Chinese Innovation Takes Flight

Paper, gunpowder, the compass – China has a history of disruption that extends back thousands of years. In the digital age, however, the Middle Kingdom’s technology startups gained a reputation for quickly copying their Western peers, rather than coming up with their own world-changing ideas. All that is changing, though, and in 2016, innovation itself is increasingly being “Made in China”. China’s Internet giants are coming up with ingenious homegrown products, services, and business models, a second wave of highly successful tech innovators is emerging, and a multitude of hungry, creative startup founders are hot on their heels.   That’s a good thing, too, because these days, proof of innovation isn’t just a bragging right in China – it’s a necessity. The McKinsey Global Institute estimates that two to three percentage points of GDP growth will have to come from innovation, as measured by gains in multifactor productivity, for China’s economy to grow between 5.5 percent and 6.5 percent a year for the next decade. The push is well under way: China leads the world in patent filings and engineering graduates, and is the world’s second-highest spender on research and development. The government is supporting startups through venture capital, government-sponsored incubators, and state-run universities. Tsinghua University’s x-Lab incubator, for example, offers founders design courses, help with intellectual property and legal issues, mentoring, and access to networks of angel investors.   As with the rest of the world, the bulk of China’s startups are focused squarely on the digital world, particularly e-commerce, as the expanding Chinese middle class increasingly shops, plays games, browses social media, and orders everything from taxis to food on their smartphones. Some 89 percent of China’s 668 million Internet users access the web from their mobile phones, and online shopping is expected to grow from 10 percent of Chinese retail sales in 2014 to 15 percent by 2017. In Beijing’s bustling Zhongguancun neighborhood, which began as a state-funded project, clusters of young tech startups build their businesses, search for funding, and attempt to survive a competitive atmosphere far more ferocious than in Silicon Valley.   But the innovation isn’t simply happening among startups. China’s first-generation tech giants, Baidu, Alibaba, and Tencent, have expanded into a diverse array of businesses with no Western parallel. In online finance alone, all three Internet giants offer online banking services, consumer credit scores, consumer and business loans, insurance, investment products, and crowdfunding. No single American tech company or financial institution can say the same. While “innovations” such as creating a new online money market fund may not seem terribly groundbreaking, Alibaba’s introduction of Yu’e Bao in 2013 was revolutionary in China. Savers earning next to nothing on their bank deposits poured $92 billion into the fund in its first year.   Tencent, which ranked 55th on Forbes’ list of the 100 most innovative companies in the world 2015, has turned its WeChat messaging service from a WhatsApp clone to a rich platform featuring products and services from a multitude of different businesses. After linking their bank account to their WeChat account, says Connie Chan, a partner at Silicon Valley venture capital firm Andreesen Horowitz, “users can hail a taxi, order food delivery, buy movie tickets, play casual games, check in for a flight, send money to friends, access fitness tracker data, book a doctor appointment, get banking statements, pay the water bill, find geo-targeted coupons, recognize music, search for a book at the local library, meet strangers around you, follow celebrity news, read magazine articles, and even donate to charity.”   As for Baidu, the company has established research labs in Silicon Valley and Beijing for artificial intelligence and deep learning, teaching machines to better recognize images and speech, process language, and crunch big data. The company has also made a major push into self-driving cars, and aims to have a model on the road by 2018.   The success of China’s first wave of globally successful entrepreneurs has inspired an entire generation of young people to start tech companies, says Ramakrishan Velamuri, professor of entrepreneurship at the China Europe International Business School in Shanghai. Young people, he says, “now see entrepreneurship as a very viable occupation – not only viable but aspirational.”   Ride-share app Didi Chuxing, for example, has prospered by developing a business model particularly suited to crowded Chinese cities where car ownership is limited. The company’s Hitch service allows commuters – rather than drivers who work for Didi – to upload their routes and pick up others going in the same direction. Riders contribute gas money and toll fees. “This is…invented in China, not elsewhere,” Didi Vice-President of Strategy Stephen Zhu said in an interview at Credit Suisse’s 2016 Asian Investment Conference in April. Apple recently invested $1 billion in the company, a move CEO Tim Cook said was intended to help the company better understand the Chinese market.   And no wonder: At the end of 2015, Xiaomi’s cheap, high-quality smartphones claimed the largest share of the Chinese market. But Apple isn’t the only tech giant that might learn a thing or two from its Chinese counterparts. DJI, a world-class drone manufacturer, was one of the first companies to make unmanned aerial vehicles affordable for hobbyists and is expanding into commercial applications. Wu Yibing, the head of Singaporean sovereign wealth fund Temasek’s China operations, said at Credit Suisse’s Asian Investment Conference that innovation is spreading to electric vehicle production, artificial intelligence, healthcare, and innovative drugs.   Challenges remain. Vincent Chan, Credit Suisse’s Head of China Research, pointed out that while China is very efficient at churning out university graduates and scientific papers, it still struggles at turning research into viable products such as medicines. The government’s top-down approach to assigning national research priorities also needs to change to a more open, collaborative process that would facilitate serendipitous breakthroughs, Chan said. Strengthening protections for intellectual property is also a must.   At the end of the day, China’s new wave of startups is developing products tailored for the country’s enormous domestic market, and the highly competitive atmosphere forces constant adaptation, innovation, and creativity. Innovation in China is no longer simply an aspiration; it’s a well-established fact.