By Wing Lee
In recent years, much of the world’s innovation is taking place beyond Silicon Valley. China in particular has transformed itself from being “the world’s factory” to becoming a hub for new ideas and a leader in technology and innovation.
So how exactly is innovation being practiced in China and what are the key types of innovators? There’s no doubt that a challenge is being presented to international companies competing in the Chinese market, and big players have to think fast to avoid being left behind.
Two types of innovative companies
There are two primary types of emerging innovators in China: Technology-powered Small Medium Sized Enterprises (SMEs) and Digital Disruptors.
An overview of the two innovator types is as follows:
- Technology-powered SMEs
The first type of innovator usually takes the form of a technology-focused SME which uses its intellectual property (IP) to create innovative products in niche markets. Some of the key characteristics of technology-powered SMEs include:
- The companies are generally engaged in areas of advanced science and technology such as renewable energy, artificial intelligence (“AI”) and new materials
- The founders are mostly individuals who returned to China after an overseas academic and/or work experience and often have connections to elite universities and global research institutes
- The companies are generally more low profile with a core team of engineers or scientists who are less marketing-focused. As such, funding interest usually comes from venture capital and corporate investors focused on advanced technology development and its application in specific sectors
Technology-powered SMEs are particularly prevalent within the healthcare sector. One example is Beijing-based Huiying Medical Technology. Established in 2012, Huiying is one of the AI-powered healthcare ventures in China providing AI-assisted diagnosis and treatment support. Huiying has built a smart medical-image cloud platform, and collaborates with over 800 Chinese hospitals.
The founder and CEO, Xiangfei Chai (a postdoctoral fellow at Stanford University) has worked in Stanford’s cancer research center and possesses years of experience on interdisciplinary scientific research in AI, image processing and data analysis. The company has extensive partnerships and collaborations with major schools such as Stanford and Tsinghua University and has received funding from a range of healthcare-focused corporates and venture capitalists.
Technology-powered SMEs are also prevalent in other emerging sectors. In the autonomous driving space, AI company Fabu Technology is developing proprietary technology for driverless vehicles, and in the blockchain space, Beijing-based Bubi Network Technology is working on blockchain innovation and is backed by the Microsoft Accelerator.
- Digital Disruptors
The second type of innovator is generally a company with high-profile venture or corporate backing–in other words, a company with plenty of resources and an innovative team. The primary characteristics of a digital disruptor can be summarized as follows:
- The companies look to disrupt business models based on consumer economics in China–a very large consumer market with proactive consumer-focused businesses who are continuously innovating and disrupting the market
- Disruptors are mostly founded by young entrepreneurs who aspire to build new and innovative digital businesses
- A plentiful supply of venture capital financing and corporate funding both from Chinese and international investors
Education is a notable sector where digital disruptors are making a significant impact. For example, Beijing-based VIPKid is an online learning marketplace which connects North American instructors with pre-K to 12th grade children around the world for real-time English immersion study. The business model innovation lies in recognizing the untapped demand from students to learn the English language, and a lack of other scalable solutions to address this market need.
Founder and CEO Cindy Mi started tutoring students in English at the age of 15, and she co-founded a brick-and-mortar language teaching school prior to creating VIPKid in 2013. VIPKid has since established partnerships with globally recognized educational institutions such as Oxford University Press to develop new curriculums for its students.
The platform currently connects over 500,000 paying students with over 60,000 teachers in the US and Canada and has attracted US$975 million from investors including Tencent and Sequoia Capital.
A summary of the core features of each type of innovative companies is provided below:
Implications for International Companies
Emerging Chinese innovators from both categories have global aspirations and therefore present a current and/or future challenge to international companies. However, established companies can employ a few strategies to stay ahead of the curve.
- Think beyond traditional sector classifications
The first skill is to be able to identify emerging competitors. Technology-powered SMEs can be hard to identify at an early stage because they are often small operations led by a team of engineers with limited marketing exposure. While digital disruptors are much more high-profile within their sectors, it is not always clear where and how their disruption will occur.
Consider the example of app-based transportation services company Didi Chuxing, which was able to acquire Uber’s China business for US$1 billion in 2016. Upon entering into China, Uber failed to realize that Didi’s business model was closely linked to the mobile payments businesses of Alibaba and Tencent, which created a significant barrier to entry for Uber.
By being proactive in assessing cross-sector competitors and emerging innovative firms, international companies can increase their chances of spotting emerging trends and identifying potential future competitors at an early stage.
- Build or be part of an ecosystem of innovators
In contrast to traditional strategy and organizational theory which stress on the importance of focus, Chinese innovators have demonstrated the power of searching for opportunities across a wide range of sectors and markets.
Successful innovators in China and on a global stage, such as Tencent and Alibaba, represent an ecosystem of innovation which combines internal R&D with external venture investments. The latter demonstrates the importance of collaboration with different players in the ecosystem–keeping abreast of market pain points and customer needs, as well as new technological developments and applications.
For example, in the recent Forbes China Top 50 Most Innovative Companies of 2019, businesses associated with Alibaba Group led the way on the list with the inclusion of Alibaba Cloud (cloud computing company), Ant Financial (highest valued fintech company globally with a valuation of US$150 billion), Cainiao Logistics (official global parcel tracking platform of Alibaba Group) and Hema (digitalized retail store that allows shoppers to buy food, eat in, or order home delivery).
Both types of innovators emerging from China have changed the international business landscape. International companies need to continue to play to their strengths, but at the same time rethink their innovation strategy and direct more resources to studying the way China’s innovators operate. In short, it might be time for them to revisit their strategy around innovating in China, or face the consequences.
ABOUT THE AUTHOR
Wing Lee is a finance professional with over 10 years of corporate finance consulting and investment banking experience. He is currently focused on early stage start-up venture investment around Education, HR Innovation and Esports.