by Sanjay Anandaram
The quip “the only thing worse than having your product copied in China is to not have it copied in China” from years ago resignedly foretold the importance of China: not having your product copied in China meant that there wasn’t enough demand for your product to be even copied! The mass producing and assembly of low cost (and knock-off) products of technology brands created the image of China as a country with shanzhai, slang for businesses that thrived on fake or pirated products.
The quip “the only thing worse than having your product copied in China is to not have it copied in China” from years ago resignedly foretold the importance of China: not having your product copied in China meant that there wasn’t enough demand for your product to be even copied! The mass producing and assembly of low cost (and knock-off) products of technology brands created the image of China as a country with shanzhai, slang for businesses that thrived on fake or pirated products.
All that was in the past.
Today, China is recognised as a rapidly emerging and evolving technology superpower with world-leading innovations in areas like drones, AI (artificial intelligence), mobile technology, AR/VR (augmented reality/virtual reality), renewable energy, semiconductors, mobiles and even self-driving cars, to name a few. It is determinedly and aggressively focused on becoming a technology superpower with the US in its sights: something recognised as being almost inevitable by leading think tanks, publications, companies and governments. Reverse innovation is already happening with American tech companies, especially those in Silicon Valley, adopting innovations pioneered by Chinese companies, like using QR codes, live-streaming of video, using drones to deliver products, in-app purchases and payments. Alibaba’s financial services affiliate, Ant Financial, allowed its 450 million users to log in to their online wallets by taking a selfie, before the iPhone did. Other Chinese companies like internet giant Baidu, China Construction Bank, and ride-hailing company Didi Chuxing use this technology to identify employees and customers.
The Chinese trinity Baidu, Alibaba and Tencent (“BAT”) and many others are watched avidly around the world by technologists, entrepreneurs, investors and, increasingly warily, by countries. China’s massive investments in creating powerhouse manufacturing capabilities from the 1980s onwards made it the “Factory to the World” with “Made in China” the dominant theme. Today, it is rapidly moving to “Designed, Developed, Manufactured, Consumed in China”, and the world. Chinese brands like Lenovo, Haier, Xiaomi, Huawei, Oppo, Vivo, Alibaba, Tencent, DJI dominate major market segments. DJI (a unicorn valued at $10 billion), for example, is the world leader in drones with more than 80 per cent of its sales coming from outside China, including Apple stores.
How did all this happen? What will happen?
Leadership with An Aspiration for China and No Distractions
Deng Xiaoping’s famous advice “Keep a cool head and maintain a low profile. Never take the lead — but aim to do something big”, and “Hide your power, bide your time” were the leitmotif, as Deng and his successors, Jiang Zemin and Hu Jintao, forged ahead with reforms and institution-building that transformed China. Today, chemical engineer President Xi Jinping, recently elevated to a “core leader” on par with Mao and Deng, and the first party general secretary born after the Second World War, has decided to shed the “low profile” and confidently assert China’s power on the global stage, overcoming the centuries of inhibition brought about by subordination to foreign powers in the past. He unabashedly stated in a TV interview that “…when the ideals of the Cultural Revolution could not be realised, it proved an illusion”.
With term limits on President Xi’s rule being removed, his team of Vice-President Li Yuanchao, a masters in mathematics, Premier of the State Council Li Keqiang, an award-winning PhD in economics, and Secretary Wang Huning, a law professor, and others, is steadfastly focused on delivering on Xi’s “Chinese Dream”, that aims to restore China’s “lost national greatness” by a “great rejuvenation of the Chinese nation” by making China a “fully developed” nation by 2049, the 100th anniversary of the founding of the People’s Republic.
Secretary Wang Huning, the influential ideologue, proclaimed “cyber sovereignty” a Chinese policy term that argues that countries should be free to control the internet within their borders, including through censoring. He believes that such authoritarian rule is necessary for China to restore its national greatness after what the Communist Party has often described as a century of humiliation at the hands of foreign powers.
The Chinese leadership clearly sees dominance in technology alongside economic and political dominance as key to its goals of being a superpower. At the National People’s Congress in March 2017, President Xi declared science and technology to be key areas of the economy. Mao’s exhortation of “surrounding cities fighting from villages” from the 1920s inspired the marketing strategy of Chinese companies as they penetrate markets overseas and even China’s geopolitical “string of pearls” strategy!
Unencumbered by a questioning media, challenges by a combative civil society or an activist justice system, and without having to bother about consumer privacy, confidentiality and rights, China is ruthlessly focused on relentlessly executing towards achieving the Chinese Dream. Encouraged by Chinese policy and government personnel, Chinese companies have copied and stolen IP (intellectual property). The Cisco-Huawei case of 2003 with Cisco alleging IP infringements and copying by Huawei, is perhaps the most high profile of these.
On 15 August 2017, a New York Times op-ed authored by former directors of the US National Intelligence and National Security Agency, titled “China’s Intellectual Property Theft Must Stop” estimated that intellectual property theft by China costs the US a majority of its losses estimated at $600 billion a year. It went on to claim that Chinese companies have stolen from virtually every sector of the US economy, including the defence industrial base — laboratories, universities, think tanks and even the US government.
In 1994, Steve Jobs quoted Picasso to say “Good artists copy, great artists steal”, as he explained how Apple stole great ideas from everywhere and innovated. China copied and stole ideas and IP and is now innovating.
Self-Reliance and Firewalls
The ruthless focus on achieving the Chinese Dream is powered by a desire to be independent of foreign technology, and own the building blocks of the knowledge economy — semiconductors, renewable energy devices, electric vehicles, security and AI.
In 1994, former Chinese army engineer and Huawei founder Ren Zhengfei had a meeting with party general secretary Jiang Zemin, telling him that “switching equipment technology was related to international security, and that a nation that did not have its own switching equipment was like one that lacked its own military”. The Chinese government supported Huawei with access to $30 billion in “export financing”, according to a 4 August 2012 article on Huawei in The Economist.
Policies, emanating from achieving the Chinese Dream and global power, are oriented towards creating enormous state capacity and capabilities in designing, developing, testing, deploying tools and methods for high-tech engineering, in complex supply chains and technology project management. For example, the massive investments in mind-boggling projects (roads, railways, dams, bridges, ports, airports, cities, renewable energy) and manufacturing create incredible state capacity. The solar expressway in Jinan covering 5,875 square metres is designed to produce 1M KWHr per year, enough to power 800 homes, all from solar panels on the road.
China is also building the world’s fastest wind tunnel, testing a near-space spy drone, testing ways to build a 1,000-km tunnel to carry water from Tibet to Xinjiang, has over 200 of the world’s fastest 500 supercomputers, including the two fastest, published papers on detecting dark matter and carried out quantum entanglement from space (South China Morning Post, 31 December 2017).
It is already a world leader in renewable energy investments, with over $44 billion invested in 2017. After the US’s withdrawal from the Paris Climate Change accord last year, “China will provide technology leadership and financial capacity so as to dominate fast-growing sectors such as solar energy, electric vehicles, and batteries”, said Tim Buckley, director of energy finance studies at the Institute for Energy Economics and Financial Analysis. Nine of the top 10 photovoltaic power module manufacturers are Chinese who cater to China’s enormous solar power appetite (with about 54GW being added in 2017 alone, greater than Japan’s entire solar power generation); Chinese electric vehicles (EVs) have over 50 per cent share of the 1 million cars sold worldwide in 2017. By imposing a 25 per cent tax on imports and providing incentives and subsidies to buyers, China is targeting seven million vehicles by 2025, with competitors lining up to take on even Tesla.
There’s a strong focus on shifting away from low-value manufacturing to higher value-added, higher-productivity manufacturing, using big data, AI cloud technologies and robotics. Inspired by Germany’ Industrie 4.0 programme, China is implementing its “Made in China 2025” programme with a plan to substantially increase the amount of domestically produced components to 70 per cent from less than 30 per cent today. China spent $200 billion (2nd only to oil) in 2016 on semiconductor imports, 10 times more than what it produces, causing the government to target raising China’s production of semiconductors consumed to 50 per cent by 2020. To that end, Beijing is investing $150 billion into domestic chipmakers through 2025.
Russian President Vladimir Putin told students on 1 November 2017: “Whoever becomes the leader in this sphere (AI) will become the ruler of the world.” But it seems that the Chinese are the ones acting on it! China wishes to be on par with the US in AI by 2020, achieve major breakthroughs by 2025, and “occupy the commanding heights of AI technology by 2030” to be the world’s undisputed leader with $150 billion in AI-based revenues, by producing solutions ranging from the military to smart cities. Global consultancy firm PricewaterhouseCoopers predicts that this would add $7 trillion to the Chinese economy by 2030. With the average Chinese consumer consuming and transacting in orders of magnitude more than the American, there’s huge amount of valuable data from 1.3 billion citizens for the Chinese government and companies for use on their AI models. In addition, the Chinese government is using facial recognition software — through partnerships with Chinese tech companies like Yitu — to keep tabs on people. This aims to identify any one of the 1.3 billion citizens within three seconds with 90 per cent accuracy!
The Great Firewall of China
The so-called “Great Firewall of China” prevented the likes of Facebook, Google and others from competing in China. Non-internet-based Western tech companies have struggled to survive due to preference for local offerings and where consumer habits differ from those from the West. Uber gave up, Netflix can’t get started, Amazon is flailing and Apple is struggling to grow from its earlier peaks. This has resulted in the rise of several Chinese tech companies that provide services similar to the biggest names elsewhere, but have leveraged China’s massive market to become giants on their own. And now they’re innovating and even experiencing reverse innovation as many of their offerings are being copied by Western companies.
Market Power
China has effectively used access to its large, lucrative and growing market to get what it wants from Western technology companies.
Google re-entered China after eight years with Google Maps and Translate under strict rules such as requiring the servers to be hosted in China, with versions available only for China, and having AutoNavi (owned by Alibaba) provide navigation when users attempt to use Google Maps’ navigation! China’s recently enacted cybersecurity laws have forced Apple to hand over management of its Chinese iCloud data to a local, state-owned firm in China called Cloud Big Data Industrial Development Company, and Reuters reported that Apple will also hold iCloud encryption keys for Chinese users in China, allowing Chinese authorities access to user data. And Microsoft created a custom version of Windows 10 for the Chinese government that allows for Chinese encryption!
China’s enormous and growing domestic market is being leveraged for its global ambitions. China’s amazing growth has led to about 680 million people being lifted out of poverty over the period 1981-2010, with extreme poverty falling from 84 per cent in 1980 to 10 per cent in 2013, a per capita GDP of over $8,000 and a $11-trillion economy growing at over 6.3 per cent. The government’s thrust on balancing investment-led growth with consumption is on a sound footing as a large mass of Chinese consumers are now enthusiastically embracing technology products and services. With over 731 million internet users and 2017 online sales in excess of $1.1 trillion (forming 23 per cent of all retail sales and growing to 40 per cent by 2021), China is the world’s largest e-commerce market by far, overtaking the US’s $450 billion, according to data research firm eMarketer, with over 75 per cent sales taking place over the mobile phone. McKinsey says China alone now accounts for nearly half of worldwide e-commerce — up from less than 1 per cent only a decade ago. Goldman Sachs expects online retail sales in China to grow at an annual average of 23 per cent over the next four years. With global-scale supply chain clusters, global-scale consumers and global-scale manufacturing, the world needs China more!
China hosts innumerable events for the world’s top companies, entrepreneurs, investors, academics, policy makers, where the country showcases its opportunities and capabilities, and propounds its worldview on technology and policy. For example, the World Internet Conference, a Davos-style gathering, has been held since 2014 in Wuzhan, with the likes of Apple’s Tim Cook and Google’s Sundar Pichai in attendance.
Research & Development and Investment
According to venture capital database CB Insights, China filed for 631 AI patents, compared with the US’ 131 in 2017, and Chinese companies soaked up 48 per cent of all investment dollars in AI startups. At the 2017 Association for the Advancement of Artificial Intelligence Conference, where top experts gather, China presented 23 per cent of the papers (up from less than 10 per cent in 2012), compared with the US’ 34 per cent (down from 41 per cent in 2012).
Huawei, the $75-billion Chinese telecom behemoth, is the world’s largest holder of patents, with an estimated 50,000 patents to its name. As of 2016, about 80,000, or 45 per cent of Huawei’s workforce is involved in R&D across the world (including India), accounting for about 15 per cent of the company’s revenues. It is a member of 360 standards organisations, industry alliances, and open source communities, and holds more than 300 positions of responsibility within these organisations. According to the World Intellectual Property Organisation (WIPO), in 2015, it filed for 3,898 patents — making it number 1, up from just 456 in 2014. ZTE, Huawei’s Chinese competitor, filed 2,155 patents, coming in third after the US’ Qualcomm.
The US has, for the last 38 years, been the number 1 in patent filings under the patent cooperation treaty (PCT) system that covers 148 countries. In 2015, it again led with 57,385 patent applications, 6.7 per cent lower than the previous year. But China-based organisations fuelled much of the overall growth in 2015, WIPO said. Japan filed the second-highest number of PCT filings at 44,235, followed by China at 29,846. “The latest figures charting a rise in demand for intellectual property rights confirm a decade-long trend, where developments in China increasingly leave their mark on the worldwide totals,” said WIPO director general Francis Gurry. “China is increasingly amongst the leaders in global innovation and branding.”
The Economist dated 3 October 2013 reported, notwithstanding persistent charges of fraud and plagiarism, “by volume the output of Chinese science is impressive. Mainland Chinese researchers have published a steadily increasing share of scientific papers in journals included in the prestigious Science Citation Index (SCI — maintained by Thomson Reuters, a publisher). The number grew from a negligible share in 2001 to 9.5 per cent in 2011, second in the world to America, according to a report published by the Institute of Scientific and Technical Information of China. From 2002 to 2012, more than one million Chinese papers were published in SCI journals; they ranked sixth for the number of times cited by others. Nature, a science journal, reported that in 2012, the number of papers from China in the journal’s 18 affiliated research publications rose by 35 per cent from 2011. The journal said this ‘adds to the growing body of evidence that China is fast becoming a global leader in scientific publishing and scientific research’.”
In January 2018, the science journal Nature reported that China surpassed the United States in the number of articles published on Elsevier’s Scopus, one of the world’s top scientific databases, with an increase of 37 per cent in the number of citations of China-based authors in academic articles over the last five years. This serves as a telling proxy indicator for who is now massively investing in knowledge, and will harvest the power of that knowledge in the future.
China spends $371 billion (the US spends $479 billion) in purchasing-power-parity dollars on R&D representing 2 per cent of its GDP; It has 1,113 researchers per million (India has 156, while the US has 4,231 per million). Three hundred and one Chinese companies are among the top 2,500 global R&D spenders, spending $286 billion overall. They have R&D units around the world from Silicon Valley to Israel to European countries to Singapore and India. They are making acquisitions of IP-based companies and buying patents and licences. The incredible export-led growth over the previous decades generated huge forex reserves of $3.14 trillion (as of December 2017), that allows China to invest around the world. Its sovereign wealth fund, China Investment Corporation, with $800B under management, established in 2007, is the second largest in the world (after Norway’s $960 billion). It delivered an astounding 16 per cent return on its overseas assets in 2017. There’s no shortage, therefore, of capital for China to invest.
Education and Talent
About 10 years ago, as part of its “Made in China 2025” programme, Beijing launched the “Thousand Talents” initiative, where global top talent, especially those with patents to their name, from innovation hubs like Silicon Valley, were encouraged to move to China. There are generous incentives, compensation and support for the family. Areas like quantum computing, AI, gene sequencing, biosciences, renewables and security technologies are areas that have attracted interest. The employer, as elsewhere, shares in the inventions. Chinese engineers and scientists are sent for overseas training while international scientific and research networks are partnered with. The objective is to encourage local Chinese innovation by adopting, adapting and improving upon technologies acquired from elsewhere.
Outside of the Thousand Talents, there are several schemes to spur innovation across tech hubs like Beijing’s Zhongguancun Science Park (Z Park), Hangzhou and Shenzhen. Z Park currently has 10,000 foreign hires and is actively scouting for talent through its 10 overseas liaison offices. The “863 Programme” with a budget of $200 billion was launched in 1986 to stimulate the development of advanced technologies in a wide range of fields for the purpose of rendering China independent of financial obligations for foreign technologies. The Loongson computer processor, the Tianhe supercomputers, and the Shenzhou spacecraft emerged from this programme.
In 2015, China announced the Double Double World-Class Project, an initiative to develop world-class universities. A total of 42 universities are qualified to develop into a world-class level by 2050. And another 95 institutions — including the 42 universities — are designated to develop world-class courses. Amounts ranging from $70 million to $600 million per university were sanctioned.
China has about 78 million graduates with about 4.7 million completing a STEM (science, technology, engineering and mathematics) programme in 2016, the most for any country. China also produced over 30,000 PhDs. In 2015, China’s Tsinghua University dethroned MIT as the world’s top engineering school. The US and China each have four schools among the top 10 engineering schools (US News & World Report annual rankings) with four Chinese universities in the top 100 research universities of the world.
Impact of China’s Rise
China today is feared and respected for its technological prowess — a clear sign of a superpower. So much so that in February of this year, the US blocked the $580-million takeover of Massachusetts-based Xcerra, a semiconductor testing company, by SinoIC, a Chinese state-backed fund. Similar actions were taken by the US in the Lattice Semiconductor-China VC fund and Aixtron semiconductor deals. In 2012, the US House Intelligence Committee recommended to the Committee on Foreign Investments in the US that Huawei be blocked from making US acquisitions. Alibaba’s subsidiary Ant Financial’s planned $1.2-billion acquisition of Dallas-based Moneygram has been held up for review by US regulators. Britain, France and Germany too have expressed serious concerns over the growing investments and acquisitions by China in their countries. Web magazine Politico reported in July 2017 that Germany, France and Italy are urging the European Union to allow countries to control Chinese takeovers.
In 2015, the McKinsey Global Institute identified four categories of Chinese innovation: consumer-led (such as e-commerce, mobile payments, or online financial services), manufacturing-led (like consumer electronics or automobiles), engineering-led (such as the construction of high-speed railways), and research-led (for example, breakthroughs in the manufacture of semiconductors or the development of pharmaceuticals). The report’s conclusion: “China is already a global innovation leader in the first two categories and has the potential to become a world leader in the latter two. Our analysis suggests that by 2025, such new innovation opportunities could contribute $1 trillion to $2.2 trillion a year to the Chinese economy — or equivalent to up to 24 per cent of total GDP growth. To achieve this goal, China must continue to transform the manufacturing sector, particularly through digitisation, and the service sector, through rising connectivity and internet enablement. Additional productivity gains would come from progress in science- and engineering-based innovation and improvements in the operations of companies as they adopt modern business methods”.
With all of the above, the conclusion is inevitable: barring something absolutely extraordinary, China will be a globally dominant technology superpower by the middle of this century. That is, in just 32 years. It has the leadership, the mindset, the policies, the resources, the capabilities and most importantly the will and imagination.
As a passionate advocate of entrepreneurship and innovation, Sanjay Anandaram is involved with several industry, government and private organizations in fostering entrepreneurship. He has 25yrs experience as corporate executive, an entrepreneur, a VC and a mentor. He writes and lectures frequently on his favourite topic and is associated with several startups, including Swarajya
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