How China’s new model for hi-tech firms can help it become a global leader in artificial intelligence and driverless cars

Dutch academic based at Zhejiang University argues that Chinese business ecosystems are completely different to those found in Silicon Valley

PUBLISHED : Saturday, 18 November, 2017, 3:51pm
UPDATED : Wednesday, 22 November, 2017, 3:09pm

Barely a decade after the global financial crisis, China’s economy is shedding its “factory of the world” past and embracing an innovative future built on a business ecosystem supported by rising companies such as Baidu, Alibaba, Tencent and Xiaomi and more than 1,000 new venture investments by the country’s nouveaux riches.

Its ecosystem has put China on pace to become a global leader in electric and driverless cars within 10 years. It is also on track to become a leading Artificial Intelligence developer.

Those are the views of Mark Greeven, a Dutch associate professor at Zhejiang University’s school of management in Hangzhou, who has a “ringside seat” on fast-evolving developments in Chinese management and leadership.

Greeven, who co-wrote Business Ecosystem in China: Alibaba and Competing Baidu, Tencent, Xiaomi and LeEco with Wei Wei, said Chinese companies have found a new method of organisation that will help it become a global innovation leader.

The business ecosystems of Chinese companies differ sharply from those of US juggernauts such as Google, Amazon, Facebook and Apple, according to Greeven, whose book came out in September.

In the US, one company usually creates a platform which outside companies either plug into or use. In China, an outside company does not plug in, but becomes part of the business as one of hundreds of players in an ecosystem, Greeven argues.

A distinct trait of a Chinese innovation ecosystem is the “glue” that exists between all the participants. For example, in the case of Alibaba – the owner of the South China Morning Post – the payment function is shared in its ecosystem.

The five companies in the book’s title are all digital driven, but they mix hardware and software, online and offline and old and new industries. They include relatively old companies such as Tencent, which was set up in the 1990s, and younger companies.

What they have in common is an aversion to adopting the standard metrics structures used by most multinationals. Greeven found. Their unique ecosystem, under which suppliers, distributors or customers become partners, helps them achieve early success in a highly uncertain business environment.

“It’s amazing that China’s private economy is so dynamic in such an uncertain environment – foreigners could hardly imagine it,” Greeven said.

“I’m so impressed by the entrepreneurs who drive innovations and organise their companies in a way so different from their foreign peers.”

Why Chinese vendors, large and small, are rushing to embrace cashless payments

Greeven, a native of Rotterdam in the Netherlands, initially came to China 13 years ago to do PhD research on innovation by Chinese entrepreneurs.

Fascinated by the survival skills of China’s private companies in a highly uncertain business environment, he decided to stay in Hangzhou, the cradle of China’s entrepreneurship in the coastal province of Zhejiang, in 2011.

Since then, Greeven has been with the Zhejiang University’s school of management as an associate professor, teaching students management and MBA subjects.

To his excitement, he has also found himself explaining China’s technology development and innovation to foreign audiences – multinational companies, venture capitalists and industry peers – as innovation booms in the Asian country at an astonishing rate that no rival can ignore.

Like other mainland public universities, Zhejiang University’s general programme in management includes courses in innovation, entrepreneurship, strategic management and cross culture management.

Greeven said he is impressed by the attitude of the undergraduates, postgraduate students and MBA corporate executives he teaches.

“Across the board, they are all very ambitious; very creative in solving problems – thinking about new business models, new ways of organising,” he said, adding they are different from the older generations.

The story of the young man who came to Greeven looking for a teaching assistant last year sums up the Chinese approach to learning, according to the professor.

Instead of sending Greeven a résumé, the applicant offered the address of a personal website that included samples of both his academic and non-academic work. During the job interview, the applicant asked Greeven how he worked with his students.

“Will I get freedom to do things, or I do I just do what you tell me to do?” the applicant said. When he was told the position would be paid, the applicant shrugged and said he did not care about money. The applicant got the job at the end.

Millennial students have “very strong” personalities and are strongly motivated to learn, Greeven said. By contrast, executive students also are eager to learn but are “very pragmatic”.

Greeven said he has observed a significant difference in the ways Chinese and American entrepreneurs develop their businesses.

Generally, Chinese entrepreneurs are good at getting started and expanding their companies quickly. They are eager to understand how to increase their business from the outset, sometimes eyeing an international and overseas expansion.

Chinese entrepreneurs also have little interest in theories and frameworks, he said. The general response to theory is: “This is nice, but what’s the application? What should I do at the next step?” Greeven said.

Alibaba smashes Singles’ Day record as online shopping festival goes global

Although China abounds with uncertainty in terms of market regulation, technology competition and customer needs, Chinese entrepreneurs do not try to control the risk, the professor said. They make use of it.

While multinationals are shaken by unexpected events, Chinese companies live with and are unafraid of uncertainty, he said.

Despite still being in the catch-up phase of its development, China is punching above its weight on innovation, HSBC wrote in a report this month.

In numerous areas, from internet technology and e-commerce to smartphones and big data, China is improving economic efficiency, meeting customer needs and engineering new and better products and services, research shows.

In addition to being the only developing economy among the top 25 countries of the Global Innovation Index compiled by the World Intellectual Property Organisation, China also has taken out the third-most patents worldwide.

Greeven attributed China’s progress in internet businesses to companies getting out ahead of the pack and establishing themselves first in the “empty spaces” in given markets.

Alibaba lets AI, robots and drones do the heavy lifting on Singles’ Day

Examples of Chinese firms that have dominated specific markets are e-commerce giant Alibaba and gaming and communication concern Tencent.

Since achieving dominance, these companies have turned to different ways of expanding, making strategic change as needed to enhance growth, he said.

The leaders also jumped into their market before it became regulated. In many cases, the government sets regulations after a product is on the market, a crucial difference from the Europe or US, Greeven said.

China’s third-party mobile payment system, led by Alipay and Tencent’s Tenpay, handled 23 trillion yuan (US$3.5 trillion) of transactions in the second quarter of this year, making China the world’s biggest mobile payment market.

Another important aspect of the ecosystem is the Chinese government’s willingness to give private entrepreneurs the opportunity to test ideas. Over the past five years, Beijing has supported innovation and entrepreneurship by creating policy frameworks, providing subsidies, setting preferential policies and encouraging the creation of incubators, Greeven said.

The market has abundant capital available, including venture capital and private equity concerns, Greeven said.

“I’m cautiously optimistic about China’s innovation future,” Greeven said. “If the government can continue to be supportive, if the financial system is stable, I think the future will be bright.”

He predicts that within 10 years, China will become a global leader in electric cars and driverless cars.

It will also be a Top-1 or -2 artificial Intelligence developer, judging from the number of start-up companies and amount of technology development in the area, he said. China is also certain to do well in the sector of virtual reality, he said.

“Probably the biggest potential we see now is in digital. Digital health care, digital financing, digital communication, e-commerce … anything digital, the whole world is looking at China,” he said.

“When some friends from Silicon Valley told me QR code was amazing, it was already old in China,” Greeven said. “Facial recognition payment is already there. Chinese companies are already one step forward.”

However, what may worry rivals is that China’s three biggest tech players – Baidu, Alibaba and Tencent – abbreviated as “BAT”, are just part of the engine which drives innovation.

Games, online video help Tencent top estimates with 69pc gain in third-quarter earnings

Millions of medium-sized companies have devoted themselves to innovation in the past decade. Though less well-known than BAT, many are engaged in a niche market and doing well, such as Shenzhen-based Lens Technology, a main producer of smartphone screen glass. These hidden champions will become tomorrow’s heroes, Greeven said.

According to Greeven, a big challenge for China’s innovation drive is the local-for-local development approach.

While Silicon Valley companies are dominated by a diversified culture, most Chinese companies only hire Chinese people, focus on the China market and lack international vision, he said.

The innovation hubs of Beijing, Shenzhen and Hangzhou are like isolated islands, with companies tending to try to solve problems related to financing, technology support and talent recruitment local, he said. Maintaining open communication is another challenge, he said.

In the long run, if a Chinese company wants to operate efficiently for 100 years as an international player, it needs a management system that will support its long-term view.

“You cannot always be so flexible, if you want to exist for 100 years,” Greeven said.