The next years will be the years of China tech

In the tech industry, China has been more known historically as a follower than a leader. But we have been underestimating them for too long.

As you may probably know, China is one of the most active markets in tech right now. But for most people, “don’t forget about China” is the anecdotic address you hear from that guy who just wants to show off.

They have built their reputation on their capacity to clone American products, but it is wrong to think that they are only defined by that.
All the new Facebook features you have seen in the last years? They are copycats of WeChat’s, China leading messaging app. Facebook released Moments last year while WeChat’s exact same product launched 3 years ago under the same name.

Chinese people use WeChat to communicate, watch news, shop, manage their finance… It is now more important for companies to have a WeChat account than a website. And it is what Messenger is supposed to become in few years.

A report by KPMG ranked Shanghai as the strongest technological hub competitor to San Francisco and even a Chinese Bay Area between Guangdong, Hong Kong, Zhuhai and Macau is slowly emerging.
At a macro level, China is indeed innovating and I am confident the next years are going to be Chinese tech’s.

Three reasons: consumers are more advanced in their digital habits, companies are much more sustainable, and government has made it a priority.

Chinese consumers really are tech-friendly

We may think that because of our local Google or Apple our digital habits are more advanced than the Chinese, but it is quite the opposite.

The Chinese smartphone market is nearing saturation like us. But the proportion of mobile internet users is considerably more important. 90% of internet users use the mobile phone to access the Internet.
More importantly, 20% are mobile-only, while in the U.S. it shyly concerns 5% of the population. They also have a notably higher penetration rate for smart TVs and wearables.

Of course, it is just a matter of time before the rest of the world gets to those numbers. Still, Chinese consumers are a step ahead in their digital habits and it enables their companies to think beyond what is released by U.S. companies and their early market.

Hardware companies need to differentiate

As smartphone sales inside the country are getting to saturation, companies are looking at opportunities in overseas markets. But out there, in the aggressive world of everyone suing everyone, the business model of copycats is dangerous.

Lack of patents makes commercialization extremely delicate. Companies have no choice but to innovate and partner with local companies, as Xiaomi did with Microsoft by buying about 1,500 of its patents last year.

The new bezel-less Mi MIX by Xiaomi

Also, in the high-competitive world of smartphones in China, the explosion of brands has made differentiation hard. What we are seeing now is that positioning is key to survive.
Companies are now trying to focus on specific niches: Oppo and Vivo are designed for photographs, Huawei for business professionals, and Xiaomi is experimenting towards special designs and features

The next years will be featuring a real globalization of Chinese smartphones, which means that they are ready to prove that they provide not only the best manufacture but also the best technology.
And we can already see the premises: Huawei unveiled a couple of months ago the Mate 9, using machine learning algorithm to optimize the phone’s computer and resources.

As Microsoft’s top executive Harry Shum said, China will “lead the world in producing artificially intelligent hardware” … It is not surprising that they are building that many relations with Xiaomi.

Software companies are real giants

In terms of software, the market is dominated by three major internet giants: the e-commerce platform Alibaba, the social network Tencent and the search engine Baidu. And those Giants are real Giants.

Size will not be my point of focus here. American software companies aim to a global presence while most of the Chinese are restraining themselves (although Alibaba today remains more influent than Amazon).
Instead, it will be more in term of capacity to monopolize markets, with more sustainability than any American tech company.

A Taobao village person

Alibaba in the past few years has established an incredible control over its value chain from the top to the very end of the production chain.

Their Taobao marketplace, which allows even micro businesses to reach customers across China, generated what we call now “Taobao Villages.”
Taobao Villages are precarious villages where the main activity is manufacturing products to be sold on the website. It has now become key to the development of China’s lower class and strengthened the relationship with the government.

The government actively allocates resources to feed Alibaba’s growth, while benefiting from the help of the economy-driving strengths of the company at a geopolitical level.
No American tech company has been that much politically backed and in control of its value chain.

WeChat’s panel of service (and more…)

Tencent’s WeChat is as impressive, owning 90% of the Chinese population using mobile internet. It is unlikely that you can now live in a city without it. Even the street sellers use WeChat Wallet for payments.

A report by venture capital firm Andreessen Horowitz says: 
WeChat is actually more a portal, a platform, and even a mobile operating system depending on how you look at it. Its open platform allows programmers to embed [individual apps] — for hospitals, football clubs and even local restaurants, millions of mini apps in all. This has meant WeChat is more like a browser for mobile websites, or arguably, a mobile operating system complete with its own proprietary app store.
This is even more relevant as the messaging app just launched ‘Miniapps’, an Apple Store killer letting users interact with inside apps without downloading them.

WeChat has been completely integrated into the general consumer payment options as opposed to Apple Pay or Facebook Chatbots (who can pay his electricity bill through Apple Pay ?). It has now become almost impossible to compete with it. 
Even government is actively using its data and monitoring it. It is on a whole different level than Facebook, which is struggling to keep its users active and have to deal with aggressive newcomers.

Finally, Baidu is the only Chinese actor that is not ahead of his American counterparts in terms of innovation.

However, it seems to have everything it takes to succeed. Indeed, it has achieved a dominance like few companies in history ever did. More than 99% of the Chinese internet population use Baidu, while only 70% of the American population use Google.

The company was historically relatively immobile compared to the other giants. But, the situation unfroze a few years ago with the perspectives offered by artificial intelligence (AI). Since then, they have been aggressively positioning on every step, from research and funding to design.

Andrew Ng, Baidu’s talent magnet arm

In addition to this, Baidu has managed to drive a strong brain drain.
The U.S. has historically been known for sucking up talent but the flux is now inverting, as the world top class researchers are turning to Chinese companies and especially to Baidu.

In 2013, famous deep learning leader from Google and Stanford professor Andrew Ng joined the company as Chief Scientist. Since then, he has been the Baidu magnet, catching the best of the AI research sphere in their new Silicon Valley lab in order to form world-class expertise groups in every major AI area before his departure. By attracting top talents, Baidu is betting on being the forefront of innovation.

2017 might be the first year we could see the results of all these efforts. 
Indeed, last year for the first time, China has published more reports on deep learning than the US.

With their strong expansion towards AI applied to hardware, software, smart cars (Faraday Future, LeEco…) and more, Chinese companies may take the lead sooner than we might think.

Government is offering its full support

To counter China’s slight economic drop, the government is betting on technology. In 2016, great effort has been made to turn the country into the world technology leader.

China Premier Li Keqiang announcing full support for innovation for the next 5 years

Strong financial support is provided to science research: China’s official representative explained in March their 5-years plan with a scientific investment rising to $41 billions (+9%) and a general reduce of scientists pain points.

From ten years ago, the country’s R&D spending increased by 20 percent in average each year.
With the recent budget cuts announcements on research funding in the U.S., the American dynamic may slowly sink in comparison.

Also, in recent years, the government has also launched a number of programs helping the science sphere to grow. Supports to scientific projects with the National Science Fund for Distinguished Young Scholars attract established professors with the Chang Jiang Scholars Program and bring back top researchers with the Thousand Talents Plan.If the approach has not proved to be very successful the past few years, it is now paying off.

It is anticipated that:

  • China’s new supercomputing system’s Sunway TaihuLight was officially named world’s faster computer at the International Supercomputing Conference last June.
  • China’s National GeneBank opened last September, containing more than 10 million bio-samples which will help for working on human health research.
  • China National Space Administration announced last month ambitious short to medium term projects like a Mars landing by 2021.
  • They are making the space conquest a priority and providing the necessary resources for it as opposed to other leading countries in the field.
  • China is the world leader in renewable energy, owning five of the world’s six largest solar-module manufacturing firms, the largest lithium-ion manufacturer, wind-turbine manufacturer, and largest electricity utility.
  • They are also the world’s largest investor in domestic renewable energy, spending a calculated $150B in 2016, more than twice as much as the U.S. and five as the UK. With the U.S. administration shutting down its environmental support, China is expected to drive the sector.

In the U.S., despite the close relationship between tech giants and governments, market economy and administration remain separated. It is not comparable to China where state officials have a dominant role in the economy, and can personally influence the evolution of new technologies. Anonymous sources have revealed that the government may soon officially benefit of representative board seats in major local Internet companies. As a foreigner, it is difficult to know if collusion or collision dictates the relations between the private sector and the Party state.

In any case, its appetite for innovation is a rejoicing and central point for the global development of the tech industry, which benefits from notable competitive advantages from government facilities.

China’s Midea acquired 95% of the shares of the German robotic company Kuka to be a part of China’s Industry 4.0 vanguard despite international critisism

This aggressive protective business growth is even starting to worrying Western countries.

A plan called “Made in China 2025” has been unveiled at the beginning of March.
This move has the objective to have Chinese firms move up the value-added chain in production and innovation networks, and to achieve much greater international brand recognition.

This new manufacturing plan has added tension between China and the rest of the world. Beijing is crossing lines in its trades with the other leading innovative countries as it is aggressively acquiring new technologies and protecting its early enterprises from competition.

Yet, the new protective politic of the U.S. is making China legitimate to the role of the leader of the global economy. Thus, it is too soon to forecast any significant worldwide reaction.

We have been waiting for China for years to prove that it is more than an incredible manufacturer. Chances are strong that they will lead the direction of the novelties during the next years.

This article has been written in a formal version for l’Atelier BNP Paribas with the thorough re-reading of Aurore Geraud, Pauline Canteneur and Sophia Qadiri. You can check it here.

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