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China technology

How US and Chinese tech will thrive through connection, not competition – if officials stay out of it

Evan J. Zimmerman and Li Yingying say while Chinese tech companies are now a force to reckon with globally, far from the antagonistic narrative of the trade war, technology innovators and investors in the US and China are benefiting from integration

PUBLISHED : Thursday, 16 August, 2018, 5:02am
UPDATED : Thursday, 16 August, 2018, 5:02am

For years, Chinese entrepreneurs would speak bashfully about the Chinese technology ecosystem, saying they just wanted to learn. This was widely recognised not as typical Chinese humility but as a pragmatic admission of reality.

Then, in 2014, Alibaba’s initial public offering made headlines globally. In 2016, Didi Chuxing shocked the world by beating back Uber in China. Nonetheless, these were isolated events, so the general unassuming narrative persisted. However, 2018 has been Chinese tech’s coming out party. On Forbes’s 2018 Midas List of companies, six of the top 10 are Chinese, including the top spot.

This year, nine of the largest 20 internet companies globally by market cap have been Chinese, according to Kleiner Perkins Caufield & Byers partner Mary Meeker’s annual report. Companies such as Bytedance, Didi Chuxing and Meituan Dianping are valued comparably to their American peers and sometimes better, as in the case of SenseTime, now the most valuable artificial intelligence start-up in the world.

Binance, a Chinese start-up, was possibly the fastest start-up to reach unicorn status (over US$1 billion valuation) while profitable. Meanwhile, Bird, widely considered the fastest unicorn of all time, based its electric scooter-sharing business model on Ofo, a Chinese bike-sharing firm.

It’s not surprising that investors from Reid Hoffman, the co-founder of LinkedIn, to Sequoia Capital’s Mike Moritz are enthusiastic about the potential of Chinese business. According to Pitchbook, Chinese companies attain billion-dollar status 18 months quicker than their American counterparts. And the IPOs of Xiaomi and Pinduoduo mean that two of the top five tech exits this year are Chinese, with Dropbox barely squeaking past iQiyi to claim fifth place.

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Chinese companies are now innovators that are particularly strong in artificial intelligence. WeChat Pay and Alipay have gone a long way towards creating a cashless society, ironically in the country that invented paper currency. WeChat’s model has caught the attention of Facebook while Alibaba is about four times the gross merchandise volume of Amazon. DJI is not just a low-cost third party manufacturer but the world’s most popular drone brand. And JD.com wowed the world with videos of its mostly automated warehouses and drone deliveries.

The secret modern history of Silicon Valley and the Pearl River Delta is one of integration rather than competition

Yet, the secret modern history of Silicon Valley and the Pearl River Delta is one of integration rather than competition. According to Deutsche Bank, the US and China have a neutral trade balance when accounting for subsidiary sales, in no small part due to technology products.

China’s most successful IPOs were not in Hong Kong but New York. These companies are largely funded by American firms such as Sequoia Capital, which has had a hand in many of China’s most recent success stories, and other China-focused funds such as GGV and Tiger Global. Similarly, Chinese money has quietly entered the American tech market.

The largest seed investor in Silicon Valley in 2017 was Hone Capital, which is run by Shan Xiangshuang, a Chinese billionaire, while companies like Tencent and Alibaba are giants in tech investing. This deepening of ties stands in sharp contrast to the increasing antagonism seen in other areas.

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While integration is gathering speed, it is not inevitable. Both markets, left to their own devices, clearly want to collaborate. Yet, as a consequence of the trade war, Chinese investment in the US has crashed 92 per cent, especially in start-ups, where previously active players like Alibaba have scaled back their presence.

Chinese investment in the US has crashed 92 per cent, especially in start-ups, where previously active players like Alibaba have scaled back their presence

While American companies are trying to integrate with Chinese companies, these projects could easily be killed, as Facebook’s recent stillborn effort shows. Scooter-sharing, for example, is powered by Xiaomi scooters – soon to be victims of the next round of tariffs. Similarly, China regularly competes with all of Europe for the title of Apple’s second-largest market and is the home of its assembly line, both of which could be put at risk.

It is key for both governments to support, rather than inhibit, this integration. In addition to tightening restrictions on overseas investment by the Committee on Foreign Investment in the US, which recently killed a deal by Singapore-incorporated Broadcomm to acquire Qualcomm, the US is considering unduly burdensome restrictions, such as a bill to restrict venture funds merely for having Chinese investors.

While China’s government must do more, especially on issues of intellectual property, it is taking positive steps, such as shrinking its “negative list” of sensitive industries and loosening its rules on foreign subsidiaries. President Xi Jinping’s reassuring rhetoric at the Boao Forum and the World Economic Forum in Davos should be matched by the Trump administration. Though both countries will naturally protect technologies they view as critical to their national security, they should remember that economic integration is the antidote to the Thucydides Trap, and there is no better place to work together than the economy of the future.

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It is also critical for businesses to invest not just in technology but in people. Both countries have their own mega-corp ecosystems – FAANG (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) in the US, and BAT+TMD (Baidu, Alibaba and Tencent and Toutiao, Meituan-Dianping and Didi Chuxing) in China.

The power of technology in setting culture means that further tech industry integration is an avenue for strengthening bonds between the countries themselves

They also have their own work cultures – 996, or working from 9am to 9pm, six days a week, in China and “work hard, play hard” in the US – and customer preferences (federated apps, in which users can use a single sign-in to access many apps, in the US and superapps, where one app encompasses most of a user’s digital life, like WeChat in China).

For every success story, such as Starbucks and Apple, there are many failures, like eBay and Home Depot. Building relationships with local players, like LinkedIn did with Chitu, is critical in both markets. The cultural education necessary for business success requires a threshold level of societal integration. Furthermore, technology’s power to influence culture means that further tech industry integration is an avenue for strengthening bonds between the countries themselves.

Technology seeks itself out. As the Chinese and American tech industries continue to evolve, they will naturally pull towards each other. Consumers, companies and investors will demand it. While this heralds future competition, it also can, and should, mean tighter connections as well. Will business be prepared? Will the governments stand in the way or push integration along? The answer is a choice, and hopefully everyone will make the right one.

Evan J. Zimmerman is chairman of Jovono, a tech venture capital firm. Li Yingying is the founder of Yingfluence, Inc. a Silicon Valley-based start-up