing director William Bao Bean. “It’s the Silicon Valley experience in Shanghai.”
Shanghai is China’s “most outward-facing city,” he adds, which makes it a good fit for the program. But Chinaccelerator, which started in 2009, was initially based in Dalian, up in China’s northeast, not too far from the North Korean border. It headed south to warmer and more cosmopolitan climes earlier this year; the program’s fifth batch of startups, which graduated in May, was its first out of Shanghai. Now it’s midway through the sixth batch as the participating teams build up to the demo day towards the end of November.
“Demo day is not the finish line,” says Bean. He believes that it’s “tough for startups to connect with brands,” even though for many it would be very beneficial to have such strategic partnerships. So Bean and the Chinaccelerator team place an emphasis on helping startups connect with major companies, even long after the startup teams have flown the coop.
But SIP still has some way to go before it can rival Silicon Valley, according to William Bao Bean, a venture capitalist with Singtel Innov8 in Shanghai.
"You need to attract talent and create a culture, it's not the easiest thing in the world," says Bean. "The government can do a lot and Suzhou has done the obvious things, but it's the software, the people side, that is important and it still has a way to go there. Building up a Silicon Valley is a step-by-step long term thing."
