When you think of Chinese technology companies, does the word innovative come to mind?
This complicated issue is one of the questions we’ll focus on for the next two weeks as GeekWire travels to Shanghai and Beijing, meeting with tech executives from big companies like Alibaba and Didi Kuadi, as well as entrepreneurs building up-and-coming startups in a country that has seen huge change over the past few decades. (We’ll also catch some basketball and a University of Washington Innovation Summit in between).
The ambition of China’s tech companies is not in question, with Alibaba’s acquisition today of Youku Tudou, a company considered to be China’s YouTube, providing just the latest example.
But innovation is a thornier issue. On the one hand, you have people like former Hewlett Packard CEO and U.S. presidential candidate Carly Fiorina lambasting the Chinese for not being innovative.
“They are not terribly imaginative,” Fiorina told Caffeinated Thoughts earlier this year, just weeks before announcing her intention to run for president. “They’re not entrepreneurial, they don’t innovate, that is why they are stealing our intellectual property.”
Or, take Vice President Joe Biden’s comments from May 2014.
“China — and it’s true — is graduating six to eight times as many scientists and engineers as we have,” he said, as CNN reported. “But I challenge you, name me one innovative project, one innovative change, one innovative product that has come out of China.”
But many others with recent experience doing business in China have a much different and more optimistic view of China’s ability to innovate.
“I believe that all the pieces are finally in place to support a blossoming of innovation and creativity in China over the next several decades much like what happened in the arts and sciences during the Renaissance in Europe,” wrote Alvin Wang Graylin, an entrepreneur and University of Washington graduate who founded three startups in China over the past decade.
Fewer copycats, more innovators
To understand if and how “innovation” and “China” go together, it helps to look back on the country’s progress over the past several decades.
Prior to the 20th century, China had one of the world’s most robust and advanced economies, coming up with transformative innovations like gunpowder, paper money, long-distance banking, the compass, and more. However, failed social movements during the 1900s caused development of new technologies in China to stall while its leaders insulated the country from foreign markets.
By the time the 1970s rolled around, China’s manufacturing arm became known as the “workshop to the world.” This movement spurred the notion that China was a nation of copycats, as factories produced millions of goods for Western companies and then notoriously used their intellectual property to create counterfeit items.
As Fiorina and Biden’s comments show, this sentiment is still shared among many Westerners. It’s why you see articles and reports with headlines like “Why China can’t innovate.” The data suggests this is still true, with MIT Sloan Management Review citing a report last year that found IP theft in China resulting in an estimated $300 billion loss for U.S.-based companies in 2013.
Yet many entrepreneurs and executives we spoke with over the past few weeks, in preparation for our trip, have a much more optimistic view of innovation in China, and say that the country is moving well beyond being a “copycat.”
Chris Roozen, a director with iSoftStone, said there is a shrinking segment in China that still tries to do copycat products. However, he said, “there is an emerging belief that innovation is going to drive China’s market in the future, and those in the industry believe by building something new the longevity and value of the reward is greater.”
“The folks I work with really want to build the next best thing from scratch,” Roozen added. “I don’t think this is limited to the folks I work with, but the latest generation of software developers. They have pride in the culture and want to build products that share their same ideals, which is not always a Western culture product.”
Edward Jung, a former Microsoft executive who co-founded Bellevue, Wash.-based patent-holding and technology firm Intellectual Ventures, told GeekWire that real innovation is “absolutely” occurring in China “at a faster rate of change than many thought possible.”
“When Intellectual Ventures began engaging innovation partners in China ten years ago, many IP experts were baffled,” he said. “But the fact is that by any objective measure — science graduates, R&D spending, patent filings — China is primed to be a leader in innovation. Looking beyond quantity, in the last five years, we have seen the underlying quality of inventions from the very best Chinese scientists rise to parity with those in the U.S. and Europe.”
Jung pointed to Intellectual Ventures’ partnerships with leading Chinese companies Vanke, which is focused on sustainable communities, and Aucma Medical, which is developing innovative vaccine storage.
“Some Chinese are already using world-class innovations to power their growth: Xiaomi in internet of things, BGI in biological data on everything from humans to plants, and others in consumer and small business financing, insurance, agriculture, infrastructure, and natural resources — areas where I feel they are outpacing the West,” Jung said. “This century will see a number of leading multi-nationals emerge from China producing truly innovative products, not necessarily for the U.S. market, but for their own. Notably, China’s increasing IP protection and enforcement of patent rights is stimulating more and more innovation.”
Going beyond patent filings and PhDs, the McKinsey Global Institute (MGI) completed a report in July that assessed “innovation” on impact and technologies that have been commercialized successfully. It noted that “Chinese companies show the greatest strengths in markets that require customer- and efficiency-driven innovation, and they have the most catching up to do in industries that rely on science- and engineering-based innovation.”
From the report:
This research, based on an impact-driven view of innovation, concludes that China does have the potential to become a global innovation leader. Although it has not yet seen the payoff, China has made the necessary investments in R&D and education to improve its performance in science- and engineering based industries. China’s success in high-speed rail and telecommunications equipment prove that, under the right circumstances, Chinese companies can be global competitors in engineering-based industries. And, even now, in science-based industries such as biopharmaceuticals, Chinese companies are harnessing the scale and speed of the home market to become more nimble and stronger innovators.
MGI also laid out some statistics. In 2014, the country spent $200 billion on research and development, while China’s universities graduate more than 1.2 million engineers per year, more than any other country. The firm concluded that “China does have the potential to become a global innovation leader.”
“With the right policies in place to support entrepreneurism, encourage market-based competition in more industries, and make China more attractive to top science talent, China can succeed in all forms of innovation,” MGI noted.
Chinese companies can innovate, too
But when you look at some of China’s most successful tech companies, that “copycat” aura still rings true. For example, an industry expert told us that Baidu, one the country’s top web services providers, has designed a web search experience “that is extremely similar to Google,” while RenRen, a top social networking service in China, “literally has the same exact user interface to Facebook.”
Many also deride phone-maker Xiaomi for copying Apple’s designs and technologies, though Hugo Barra — the former Google exec who joined Xiaomi in 2013 — said he’s tired of people making “sensationalist statements” on that subject, according to The Verge.
Despite these examples, in recent years there are also many Chinese tech companies like Tencent with WeChat, or Alibaba with Taobao, that are taking original ideas from abroad and improving upon them.
Amy Sommers, a partner at the K&L Gates law firm with more than 25 years of experience working with Chinese businesses, said that for every Chinese e-commerce site that Westerners may characterize as a “copycat,” the Chinese version is often much more dense, multi-faceted, and at the end of the day, actually provides more value to the consumer.
“This is a demonstration of how Chinese companies may in fact be a world-leader that Western companies should be attempting to emulate,” she said.
Sommers added that more widespread use of the Internet in China and the smartphone have resulted in a new phenomenon, particularly for a country with so many people spread across so much land. “A new paradigm has emerged as China has started shifting from producing ‘things’ to producing experiences and connections,” she said.
Isabella Ko, an entrepreneur based in Beijing, said that new consumer-facing technologies that roll out in the U.S. are often already available China — and sometimes even better.
“You will find that Chinese apps have a much more complicated system in the app than U.S. apps,” she said.
Part of this shift can be attributed to changes in demand from Chinese consumers, explained Hunter Lin, CEO and founder of North America Real Estate Investment Group Inc., which operates leading online real estate portal BeiMeiGouFang.com.
“When you look into the requirements of Chinese people of 20 years ago, you found that most people had similar requirements for food, for education, for living necessaries,” he explained. “But now, every young person has their unique requirement. This change brought huge opportunity for the Chinese technology industry, as it can penetrate into all tech sectors and breed a huge amount of startups.”
Two other patterns point to more innovation in China: A shifting education culture that spurs younger workers to be more creative and less risk-averse, and an increasing amount of Western executives re-locating to China because of new opportunities.
“Over the last thirty years, more than three million of the best minds from China have emigrated to study overseas, but only a third has returned, which created significant brain drain,” wrote Wang Graylin, the UW and MIT grad who earned three degrees in the U.S. but has worked in Shanghai ever since.
He added, “Over the last decade, the tide has shifted as the massive growth opportunities in China and government incentive programs have attracted back hundreds of thousands of western educated returnees that will play a critical role in this China Renaissance. Additionally, China’s massive opportunities have also attracted millions of foreign expats to complement local staff. It’s not unusual these days to see foreigners hold senior roles even at very local companies.”
The government effect
It’s clear that Chinese tech entrepreneurs and executives have the work ethic and creative ideas to produce world-changing innovations. But much still rides on the shoulders of China’s political leaders — many of whom visited Seattle in September to meet with American dignitaries and business executives.
“Chinese firms can innovate,” noted The Economist. “But its government has not yet learned to distinguish between helpful support and counter-productive meddling.”
Adds the Harvard Business Review: “The problem, we think, is not the innovative or intellectual capacity of the Chinese people, which is boundless, but the political world in which their schools, universities, and businesses need to operate, which is very much bounded.”
There are signs of progress, however. For example, innovation is a central part of China’s newly-released five-year plan, with President Xi Jingping encouraging his country to pursue projects related to science and technology, such as aviation engines, quantum teleportation, and intelligent manufacturing and robots.
How the Chinese government helps spur innovation and economic growth will not only affect tech companies inside its borders, but also those abroad. Regardless of whether you think the Chinese are innovative, it’s clear that tech giants from the U.S. and other countries want to invest in China.
Facebook CEO Mark Zuckerberg, whose website is banned in China, spoke about the country during his company’s most recent quarterly earnings call, after the social media giant posted revenue of $4.5 billion.
“Obviously, you can’t have a mission of wanting to connect everyone in the world and leave out the biggest country,” Zuckerberg said. “So over the long term, that is a situation that we’ll need to try to figure out a way forward on.”
Apple’s Tim Cook, another top American technology CEO, spoke confidently of his company’s business outlook in China, despite its recent economic woes.
“We are investing in China not just for next quarter or the quarter after, but for the decades ahead,” Cook said on Apple’s most recent earnings call. “Our view is that China will be Apple’s top market in the world — and not just for sales. It’s also the developer community, which is growing faster than any other country in the world. The ecosystem there is very, very strong.”
Cook also pointed to China’s middle class, noting that a recent McKinsey study showed the middle class growing from 50 million people five years ago to 10 times that amount over the next five years.
“We see enormous change in China over the next several years,” Cook said.
In the end, more innovation coming out of China will likely have a positive impact not just for the Chinese people, but for the global economy.
“The extent and speed of China’s advances in innovation will have significant implications for the country’s growth and competitiveness and for the types of jobs, products, and services available to the Chinese people,” McKinsey & Company wrote in another report from October. “They will also have powerful consequences for multinationals (competing at home and abroad with Chinese companies), some of which are now using China as an R&D base for global innovation. Fortunately, that isn’t a zero-sum game: a more innovative China ought to be good for a global economy that seeks new sources of growth.”
Editor’s Note: Check back starting next week for regular reports from GeekWire’s Taylor Soper from Beijing and Shanghai.