What China is doing to create a tech edge over the US

It used to be that any time a product bore the all-too-familiar ‘Made In China’ stamp, it was a sign of poor-quality. How things change. These days, China doesn’t just create cheap toys and the flotsam of the past. Nor does it just assemble devices for Apple, or make clothes for Nike.

China manufactures over 70 percent of all smartphones. Chinese brands accounting for half of the world’s market share. China also produces 80 percent of the world’s solar panels, air conditioners, PCs, and much more. It’s the world’s industrial powerhouse. Block miners in China are even estimated to control around 80 percent of the Bitcoin network hash rate.

There are two regions dominating the digital world and they’re both on the Pacific ocean. The West Coast of the U.S. houses Apple, Google, Facebook, Amazon, Tesla, Illumina, Silicon Valley, San Francisco, Seattle, and Los Angeles. The East Coast of China is home to Tencent, Alibaba, Baidu, and Shenzhen.

Once strictly an importer of foreign technology, China has now become an exporter. The country set the new record for filing the most patents in a year, growing its patent filings more rapidly than any other top 10 country.

The Boston Consulting Group (BCG), together with divisions from Alibaba, Baidu, and Didi, noted in a September report just how fast Chinese tech companies are reaching unicorn status— achieving a valuation of over $1 billion.

According to the report, these companies take just four years to hit the magical $1 billion mark, on average. In comparison, U.S. companies take seven years. 46 percent of these Chinese-founded unicorns get there in two years, compared to just nine percent in the U.S.. The number of unicorns is almost on par, too. Deloitte and China Venture’s sixth Sino-US Unicorn Research Report revealed, China has just under 40 percent of world’s unicorn corporations. The U.S. tops the list with just over 42 percent. Third-place was India, which accounts for only four percent.

Part of the reason for this is the natural size of the Chinese and U.S. markets, internet user growth rates (increases in which are conducive to the creation of new start-ups), and gaps in the market. While some U.S. tech giants are expanding overseas —Google just announced a new AI research center in Beijing— we’ve yet to see aggressive moves from Chinese giants beyond some moves into India. That appears to be at least partly down to the ongoing development of China’s own market, where internet penetration is just over 53 percent.

These new Chinese unicorns are popping up far quicker and far bigger than U.S.-based ones, and it’s these that will shape the disruptive forces of the future domestically and eventually all over the world.

So how did we get here?

Open-source information

Open-source and sharing of information plays a bigger role in China than in the United States.

In the U.S., patents and copyrights once designed to protect intellectual property (IP) are now often used to aggressively hunt down infringements and seek damages, which stifles creativity and development. The idea of working together and sharing ideas is fostered by students and hobbyists, but not in corporate environments. The open-source world of software hasn’t found much uptake in hardware.

According to Managing Director of Shenzhen-based Hax Hardware Accelerator Duncan Turner, patents aren’t created in China to fight copycats and exert legal pressure, they’re used for trades between companies to share information.

The Chinese counterfeit consumer goods industry, which are known as ‘Shanzhai’ in China, has been a key for domestic skill creation. The industry operates largely in a legal grey area, and a number of serious cases of IP theft has made it a hot topic for companies, and increasingly political.

The Shanzhai industry has showcased the skills of engineers and designers who manufacture near-identical devices to leading brands at far lower costs. Yet as China’s middle class class gains more purchasing power, they are increasingly after genuine brands, which has changed the nature of Shanzhai businesses.

Though the Shanzhai model was once the only way for Chinese entrepreneurs to sell devices in their once-poor country, a different path is opening. Moving with the same speed and mindset as before, many of these companies are now focused on the creation of new cutting-edge products and brands, with innovative and increasingly influential ideas. Wired’s 2016 documentary, Inside Shenzhen: The Silicon Valley of hardware, featured names like Andrew ‘Bunnie’ Huang, Seeed Studio founder and CEO Eric Pan, David Li, Richard Chiang, and many more, and showed the incredible depth of electronics manufacturing, making, and hacking that made Shenzhen as it is today.

Customer-to-business innovation

A separate BCG report highlighted ‘customer-to-business’ innovation in China, where product ideas come from customers through feedback, as well as intent and data analysis. These ideas are quickly produced, and can be just as quickly removed if unpopular.

This is different to the traditional model, where US companies create products based on more limited data and hope it will sell. The Chinese tech ecosystem is also far more concentrated and geared toward rapid action. It’s able to turn concepts into prototypes in days or weeks, rather than months.

The BCG report details the incredible depth of data gathered by major Alibaba ecommerce marketplaces Taobao and Tmall. These sites are different to our familiar Amazon marketplace and focus on a rich experience over efficiency. Where Amazon users favor one-click, fast shipping, Taobao and Tmall offer entertainment, social sharing, and community. Alibaba has insisted it is in the social commerce business, rather than e-commerce.

In 2016, these marketplaces’ users generated 20 million product reviews and 2 million questions about products every day. Users spend much more time on these sites, often visiting them more than seven times a day. This makes them mega-hubs for data in a country with fewer Government restrictions on the collection and use of data. This allows for greater personalization and recommendations, and also helps businesses create and tweak new products based on deeper consumer insights.

Diversity

Gender diversity is a hot topic. Although not telling the full story, a simple comparison between Uber and Chinese ride-sharing app of choice, Didi Chuxing, offers some insight: At Didi, women occupy over 37 percent of its tech staff. Uber, cruelled by toxic culture claims, sits at just 15 percent.

Alibaba’s founder, Jack Ma, said at a conference earlier in the year that women were the ‘secret sauce’ to the company’s success, while urging firms to copy his playbook and “hire as many women as possible”. More than one-third of Alibaba’s founders are women, and a similar percentage hold senior management roles.

China’s authoritarian regime doesn’t offer a bastion of freedom and open-doors for skilled foreigners to consider immigration, but some laws have changed to fast-track highly-skilled professionals. Hugo Barra’s tenure at Xiaomi helped it grow from being just a domestic Apple-clone company to one with a global presence.

More work needs to be done to welcome more diversity into the workforce, but as many Chinese University students unable to find work, the country has to strike fairly fine balance.

In the U.S., many of Silicon Valley’s top companies have been founded or run by immigrants or the children of immigrants. This includes Steve Jobs at Apple, Sergey Brin at Google, Microsoft CEO Satya Nadella, and many more. It’s clear that making your country attractive to the world’s best and brightest is a competitive advantage—as Nadella says himself:

Changes pursued by the Trump administration are putting this advantage at risk.

China: The meteoric rise continues

China’s growth has underpinned the global economy. Its efforts to gain equal footing with the West has spurred a middle class bigger than the entire U.S. population and created tremendous business opportunity.

That same growth is spurring China’s technology and digital firms to go further. As China’s unicorns catch up to those of the United States, the race to become biggest and best is on.