The Insider’s Guide To Cross-Border Innovation In China
How China Transformed into One of the World’s Most Valuable Startup Hubs, and How Corporates Can Reap the Rewards
In a globalized world where geopolitical dominance and economic hegemony is up for grabs, companies are looking for the best locations to foster new ventures and innovation. Silicon Valley is no longer the sole beating heart for innovation, as new hubs have sprung up across the world in cities like Beijing, Shanghai, Tel Aviv, Berlin, and more.
This worldwide embrace of startups and technology has created the new phenomenon of cross-border innovation. In this article, we will define cross-border innovation as one of two things: a corporate testing innovation with a startup in a different country, or a corporate testing innovation with a foreign startup in the corporate’s own country. Cross-border innovation can involve more than just corporates working with startups, but for the purpose of this article, we will purely stick to the idea of cross-border innovation between corporates and startups.
While there are many startup hubs across the world, China has certified itself as one of the best countries to practice cross-border innovation. China’s governmental forces, combined with the power of its people, have helped certify China as one of the best places for trailblazing startups and corporates to innovate.
The Monumental Force Behind It All
In the 1950’s, the US government established the Small Business Investment Act, which gave preferential tax treatment to venture capitalists, and certified over 600 different venture capital firms. The Small Business Investment Act was one of the most important catalysts for US tech dominance, which lit the fuse that enabled Silicon Valley to develop into one of the most important and successful tech centers in the word.
Almost 70 years later, China is now hot on Silicon Valley’s heels (and is predicted to surpass the US in venture capital commitments by 2020). In 2016, China’s venture capital commitments exceeded USD $50B, which just about matched US fundraising in 2016. Just as the US government passed laws and implemented measures in the past to make American soil fertile for startups and technology, China is now doubling down on its efforts to reign supreme, passing laws and championing initiatives to ensure that its megacities, like Shanghai, Beijing, and Shenzhen, have the perfect conditions to battle for tech hegemony. The two biggest initiatives leading the charge for China’s dreams of tech hegemony are Made in China 2025 and Internet Plus. Made in China 2025 is the Chinese government’s 10-year plan aiming to hypercharge China’s high-tech manufacturing sectors by providing direct subsidies, investing in and acquiring foreign companies, mobilizing state-owned enterprises, setting national strategies, and amplifying 10 different high-tech industries.
This 10-year plan spurred Li Keqiang, China’s Premier, to introduce Internet Plus in 2015, a separate 5-year government plan that has brought economic reforms, tech-friendly policies, and created a fertile environment to start and invest in new businesses. In just two years after the plan was introduced, the State Council and local governments executed a total of more than 400 measures aimed at making China incredibly friendly to innovation and entrepreneurship. In addition, USD $4.4 billion was added to government budgets to invest in startups and technology. This collection of tax breaks, red-tape snips, and generally tech and foreign-friendly policies that were born from both Made in China 2025 and Internet Plus have attracted more startups, private equity firms, and venture capital investors to China.
The Audience Supporting the Charge
These initiatives and policies, along with China’s massive rise to power that commenced in 1978 with the advent of Deng Xiaoping’s economic reforms, have validated China as one of the most promising places for innovation in the world. Adding fuel to the fire, China’s market scale and its consumer power are also powerful beacons of hope that attract thousands of world-class startups to its watering holes.
China’s enormous market and user-adoption rates dwarf those of any other nation. In 2018, out of China’s population of 1.4 billion, there were 780 million smartphone users. The next two runners-up were India and the US, boasting smartphone users of just 375 million and 250 million respectively — fortifying China as the undeniable goliath of the digital age. China’s internet users alone make up the combined populations of the United States, Russia, Japan, Germany, France, and the UK. This mind-boggling reserve of internet and mobile technology users demonstrates the massive capacity and the market with which to test new technologies and ideas.
However, not only is the Chinese market enormous, but its users are highly receptive to new technologies, and are eager to try out new services. For example, cash payments are almost a myth in China, where the majority of Chinese society has embraced mobile payments through apps like Alipay and Wechat pay. Bike-sharing, P2P lending, and many other forms of new services have also all had their hey-days in China, demonstrating the Chinese population’s propensity to try new things. With apps like Tiktok and PubG that were grown in China and have now voraciously taken over the world, the world’s largest population has demonstrated that the Chinese consumer is a powerful advantage.
The Origins of Cross-Border Innovation in China
The efforts of the Chinese government and the tech-friendly attitudes of the world’s biggest population have proved their worth. In 2018 alone, China created a unicorn (a private company valued over USD $1B) every 3.8 days: a total of 97 companies with a combined total worth USD $178B. But now, not only are startups flocking to the Middle Kingdom, but so too are Fortune 500 companies and multinational companies, who have already established offices and formed partnerships in China to challenge their products, services, and ideas internationally. As mentioned previously, cross-border innovation between corporates and startups are seen in two specific ways. The first example entails companies across the world testing innovation with startups in China (like a company in Switzerland running a pilot with a startup based in China). The second example entails a company in China testing innovation with foreign startups in China (like a corporate in China running a pilot with a Brazilian startup based in China).
In both examples, however, the startups who are most-likely involved in cross-border innovation in China are usually not Chinese. What’s that, you say? Wouldn’t it be more advantageous to work with Chinese startups in China?
In many cases — no — it would not be. Here’s why:
The Majority of Chinese Startups Do Not Service Corporates
China does not have ample experience with, and has never been necessarily fantastic at, B2B business models. While B2B investment has been growing in China for the last few years, China is still far behind the levels of B2B investment in the US and Europe. Traditionally, Chinese entrepreneurs never bothered setting up B2B businesses to service corporations because Chinese venture capital firms almost never funded B2B startups. In turn, B2B startups were rarely funded because Chinese corporates never wanted to pay for services or innovation. Chinese corporations either didn’t see the value in external services, or believed they could do it themselves. Today, with the abundance of VC money floating around in China (a record high of USD 40 billion in 2017), Chinese startups have the ability to focus on their core goals, and don’t need consider other funding alternatives, like working with corporates. Additionally, many tech giants like Tencent and Alibaba already operate internally-competitive models that pit small teams against each other to create the most successful products and services. With models like these, startups are not necessary.
Because of the lack of funding for B2B startups, enterprise solutions and software for corporations were not frequently created in China. Most of the B2B unicorns in China fall into two key areas: automotive companies (electric vehicles and unmanned aerial vehicles) like Momenta, and artificial intelligence with public service applications, like SenseTime. This demonstrates that the most successful B2B companies in China are all closely related, and are narrow in scope. This software-adverse mindset is even reflected in China’s consumer population today. For example, China is the world’s number 1 market for gaming, but all of the revenue comes from in-game purchases, as consoles and gaming software were banned until just recently.
The culture is quickly changing, but enterprise solutions and B2B business models in China remain limited. For example, of the 91 unicorns that existed in China in January of 2019, only 18 of the companies had a B2B model (20%), while 59 of the companies had a B2C model (65%).
Compared to the US, from the 169 unicorns as of January 2019, 65 (38%) were B2B and 86 (51%) were B2C.
The B2B market in China is mostly fulfilled by foreign startups. While the number of local Chinese B2B companies is starting to grow, a majority of the startups working with corporates in China are still foreign. It is important to note, however, that we are not promoting corporations to only work with foreign founders and startups in China; corporations can receive equal (if not more) value from working local Chinese founders as well. Instead, we are using data to point out the scarcity of local Chinese B2B companies. The chances are that corporations will partner with foreign founders when innovating in China.
How Corporates Can Benefit
Currently, B2C companies significantly outnumber B2B companies in China. This void of enterprise solutions offers massive opportunities for startups and corporates to challenge their assumptions, products and services. There are not many better markets to enter than those which have the least number of players. Thus, for corporates across the world looking for locales and methods to test B2B innovation, there is no better place in the world than in China.
There are multiple ways that companies can get in on the corporate innovation action that is currently rippling through cities like Shanghai, Shenzhen, and Beijing. Some companies choose to set up innovation teams, based in China or elsewhere, whose sole purposes are to identify and work with disruptive, innovative startups and solutions that can hopefully align with the company’s future goals. These teams can then work with other business units within the company to understand the different challenges and goals of each BU. These teams can then partner together to start initiatives (with buy-in and commitment from each BU and from senior leaders) with the goal of achieving something that couldn’t be achieved before. Some innovation teams partner with relevant players in the innovation space, whether sourcing platforms, corporate innovation firms, or other innovative companies. Other companies take less structured approaches, and instead look for innovation opportunities from a broad range of departments or from top-down C-Suite directives.
While every company is unique and has different strengths, needs, and processes, it is almost always crucial that corporates find relevant innovation partners. Partners can offer valuable expertise in many different areas, like deep knowledge of certain verticals and geographies. At the same time, partners might also be more adept at communicating and working with startups, which can ameliorate relationships formed in the process. The idea here is to bring a partner different from your own company to the table, who complements your skillsets and brings a different perspective. With the right partners, corporate innovation has a chance to truly shine.
China truly has validated itself as one of the world’s best sandboxes for innovation. With massive support from the government, buy-in from a burgeoning population, a hotbed of cutting-edge startups looking to shake the world, and fantastic corporate innovation partners, there has never been a better time to initiate cross-border innovation in China.
Contact firstname.lastname@example.org with all Corporate Innovation enquiries for SOSV and Chinaccelerator. Please stay tuned for our next Chinaccelerator: Corporate Innovation article.