China is in the kind of technology bubble that helps local firms. Will it last?
China’s technology sector is in a bubble – but not the kind that erases huge fortunes when it bursts. This bubble, imposed by the Chinese authorities in Beijing in the form of the censored, closed internet also known as the Great Firewall, has stymied efforts by the world’s second-largest economy to create truly innovative breakthroughs.
Various commentators of late have written about how China has “won” against Silicon Valley or has caught up with it.
They cite the rapid growth of BAT – Baidu Inc, Alibaba Group Holdings and Tencent Inc - and their innovations in e-commerce, mobile payments, social network and instant messaging as evidence of China’s innovation prowess. Alibaba owns the South China Morning Post.
What they often don’t mention is that BAT were born, survived and thrived in a protected market, which is the other aspect of the bubble. It keeps competitors out, as well as restricting the free flow of information.
Shielded from competition from the American tech innovators they originally copied, and with a home market of 1.35 billion people, BAT and newer Chinese web startups have been able to grow rapidly on the mainland and come up with innovations that have evolved out of the closed Chinese internet environment.
Recent examples include live streaming companies, and so-called knowledge payment services that offer online comedy, investing tips, beauty advice for a fee.
These firms have attracted venture capital funding on the basis of their millions of paying subscribers. But very few of these business models are exportable outside of China. All this content is available for free on YouTube, which is banned in China. If that ban was ever lifted, these start-ups would find their business models severely disrupted overnight.
As for BAT, they have largely been unable to make inroads outside China, other than being listed on stock markets in the US or in Hong Kong.
Ancient Chinese scientists gave the world paper currency, the compass, gunpowder and moveable type printing. What inventions of similar importance have emerged from China since the country embarked on its economic transformation three decades ago? Nothing comes to mind.
Compare the inventions of antiquity with the major tech milestones of the past 50 years: mobile phones in the 70s, personal computers in the 80s, the internet and web search in the 90s, and smartphones and social media after 2000.
It is doubtful any of these US tech breakthroughs would have happened without free market competition, and an open information environment.
The world is overdue for another game changing technology, one that should come from China given its near unlimited manpower and financial muscle. But with the free flow of ideas hampered by strict censorship laws designed to maintain social harmony and keep the ruling Communist Party in power, the odds are stacked against it.
Under Xi Jinping’s rule, China’s internet controls have tightened and scientists and academics complain they can’t access overseas research, hampering their work.
During the parliamentary meetings in March, some delegates proposed an easing of the restrictions - but ironically one proposal was censored and the other went unreported on the mainland.
What about the next generation of Chinese tech firms: could a game changing innovation emerge from this group, which includes scores of of so-called unicorns, or private firms valued at over US$1 billion?
China accounts for a fifth of the world’s unicorns, while the US has 55 per cent, according to CB Insights.
The world’s biggest unicorn is Uber Technologies Inc, with a valuation of US$68 billion, followed by China’s Xiaomi at US$46 billion, and Didi Chuxing - the dominant Chinese ride-sharing company that bought out Uber’s China business - at US$34 billion.
Xiaomi started in 2010 as an iPhone copycat while Didi drove the company it copied out of China after it got a US$1 billion investment from Apple.
However, Xiaomi’s phones have become commodities and Didi is, as one tech commentator put it, an “illegal cab company with a slick smartphone app.”
To their credit, Didi and Xiaomi recognise the limitations of their current copycat business models and are investing in research and development, with Didi targeting artificial intelligence, which is also a focus of BAT.
The newest crop of Chinese unicorns includes Ofo, one of many so-called “Uber-for-bicycle” companies that are attracting venture capital investment.
While they satisfy a need for convenience and environmentally friendly “last mile” transportation, it’s hard to see these companies as the vanguard of the next game-changing technology.
Billion dollar valuations for companies with little in the way of intellectual capital is reminiscent of Silicon Valley’s dot-com boom of the late 1990s, when flimsy start-ups like online grocer Webvan saw their valuations soar to billions of dollars after their initial stock offers.
The Silicon Valley dot-com bubble burst in spectacular fashion soon after – but out of the rubble came many of the tech advances that have changed people’s lives over the past 15 years.
Maybe China is in a tech bubble after all – the type that overvalues companies.
But before the country can come up with the next truly game changing technology, both bubbles will need to burst.
Craig Addison, a news editor at the South China Morning Post, has been covering Asia technology since 1992.