(This post was first published on Forbes)
Perception always trails reality, sometimes by over a decade. Despite China’s persistent copycat image, several waves of innovation co-exist in the country today. Some companies have evolved from imitator to inventor, some focus on “fast-following,” while others create original products, or overlap several categories. Please meet the six waves of Chinese tech innovation.
First Wave: Tech Commodities
It is old news that China has become the world’s electronics factory, with Shenzhen now nicknamed the “Silicon Valley for Hardware.” It makes about 70% of the world’s mobile phones, 80% of air-conditioners, and a staggering 90% of personal computers.
For those thinking that rising wages, competition from emerging markets, or a leveling of the field thanks to robots will change China’s dominance, this doesn’t count the impact of skills, education and the network effects of the supply chain. China is here to stay. Even Apple’s CEO Tim Cook said so to Charlie Rose last December.
In those product categories, Chinese tech companies going global are not novelty: Lenovo, Huawei, TCL are already world leaders. But they mostly build commodities with which it is difficult to appear truly innovative to foreign eyes.
Second Wave: Niche Products
This wave came about with the commoditization of components. The Taiwanese semiconductor company Mediatek added its low-cost platforms to the mix, and it gave birth to the closest you could find worldwide to an open source electronics supply chain. Suddenly it became possible to create on a small scale a variety of electronic products, sometimes of questionable quality.
Third Wave: Xiaomization
Our term for the “fast commoditization of connected devices.” The smartphone giant Xiaomi brought a key business model innovation: quality consumer electronics sold online in flash sales, with no advertising and low margins. Xiaomi then extended its line-up of “mi-too” products via investments. When it launched its low-cost activity tracker and action camera, the game changed for the likes of FitBit, GoPro and others, as TheStreet’s Jim Cramer said on CNBC this month. Xiaomi now offers connected rice cookers, air purifiers, robotic vacuum cleaners, smart electric bikes and more.
But Xiaomi is not alone anymore. Huawei, Vivo and Oppo now follow similar models, “xiaomizing” Xiaomi itself. With prices being pushed so low, can anyone still make money?
Fourth Wave: Fast Followers
We love the idea of genius inventors, but today’s big winners are “system innovations” like Facebook or Tesla. In China, intense competition pushes entrepreneurs to favor speed over disruptive innovation. Many also focus on the underrated art of ecosystem adaptation. The time when a carbon copy would work has largely ended, be it tried by a foreign company expanding or by a local entrepreneur. Today, as Darwin wrote, the fittest is the one most adaptable.
Interestingly, some Chinese adaptations of foreign ideas outgrew their “original ancestor”: Tencent was born from ICQ, Meituan-Dianping evolved from Groupon (though Dianping and group-buying sites existed in China before Groupon). While ICQ was forgotten, Tencent became a giant. Meituan-Dianping is now, at a $18 billion USD valuation, worth 10 times more than Groupon.
Fifth Wave: Innovation Buyers
Some Chinese companies are playing catch up and buying inventions, brands and distribution networks globally. HBR calls it “innovation by acquisition.” In the list are Volvo, Club Med, Vizio, some of your favorite video games like League of Legends or Clash of Clans (now both owned by Tencent) and many, many more.
More recently Ninebot raised $80 million USD and bought Segway, thereby settling its patent battles, and securing a great brand name and a distribution network. The appliance maker Midea bought Germany’s industrial robotics pioneer Kuka for $4 billion USD to prepare for a robotics future.
Today, Chinese buyers and investors are found everywhere.
In the United States, they’ve spent about $300 billion USD between 2010 and 2015 (amounting to 10% of foreign direct investment). In Germany this year, Chinese investors acquired 37 companies worth $10.8 billion USD, representing 40% of all inbound investment.
Where does this cash come from, you might ask. Profits, for one: Tencent alone had $3.5 billion USD in net cash in August 2016, enough to buy scores of startups. But it also comes from China’s stock market frenzy. Many companies listed on the Shenzhen stock exchange enjoy forward PE above 50. This means any acquisition pays for itself almost immediately: buy for a generous 10x or 20x and the market will reward you with 50x.
Sixth Wave: “True” Innovators
The world leader in consumer drones, DJI, is a Chinese company—and is not an anomaly. DJI is simply the first of this new wave of “true” innovators. They simply haven’t reached the threshold required to be noticed overseas.
Interestingly, while some Chinese web or mobile companies like Musical.ly are global, hardware is generally less culture-dependent than software, and might be putting Chinese tech companies faster on the global innovation map. Drone companies, of course, like Ehang’s personal transporter drone (which created a stir at the last CES), or the Hover Camera selfie drone, but also many others. Our company, HAX, invested in and accelerated about two dozen startups Chinese hardware startups out of our 200-strong portfolio, including a “Lego for robotics,” a smart industrial robot arm and several health tech devices. We are not alone: investors like GGV Capital, Jun Lei’s Xiaomi and Shunwei, ZhenFund or Kai-Fu Lee’s Sinovation Ventures do so too. Many large consumer brands and even factory owners also see hardware startups as the future of their industries. The question is not whether or not Chinese tech startups will go global, it is how fast.
Most Chinese hardware startups will focus on their local market and won’t register on the global radar unless they reach “unicorn” status. Even then, many domestic Chinese giants worth billions with hundreds of millions of users will remain a mystery to outsiders, at least until they turn up on our shores.
Those with the best chances of making history will be either Chinese companies who understand how to sell to global customers or foreign startups who understand how to build with China. In this future, the most likely to succeed will be entrepreneurs with heavily stamped passports.