US must not get lapped in innovation race with China

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I recently traveled to China, along with 12 CEOs, to meet with Chinese companies, consider investment opportunities and see first-hand how they stack up against American innovation, technology and work ethic.

Our trip consisted of meetings with top executives from Baidu (the Google of China) and Xiaomi, Inc., venture capitalists and startup companies. We met with these groups to understand how they approach innovation and disruption not just in China, but worldwide.

Time and again, we heard Chinese entrepreneurs and venture capitalists mention the “9-9-6” concept. This is simply how they view a healthy work/life balance — working from 9 a.m. to 9 p.m., six days a week. Per month, they project gaining three days of work production over their Silicon Valley rivals (and 10 days on their European peers).

China’s full attention is focused on business, legacy and the race to out-innovate the U.S. It is impressive, disruptive and eye-opening to those of us who witnessed it.

Much has been written lately on China’s economic push into the United States and how the president and Congress will soon act, in a bipartisan manner, to crack down on the country by restricting trade and overhauling the laws surrounding the Committee on Foreign Investment in the United States (CFIUS).

If the reports are true, CFIUS, in particular, will soon prohibit most Chinese investment into the U.S. dealing with artificial intelligence (AI), drones, technology and robots. National security concerns aside, the intent is to punish China due to the imbalance in investment and trade policy between the countries.

The current North Korea foreign policy issue may have paused the global economic and technological arms race by the two countries. But soon, it will be back on track. While the Trump administration and congressional leaders should obviously protect the United States’ interests first, we must also aim to compete.

The Chinese workforce is clearly outworking the United States, and they are laying down the gauntlet on the world economic stage. The U.S. Generation X, millennials and Generation Z will need to feel the pressure of global competition to spur a race to outperform and out-innovate the Chinese.

Peter Diamandis, the renowned entrepreneur and venture capitalist, led our delegation. Before our trip began, he aptly stated that Chinese companies are going from deceptive to disruptive very quickly. These entrepreneurs don’t fit the copycat stereotype of the past, they’re innovating quickly, and they have the full backing of the Chinese government.

How quickly is the country becoming globally disruptive? A few years ago, less than 75 Chinese companies were represented in the Fortune Global 500. Today that number is 110 (including three of the top five).

Diamandis’ astute metaphor for the country is that, “China is a single corporate platform with a billion employees. Every company is an app running on the platform. And they are focused to win the race on global economic dominance.”

No company encapsulates that more than Tencent; the world’s fifth-largest internet company in the world. Jeffrey Towson, a private equity investor and professor, recently assessed the three big advantages of the mega-tech company: “Management, which is just outstanding; the speed and ruthlessness of China’s internet space, (meaning) your chessboard keeps changing and the development of the markets and consumers.”

One could easily view every top Chinese tech company in the same light.

Baidu leadership is focused on a major push for AI innovation, and it has led the company to develop autonomous vehicle software. Their executives are bullish that by 2020, they will have fully autonomous cars available to the public.

Xiaomi, Inc. the privately owned Chinese electronics company and the world’s fifth-largest smartphone maker, designs, develops and sells smartphones, mobile apps, laptops and related consumer electronics. Its focus on product innovation reminds me of Apple, and its self-described “ruthless efficiency” culture, reminds me of Walmart.

We also met with top venture capitalists like Kai-Fu Lee (named by Time as “100 Most Influential People in the World,” Michael Kuan  and Ken Chang, from the government-backed investment platform, Shanghai Valley.

Lee, head of Sinovation Ventures, brought in various Chinese start-up companies to meet with us, including Face++, which is on target to revolutionize the facial recognition business (and is already being used by mega-company Alibaba).

China has built-in advantages, however: The government picks winners and losers. If the government agrees with your business, you will succeed as a Chinese entrepreneur. The winners soar, creating billion-dollar companies in a few short years (sometimes months).

While the United States’ current policy regarding Chinese investment into our country is fairly open, it is not reciprocated. American companies buying into China are only allowed limited investment. Companies literally have to find a Chinese partner to do deals. These “local partners” will own the majority of shares of an investment.

It’s a one-way system, and the bipartisan congressional effort to rein in unfair reciprocity through CFIUS, will soon be hotly debated on the domestic and international stage.

Even former U.S. Treasury Secretary Henry Paulson, in his brilliant book, “Dealing with China,” advocates that China’s government should be more inclusive to outside investment, stating:

“The government should also permit foreign financial institutions to compete on an equal basis with domestic institutions. It makes sense to empower the world’s leading commercial banks, securities houses, and money management firms to operate freely in China, creating innovative investment products and opening up opportunities for the country’s citizens to build their wealth.”

Paulson is right: China should focus on international competition instead of creating divisions and restrictions. We as a country must continue to make this case to the Chinese.

Time is ticking for the next American generation to step up and fight to win the oncoming global economic revolution. We can’t do that by completely disengaging with our fiercest competitor. We must engage, protect our interests and, frankly, embrace our own 9-9-6 challenge.

By Phillip Stutts
The Hill

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