China could top Silicon Valley (or parts of it) as an innovation center: VCs

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From left: Bessie Lee, founder of Withinlink; Wayne Xu, president of ZhongAn International; Harry Hui, founding partner of ClearVue Partners; Lei Chen, CEO of Xunlei; Tim Culpan, moderator and technology columnist with Bloomberg Opinion. Image credit: Seb Daly / RISE via Sportsfile

The US government’s ban on ZTE buying US technology may have been lifted, but that issue – along with the ongoing US-China dispute over trade tariffs – has raised broader questions over China’s growing dominance in ICT development, the extent to which it depends on US companies for technologies like chipsets, and whether the country could eventually take over from Silicon Valley in particular as the world’s ICT powerhouse.

That was the theme of a panel of regional venture capitalists at last week’s RISE conference in Hong Kong. The general conclusion: China will probably lead in some tech areas and not others – but it may lead in the areas that really matter in the foreseeable future.

“In certain areas, China has been leading the world – that would be mobile, e-commerce and social media, but in other areas like users’ privacy protection, they’re not,” said Bessie Lee, founder of Withinlink. “And I think going forward, China probably will lead the world in artificial intelligence.”

Clarifying her point about privacy protection, she added it’s not so much a technology question but a regulatory question. “The regulation always falls behind the technology. So compared to say, five years ago, the protection for users [in China] is already a lot better. But compared to the GDPR of Europe, it’s not there yet. If you want, you can use technology to really best protect the users privacy, but that not being developed enough.”

Wayne Xu, president of ZhongAn International, said China’s tech strengths lie more in the financial and consumer-facing areas. “The business model application layer, I think China has an advantage [there].”

Harry Hui, founding partner of ClearVue Partners, said he was seeing “a lot of exciting innovation” coming out of China right now, and that this matters because that innovation has been characterized by fierce, fast, data-driven competition.

“There’s this new view that it’s about swarm innovation – the idea that it’s so competitive in China right now, that unless you’re running so quickly, data-inspired and enabled by technology, you’re just going to be left behind,” he said.

Technology vs innovation (and potatoes)

Hui added that to understand China’s advantages over Silicon Valley, it’s important to distinguish between between technology and innovation.

“The US clearly does lead in this regards, as far as the technological innovation in the digital realm, globally, no question,” he said. “But in terms of its application, in innovation, in its iteration and how it applies to the Chinese market, clearly Chinese companies are seeing exponential growth in its adoption, purely by the fact that they have this large domestic market base, they have access to vast amounts of data, and they can react so much quicker.”

Hui also pointed out the that it’s not so much a question of superior technology so much as different approaches to innovation that are unique to each market.

“In China, it will be much more incremental, rather than radical, first of all,” he said. “And second of all, its innovation, its ability to evolve and adapt will be very much a tailor-made-for-China solution.”

A classic example is electronics maker Haier, who years ago released a washing machine for the domestic market, only to discover that in Tier-3 cities, farmers were using the machine to wash potatoes.

“Of course it was not designed to wash potatoes, and so the product developers said, ‘What’s wrong with this?’ And they took it back and they re-engineered it – they changed the filtering system, and they labeled it and relaunched it and said this [machine] is good for clothing and potato washing,” said Hui. “A US product manager would have thought differently and added a label saying ‘this is not meant for potato washing’.”

Regulatory clashes

Lei Chen, CEO of Xunlei, said that China also has the potential to lead in development of blockchain technology, even though “it’s a bit late to the game”.

He also dismissed concerns that China’s crackdown on cryptocurrencies and exchanges would hurt domestic blockchain development.

“The problem is not the regulation, the problem is the participants in this market. There are just way too many schemers and people who not responsible with the technology that they’re handling,” he said. “Too many people [are] focused on the fast money – those are the people that I think the government should push out.”

In the meantime, he added, “I also see a lot of Chinese entrepreneurs who are really focused on the application of blockchain and related technologies to change the world to benefit society. I think those are the people that we shouldn’t let down. Hopefully, we’ll see clearer regulation and clearer ways to discern what is good and what’s bad.”

Speaking of crackdowns, one factor lurking over ICT competition between China and the US is the ongoing trade spat and the US Congress’ increasing obsession with ZTE and Huawei posing national security threats to the point that the ZTE supplier ban could be reinstated, and possibly extended to Huawei and other Chinese tech companies.

Bessie Lee of Withinlink commented that while the ban had put ZTE at a competitive disadvantage, you could be sure the Chinese government is already taking steps to ensure no Chinese company is put in that position again.

“There’s actually quite a lot of investment, effort and devotion from the central government level into those areas where at the moment, on the surface, it may look like China is lagging behind the US on chips,” she said. “But give them a couple of years, [and] I think the game will turn.

Also, she added, “I like what I’ve heard in another forum where someone said the Chinese are going to take on the US market, but the US is not going to take on the Chinese market.”

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