If, for years, China has not been seen as leader in the field of new technologies development and innovation. Could it soon take the place of the U.S?

Why should Silicon Valley be worried about China’s tech industry ambitions?

It’s no secret that most Facebook features released in recent times look suspiciously similar to some of WeChat’s, China leading messaging app. Indeed Facebook launched Moments last year, when WeChat had already released an identical feature under the same name 3 years ago. The Chinese messaging app is also what Messenger is expected to become in few years. This shows that the longtime reputation of China as a manufacturer that only clones American products is something of the past and that American companies are gradually starting to look up to this market for inspiration. China is actually one of the most active markets in the technology sector right now: a report by KPMG ranked Shanghai as the strongest technological hub competitor to San Francisco. Furthermore, a Chinese Bay Area between Guangdong, Hong Kong, Zhuhai and Macau is also slowly emerging as a hub. At a macro level, China is indeed innovating and the next years have in fact strong chances to be turn-up years for Chinese tech, for many reasons:

Chinese consumers are now ready for innovation

If Silicon Valley cultivates the idea of being the world's epicenter of innovation, the digital habits of its inhabitants and the rest of the U.S are not the most developed. Indeed Asian companies benefit from a more mature environment: the Chinese smartphone market is nearing saturation, just like in the U.S., but the proportion of mobile internet users there is considerably more important. 90% of Chinese users access the internet from their mobile phone and 20% are mobile-only. Meanwhile, in the U.S, only 5% of the population explains accessing the internet only through their smartphone. Chinese consumers also have a notably higher penetration rate for smart TVs and wearables. 

Chinese statistics about online users

In short, they are much more mobile-centric and they adapt to change more easily. 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 forces their companies to think beyond what is currently released by U.S companies and their early market. They are also the perfect playground for companies to test their innovations as they are more open-minded. Beware!

Hardware companies are forced to innovate and will be competition

Smartphone sales getting close to saturation and the few newcomers in the Chinese market have made differentiation complicated for traditional mobile manufacturers, these last years. Moreover, Chinese telecom companies were used to looking into opportunities in overseas markets, intellectual property being more and more firmly protected by law, they now have no other choice but to innovate by themselves. In order to do that, one of the many solutions found by Chinese companies is partnering with local companies. For instance, Xiaomi signed a long-term partnership with Microsoft in 2016 by buying about 1,500 patents from them. A second key trend that we’ve noticed is that positioning is becoming key to surviving. Companies are now innovating by trying to focus on specific niches: Oppo and Vivo are betting on smartphone as a camera, Huawei focuses on business professionals, and Xiaomi is experimenting towards special designs and features.

We can only imagine that it won’t be long before the Chinese telecom companies turn to globalization in an attempt to reach a larger market. Which means that they are ready to prove to the United States that they not only provide the best manufacture but also the best technology. Huawei struck the first blow by unveiling a couple of months ago its new Mate 9 smartphone which uses machine learning algorithm to optimize both software and hardware. China will “lead the world in producing artificially intelligent hardware”, Microsoft's top executive Harry Shum recently said. The benefit for Microsoft from its partnership with Xiaomi appears here pretty obvious.

Software companies are creating jobs and attracting talents

On the software industry side, three major internet giants are dominating the Chinese market: Alibaba (e-commerce), Tencent (social network) and Baidu (search engine). A comparison by company size is not relevant as American software companies aim to a global presence while most of the Chinese don’t find value in it (although Alibaba today remains more influent than Amazon). They are however stronger in terms of social sustainability and employment, which gives them a competitive advantage towards worldwide tech company as they are now seen as role models, while the latter are usually seen as big corporates that are only interested in business.

For instance, Alibaba has managed to establish an incredible control over its value chain from the top to the very end of the production chain. Taobao marketplace, which allows even micro businesses to reach customers across China, generated what we call now “Taobao Villages”: 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, which actively allocates resources to feed its growth, while helping at a geopolitical level by its economy-driving strengths. No American tech company has been that much politically backed and in control of its value chain.

Tencent’s WeChat is as impressive, reaching 90% of the Chinese population using mobile internet. WeChat has indeed been completely integrated into the general consumer payment options when Apple Pay or Facebook Chatbots are struggling to find its way in the global market. Even electricity and gas bills in China can be paid through WeChat and street sellers actually 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’, that is meant to compete with the Apple Store by letting users interact with inside apps without downloading them. It is also on a whole different level than Facebook: the company is currently struggling to keep its users active and have to deal with aggressive newcomers.

As for Baidu, it is the only Chinese player that is not ahead of his American counterparts in terms of innovation. However, it seems to have everything it takes to succeed since more than 99% of the Chinese internet population use Baidu, while only 70% of the American one use Google. And if, historically speaking, the company couldn’t even compete with other giants, its 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.

In addition to this, Baidu has managed to drive brain drain. Top class researchers from all over the world are now 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 acting as a magnet, leading the best of the AI research sphere to 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. And 2017 might be the first year we could see the results of all these efforts. In fact, last year for the first time China has published more reports on deep learning than the U.S. 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.

The government is offering its full support on R&D

To counter China's slight economic drop, the government has been betting on technology. In 2016, great effort has indeed been made to turn the country into the world technology leader. Strong support is particularly provided to science research: China's official representative unveiled in March a 5-years plan with a scientific investment rising to $41 billions (+9%) and a general reduction of scientists pain points. Also, the last ten years has seen 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.

If the approach has not proved to be very successful for the past few years, it is now paying off. In computing, China's new Sunway TaihuLight was officially named the world's faster computer at the International Supercomputing Conference last June. 5G telecommunications equipment has already been proceeded in trials in 100 cities, while the International Telecommunication Union is aiming for a deployment in 2020. China's National GeneBank opened last September, containing more than 10 million bio-samples which will help for working on human health research. And finally, China National Space Administration announced, among other ambitious short to medium term projects, that they are aiming to land on Mars by 2021…

In the US, despite the close relationship between tech giants and governments, market economy and administration remain separated. It can’t be compared to China where state officials have a dominant role in the economy, and can personally influence the evolution of new technologies. In fact, anonymous sources have revealed that the government may soon officially benefit of representative board seats in major local Internet companies. However, it is difficult to know if collusion or collision will dictate the relations between the private sector and the Party state. In any case, its appetite for innovation is a rejoicing and central point to the global development of the tech industry, which benefits from notable competitive advantages from government facilities.

This aggressive protective business growth is even starting to worrying the Western countries. A plan called “Made in China 2025” has been unveiled at the beginning of March with 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 politics 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.

By Ramy Ghorayeb
Strategic Analyst