Innovative Chinese ‘unicorns’ spring on to the global stage

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“New era, new revolution. I am a MAKER, for the hearts of the dream.” So goes a rallying cry carved in giant letters on the wall of a warehouse in Shekou, a seaside enclave near Hong Kong.

Many of China’s most promising entrepreneurs flocked there recently for a conference organised by TechCrunch, a technology publisher from Silicon Valley.

Yet Baidu, Alibaba and Tencent — Chinese internet giants collectively known as the BAT — were overshadowed by upstarts such as Didi Chuxing, a ride-hailing firm that chased America’s Uber away from China, and Ofo, a bike-sharing start-up that is going global. They are part of a new wave of inventive young firms emerging from China.

A few years ago, Chinese innovation meant copycats and counterfeits. The driving force is now an audacious, talented and globally minded generation of entrepreneurs. Investors are placing big bets on them. About $US77 billion of venture-capital investment poured into Chinese companies from 2014 to last year, up from $US12bn between 2011 and 2013.

China’s 89 “unicorns” (start-ups valued at $US1bn or more) are worth more than $US350bn ($441bn), by one recent estimate, approaching the combined valuation of America’s. And to victors go great spoils. There are 609 billionaires in China compared with 552 in the US.

“Innovation moves faster here,” insists Kai-Fu Lee, a former head of Google’s Chinese operations who runs Sinovation Ventures, a VC fund and accelerator in Beijing. Gone are the “C2C” (copy to China) and “JGE” (just good enough) strategies of their parochial predecessors. China’s nimble new innovators are using world-class technologies, from supercomputing to gene editing. Having established themselves in the cutthroat mainland market, many are heading abroad.

There are three main reasons China’s entrepreneurs can expand their businesses rapidly. First, the economy, the second largest, is big enough to let firms attain huge scale just by succeeding at home. It helps that language and culture are more homogeneous than in Europe and infrastructure such as roads and wireless broadband is excellent, unlike in many rival countries.

Second, Chinese shoppers are venturesome, an advantage to innovators with clever products but unfamiliar brands. They are also eager to embrace technology. China’s penetration rates for mobile phones and broadband internet are high, making it easy for start-ups to reach a vast market cheaply. And China is becoming cashless. The volume of mobile payments shot up almost fourfold last year, to $US8.6 trillion, compared with $US112bn in the US.

Third, state-dominated industries from telecommunications and banking to healthcare are woefully inefficient. This allows newcomers with business models that put the customer first and deploy the latest technolo­gies to jump ahead of incumbents more easily in China than their counterparts in developed markets.

The government’s inability to run industries well is counterbalanced by its willingness to support new ventures, which in turn hastens innovation in areas such as transport. David Frey of KPMG says the government has played a useful role as a “market-maker”, one reason China is far ahead of the US in electric-vehicle registrations and the number of charging facilities. A recent announcement of an eventual ban on petrol engines (probably after 2030) could help to secure a long-term lead in the global EV market. But the most useful change was a decision to allow venture-backed start-ups without previous carmaking experience to enter a field previously dominated by inept firms cranking out subpar EVs.

The Chinese are keen to try new products and are more forgiving than Westerners if they are not perfect. Deprived of consumer goods and luxuries for many years, they are eager to experiment. Wealthy Chinese are younger and more familiar with technology. Because the car is not a cultural icon as it is in the US, locals are not addicted to driving and are open to alternative forms of mobility such as ride-sharing.

That has been a boon to Didi. With a reported valuation of $US50bn, it is the most valuable start-up after Uber. This is thanks to an injection this year of $US5.5bn, the biggest funding round for a young tech firm, by a group led by Japan’s SoftBank. Didi’s other investors include all the BAT companies and Apple.

Didi is more than a smartphone app. It runs car pools, minibuses and buses in addition to taxis and luxury cars. It has ser­vices for the elderly and can send a driver to take you home in your own car. The firm provides about 20 million rides a day in China, several times the number managed by Uber worldwide. Didi hopes to use artificial intelligence to predict a customer’s transport needs, be that for cars, public transport or bicycles. Its platform offers 200,000 EVs, a figure set to rise to one million within a few years, and it plans to promote autonomous cars heavily.

The battle of the bikes is the most closely fought of China’s sharing-economy wars. Ofo and Mobike, rival bike-sharing unicorns worth about $US3bn each, have redesigned the two-wheeler to be an intelligent, cloud-connected device. Because tracking technology removes the need for dedicated docks, the brightly coloured bikes can be picked up and dropped off anywhere. This convenience creates new problems. Ofo is pioneering a credit-scoring system that rewards well-behaved users and punishes naughty ones, such as those who park in the middle of roads. Three years ago, Ofo’s foun­ders were poor students in Beijing, frustrated that their bikes were often stolen. They now control eight million bikes and provide more than 25 million rides a day in the US, Singapore and Britain as well as China, and expect to operate in 200 cities in 20 countries by the end of the year.

The high-octane nature of innovation in China may make for a bumpy ride. The spectacular rise of some firms could be mirrored by the precipitous fall of others. Even so, there are good reasons to think the best will overcome such obstacles and in time enhance competition and provide bet­ter goods and services everywhere.

The Economist

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