Not only have Chinese tech entrepreneurs built powerful businesses based on western models, they have improved and out-stripped them.
By Derek Parker
The rise of the silicon dragon
The key part of the story of the 21st century is, so far, the story of China leaping into the economic front rank, and there are few areas where the transformation is more obvious than in the development and application of technology. According to a study by the US Georgia Institute of Technology, in important areas China has caught up with and overtaken the rest of the world in its ability to develop new technology, turn these developments into products and services, and then bring them to market. The study ranks 33 nations relative to one another on each nation's recent success in exporting high technology products. It gives China a 'technological standing' of 82.8 out of 100, compared to 76.1 for the US, 66.8 for Germany and 66 for Japan.
By comparison, Australia scored 53.5, Malaysia 58.3, Singapore 63.0 and New Zealand 54.1. A decade ago, China's score was just 22.5, while the US peaked in 1999 with a score of 95.4. The authors of the study are quick to note its limitations, pointing out that Australia's relatively low score, for example, relates to the fact that its technology-related exports are niche-orientated rather than broad-based. But nevertheless the figures in relation to China are telling.
However, the idea of China as a leader in the field is hardly news to Rebecca Fannin, author of a recent book, Silicon Dragon: How China is Winning the Tech Race*. In fact, she believes the figures might underestimate China's position, as most tech firms are focused on the domestic market rather than exports.
Fannin, who is also the international editor of the Hong Kong weekly Asian Venture Capital Journal, closely examines a dozen of China's leading technology companies, including interviews with the founder / entrepreneurs, and finds a remarkable sense of energy as well as problems which will need to be overcome before the country's tech sector can fulfil its potential.
She is careful to underline the connections of the new wave of Chinese firms with the US, noting that much of the China technology wave is underwritten by US venture capital, much of which flows through Silicon Valley.
'The in-thing among bright young Chinese techies is to draw up a business plan, get financing, scale the start-up to sizeable revenues and profits, and then go public in the United States,' she says. 'There are a few who have listed in China, especially Hong Kong, but the gold standard is really seen as the NASDAQ or the New York Stock Exchange. There are already more than 65 companies trading on the NASDAQ and the NYSE, and doing very well out of it.'
The numbers game But many of the tech entrepreneurs have not just borrowed the development plan from the US model: they have copied the business and adapted it for the Chinese market. One example is Baidu (pronounced 'buy-do') which has emerged as China's leading internet search engine. It is very closely based on Google, or at least it was in its early stages. Fannin points out that in its present incarnation, Baidu has new features which result in faster and more precise searches in Mandarin, as well as localised features such as instant messaging.
Since listing on NASDAQ in 2005, Baidu's value has spiralled upwards, giving its founder and CEO Robin Li a net worth of US$645 million. Like many of China's tech entrepreneurs, Li spent time in the US, where he not only saw the Google model but made important connections in the US venture capital market.
Although Baidu leads Google in China, it is also seeking to expand, having already moved into Japan. Google is coming up fast, pouring in investment funds and recruiting top-level technical talent.
'Within three years, China's internet population is likely to pass that of the US,' says Fannin. 'At the moment, there are 185 million web users in the US, compared with 162 million in China. By 2010, more than 227 million people in China will have internet access, and the US figure will be around 196 million. It's a numbers game.'
Finding solutions Another 'copycat' entrepreneur is Peggy Yu Yu, a co-founder and driving force of the Chinese online bookseller Dangdang.com, who applied the Amazon model of online book selling to China. In fact, she was not the only one to try the trick: in 1999, five years after Amazon's founding, dozens of would-be clones sprang up in China, trying to take advantage of the country's burgeoning appetite for reading. Dangdang prospered by offering the widest possible selection of books (currently 200,000 titles for sale), using marketing innovations such as steep discounts (important in a market where cheap pirated copies are rampant), and making the site as user-friendly as possible.
An injection of $US40m of venture capital from the US and China was also crucial, giving the company valuable breathing space when many competitors in China crashed in the wake of the US tech-wreck of 2000. Another advantage was the fact that Amazon fumbled its China venture after acquiring the Joyo site and then failing to properly support it (the Joyo site has recovered somewhat but is yet to make a profit).
At last count, Dangdang (which translates roughly as 'worthy') had nearly 13 million registered customers, compared to Joyo's 11 million. Again following Amazon's trail, Dangdang began to add general merchandise to its sales site in 2004, and now non-book items account for about 40 per cent of revenue (compared with 25 per cent for Joyo).
'Dangdang has faced some very Chinese problems,' Fannin says. 'First, credit cards have not really caught on in China, so Dangdang instead used money orders, which are very popular. More recently, they have added a cash-on-delivery service. Then there is the obstacle that the postal service in China is less than reliable, so Dangdang used couriers, bicycles, early on, and now cars.
'In many ways, Peggy Yu Yu and Dangdang have benefited from being a few years behind the West in this area. They could cherry-pick from a lot of things that others had tested in very elaborate and expensive ways, and decide what to do and not do.'
Fannin believes that the next step for Dangdang could be an IPO, possibly timed to coincide with the Beijing Olympics.
Fannin profiles other Chinese companies that have been based on US models, the Taobao auction site, part of Jack Ma's Alibaba business, derived from eBay with a touch of Yahoo!; and Joe Chen's Oak Pacific Interactive, which copies MySpace, YouTube, Facebook, and Craigslist, for example, but she argues that each has added features that distinguish them from the original. And, of course, the sites are in Chinese.
'Most of these companies are looking primarily at the China market,' she says. 'Yes, the fact that they are based on US models could raise legal problems if they seek to move into the US, although there have not been any signs of that yet. I think that when they start to really look overseas, a likely pathway will be the Chinese-speaking communities in other countries. Globally considered, that is a huge market, and an obvious avenue for development, but broadly speaking I would say that it is still a few years away.'
Home-grown innovation Even while the 'copycats' are doing well, Fannin also makes the point that China's tech boom has spawned a host of companies based on home-grown innovation. Several of the most successful are linked to the astonishing growth in the number of mobile phones. At present, China has the world's largest number of mobile phones, over 500 million, far outnumbering landlines.
One of the most interesting companies in the field is Oriental Wisdom, headed by Liu Yingkui. The company is onto a big future tech trend: using phones for marketing, distribution and customer service. The key offering has been financial services, from advertisements for banks, insurance firms, and mutual fund companies, to news and tips on stockmarket investing, real estate, and the broad economy. Oriental Wisdom is still, Fannin says, a relatively small company, but it has a first-mover advantage and market leadership in a specialised niche. Its financial targets for 2008 are US$20m in revenue and US$3.3m in profit.
Another innovator is Jeff Chen's Maxthon, which has developed a Chinese internet browser that can easily perform a wealth of functions with a tiny gesture on the mouse, including capturing and saving web pages as files, zooming in on pages, blocking ads, and boosting speeds for downloads. 'My personal favourite,' says Fannin, 'is an undo command that lets you go back to a page that was closed accidentally. Microsoft didn't come out with similar features until Internet Explorer Version 7, 18 months after Maxthon.'
Maxthon is one of the first Chinese tech firms to have truly gone global. About one-third of its users live in the US and Europe, and the browser is available in 20 languages. Key parts of the underlying code have been developed by online programmers around the world working with open-source software.
'Companies like Maxthon and Oriental Wisdom show just how innovative Chinese technology can be,' Fannin says. 'But the big problem, especially for global expansion, is a shortage of management depth.
There are some very good people at C level, but not much in the second tier. It's a serious constraint.
'Nevertheless, there is a sense that the Chinese tech sector has attained a level of critical mass. Already, China has a dozen more billion-dollar tech firms than the US. The new breed of tech entrepreneurs is leading China through a second industrial revolution. It's that big.'
*Silicon dragon: how China is winning the tech race, Rebecca A. Fannin, McGraw Hill, $39.95.
Further information
view an interview with Jack Ma, creator of the Alibaba site, on YouTube
