From Copycat To MAKER
China’s Nationalist Agenda Heats Up
Few experiences can compete with the awe and wonder inspired by a visit to China. The magnitude and scale is beyond anything familiar here in the United States to the point that touching ground in JFK, LAX or SFO all feel infrastructurally and technologically dated. And, the old school stereotype of a lethargic state-run Communist China, well that just isn’t true. China is not without its problems and its officials still love to meddle, but even its inefficiencies are playing to the advantage of enterprising entrepreneurs.
China sits at the front of a global frontier of new technology and the chance that your fiercest future competitors will be Chinese is here. $77bn in venture-capital investment was made in China between 2014 and 2016 compared with $12bn between 2011 and 2013. China has 89 unicorns (startups valued at more than $1bn or more) with a cumulative value of $350bn. And, China boasts 609 billionaires compared with 552 in America.
China is not the first country to industrialize, but that China industrialized so quickly, and at such scale has taken even the best economist by surprise. There is contemporary wisdom to be gleaned in the economic reform China officially began in 1870. This same reform can be credited for inciting the industrial revolution that has quickly taken the country from producing textiles, laser pointers, and cigarette lighters to being a data driven powerhouse leading the front lines of technology. To top it off, China is fueled by an educated, skilled, and passionately diligent workforce that is highly optimistic for themselves and their country.
For some time prior to the 1950s, China had experimented with passing land ownership from landlords to peasants. But it wasn’t until the 1970s that fears of capitalism were quelled and land reform accompanied by assisted agriculture officially took off. The peasant class now held the deed to the property where they lived and worked. This provision, allowing people to hold deeds, spurred a massive, previously idle workforce to transform into household farmers and the provision ultimately served as the catalyst for the industrialization of China.
Agriculture was found to be incredibly responsive to labor intensity when operated like a home-style garden. As long as more and more labor could be supplied (a problem China had no problem with), more and more food could be produced at higher yields than what was possible on a commercial farm. This resulted in a fabulously even income distribution under the umbrella of a low-cost economy. This massive, income-generating labor force simultaneously created high demand for basic household goods, which in turn kicked off an emphasis on manufacturing to support the laboring domestic market.
As demand for consumer goods took off, so did demand for factory workers as manufacturing became the best way to move workers out of the agricultural economy and into new industries. When you have a low-skilled workforce it is much easier to train them to work in factories, rather than in service jobs, because so much of what needs to be done is embedded in the machinery and equipment. Coupled with smart finance that supported small scale agriculture and manufacturing, it was the combination of these elements that kicked into high gear China’s boastful year-over-year average annual GDP growth rate of 10%, while the United States and other countries floated around 5% to 6%.
Shenzhen was a market town with a population of 30,000 until 1980 when it was set apart to be the first Special Economic Zone (SEZ) in China — five years later Teddy Ruxpin was in our schools making tech our new best friend. Teddy Ruxpin symbolized the beginning of a technological revolution that would forever impact entrepreneurs and shape the landscape of industries and consumers worldwide. Fast forward to 2017, and the city of Shenzhen boasts a population of nearly 15 million, has over 200 known makerspaces, and is a recognized mecca for the latest evolutions in VR, Internet of Things (IoT), and connected devices.
To put things into perspective, one makerspace I toured (Galaxy Incubator) has a $16 million onsight buddhist temple. The working space is over 215,000 square feet, will host over 100 startups, and will be filled without vacancy by revenue-generating startups before the end of 2017.
China’s prowess comes in the form of densely populated urban environments inhabited by an educated workforce that continues to be supported on low, albeit rising, wages. These concentrated networks produce powerful scale economies for entrepreneurs setting up shop in China and, at the same time, provide huge cost and quality advantages when it comes to technological innovation and production. Unlike in the United States, the infrastructure supporting China’s scale is brand new. And unlike in Europe, a common language is shared across a large geographic area.
Cutting edge infrastructure in China can be attributed to what is known as technological leapfrogging. Developments in both mobile and Fintech technologies provide prime examples. Take payments, for example. In the United States we have been using VISA and AMEX merchant networks since China parceled out land to its peasant populace. FinTech innovation in the US has come by way of PayPal, SquareSpace, and Stripe. Imagine if these later innovations were the first and only payment services we knew? What if the sunk cost of archaic systems didn’t exist or didn’t have to be overcome for a new, more efficient system to take its place? So is the case in China, where most street vendors wouldn’t think to take a credit card, rarely take cash, and accept mobile based QR code payments as a standard.
In 2016 mobile payments in China topped $5.5 trillion and have since risen. In the United States, this same number was just $112 billion. Ant Financial, formerly Alipay, is the PayPal of China and the largest FinTech firm in the world. The company has an estimated valuation of $60 billion and is growing in a country where only 16% of the population holds a credit card and 96% of e-commerce sales take place without a bank.
There are two big reasons why adoption of technology and the infrastructure to support it has accelerated at the pace it has in China. One is the lack of incumbent systems that allow China to rapidly become cashless. In the United States, retailers are ladened with antiquated credit and debit card processing procedures that on top of being slow and inefficient require their own hardware and dependent point-of-sale (POS) integrations.
Enabled by Tencent’s WeChat, China has been able to avoid primitive retail payment systems and offer QR code enabled payments directly through the WeChat app. Alipay enables similar payments, processing 170 million transactions a day with over 400 million active users compared to PayPal’s 180 million active users and Apple Pay’s 12 million.
The second reason is China’s inefficient state-dominated industries that lack acceptable levels of customer service. However, where government has failed, it has been very willing to accelerate innovation by supporting new ventures. Entrepreneurs, in turn, have shown wild success deploying business models enhanced by new technologies at a faster pace than incumbents and often do so quicker than counterparts in other, more developed markets. Recent propaganda from China’s head of state, Xi Jinping, indicates a renewed desire to support the current trajectory while preserving traditional Chinese culture and astutely managing Xi’s power.
The Communist Party Congress meets every five years and began their most recent National Congress last week. President Xi Jinping opened with a pledge to build a “modern socialist country” that will remain open to the world. The most powerful leader since Mao also stated that in this, China’s ‘new era’, he would relax market access for foreign investment, expand access to its service sector, and deepen market-oriented reform of its exchange rate and financial system, while at the same time strengthening state firms.
A prime example of the market-oriented reform Xi speaks of is seen in China’s announcement to eventually ban vehicles with combustion engines. A change was also made to allow venture-backed startups without previous carmaking experience to enter a market previously owned by incumbent firms with subpar outputs. Not only is China way ahead of the United States’ electric-vehicle (EV) registrations, but also in the number of charging stations.
Don’t get the wrong impression, Chinese regulators aren’t turning a blind eye. Just last month, Chinese officials began pushing for the largest tech companies to offer the state an ownership stake and a direct role in corporate decision-making. The stake would be around 1% and come with an appointed government official that would have a say in corporate operations. Two companies have followed suit thus far, mobile news site Yidian Zixun and Beijing Tiexue Tech, which operates a patriotic news site. More significant tech companies like Tencent Holdings, Weibo, and Youku Tudou (now part of Alibaba) have yet to comment, and corresponding share prices seem unaffected by the news.
Arguably, one of China’s greatest advantages, above all else, is optimism. Traveling between China and the United States makes the contrast striking. In the United States, the general sentiment has a negative cloud of doom and gloom, while in China, even the lowly street worker has an approachable charm. The impression given across the board in China is that not only can China do anything, but that its people feel empowered and their contributions validated to attempt to do anything down to the lowest in rank.
If you are more interested in the global economy, the United States is still the best place to be. However, if you are more interested in rapid growth, China has alluring prospects. Silicon Valley is rediscovering itself under greater public and government scrutiny. The wizard behind the curtain has been unveiled, and the utopian ideals touted by many of Silicon Valley’s founders have long been laid to rest (see NY Times — Silicon Valley is Not Your Friend).
Where Silicon Valley lags and weighs down national averages, new tech hubs like Salt Lake City, Utah, gush of optimism and innovative new technologies that are leading world-changing paths of economic growth. Utah is home to five startups valued at over $1 billion; and CB Insights reports that $2.6 billion has been invested into the top 10 most well-funded businesses. Lessons of community leadership, a culture of innovation, and powerful visions void of limits are proving new ecosystems of rapid, sustainable growth that compete at a global scale.
Even greater efforts will be required to compete at the scale China is rising to. However, China is still averse to risk-taking abroad, and political tension is rising as North Korea continues to stir up eastern tensions. Opportunity for the globally minded leader and entrepreneur in the United States is great, and the need is real for all those that hear the call to band together in a collaborative step forward out of isolation and into a global community of makers. #buildhackplay
Resources:
The Investors Podcast — How Asia Works by Joe Studwell
L2inc — The Chinese Form of Innovation
Reuters — China’s Xi lays out vision for ‘new era’ led by ‘still stronger’ Communist Party
ISPOS — What Worries the World — July 2017
Seeking Alpha — China pressing for state investments in key tech firms
