What’s Pushing China’s Tech Sector So Far Ahead?

China’s technology sector has grown so rapidly in the last two decades that it is pushing the United States out of its long-held position at the top of the digital food chain. Advancements by companies like Huawei, WeChat, Baidu, Tencent and others are helping the Chinese economy grow at an unprecedented rate and influencing the global economy. China and the U.S. are battling to be the leader in 5G technology, a fight it seems that Chinese tech companies are winning. A new book by journalist Rebecca Fannin looks at how China has come to dominate areas ranging from telecommunications to artificial intelligence to e-commerce. It is titled Tech Titans of China: How China’s Tech Sector is Challenging the World by Innovating Faster, Working Harder and Going Global. Fannin, who is also the founder of media platform Silicon Dragon Ventures, joined the K@W radio show on SiriusXM channel 132 to talk about her book. (Listen to the full podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge@Wharton: How has the tech sector in China been able to develop so quickly?

Fannin: Some of it has to do with venture capital investment. And some of that venture capital investment has come from Sand Hill Road [Silicon Valley], funded by our pension funds, our universities, our endowments, our family offices. But I also think a lot of it has to do with China’s own entrepreneurial culture. It’s innovating very fast. It’s moving very swiftly. They are working nonstop. China’s entrepreneurs and the tech sector are just very ambitious. It’s unstoppable.

Knowledge@Wharton: “Social” seems to be a key word when talking about the Chinese economy. Are e-commerce and social media playing big roles in China’s becoming such an influential global player?

Fannin: Social commerce is all about online shopping and sharing and prizes and games. It’s a business model that we really don’t have in the U.S. Social commerce has come on very strong. There is a [group-buying platform] called Pinduoduo, which went public in New York last year and has gone on to become one of these tech giants in just three years’ time. They are already China’s second-largest e-commerce player, and they’ve developed this whole new business model around social commerce.

Knowledge@Wharton: There are areas where the U.S. is behind China, such as the development of 5G. Will the U.S. be able to catch up?

Fannin: 5G is one of those clear battlegrounds. Huawei is the No. 1 telecom equipment operator, and the U.S. is not allowing Huawei equipment to be sold into the U.S. This is going to be an area that the U.S. needs to catch up in. Right now, the U.S. doesn’t have a 5G player. The main players are Huawei and GTE from China, plus Nokia and Ericsson. China is outspending us on 5G wireless infrastructure and those towers that need to be built. So, 5G is coming very soon, and this is going to be one area to watch.

…The U.S. needs a policy that can address China’s rise in technology. China has top-down government directives that are propelling the country forward in all kinds of technology sectors. The “Made in China 2025” [plan] has designated time periods where China is going to lead globally in certain sectors, and the U.S. really does not have anything that’s the equivalent to that. Of course, it’s a totally different governmental system, but the U.S. needs some muscle behind our technology prowess. The U.S. is still the world’s leader, but China is coming up very fast.

Knowledge@Wharton: In the book, you discuss electric vehicles. We’re seeing some growth of EVs here, but not at the rate we are seeing in other parts of the world, specifically China. It seems like China has bought into the role that EVs can play in their culture and how important they can be for their economy overall.

“The U.S. is still the world’s leader, but China is coming up very fast.”

Fannin: This is true. Electric vehicles are being adopted more quickly in China than in the U.S., and we see entire cities with their bus fleets that are electric, such as in Shanghai and Shenzhen. The U.S. needs to catch up with this electric vehicle sector, as well. China has 40 new electric vehicle makers that have come on the scene. Some of them have already gone public in the U.S. — for instance, Nio, which has been called “a Tesla killer.” But there are others such as Xpeng, and these companies are funded by very large technology companies such as Alibaba, Tencent, Baidu. They are also started by technologists and serial entrepreneurs, not automakers. This gives China a real advantage.

Knowledge@Wharton: How big is the impact of venture capital investment from the U.S. in China?

Fannin: It’s having a tremendous impact. The spending of venture capitalists in China is almost equal to the spending in the U.S. Most of these startups in China that have come forth, that have become tech titans, were funded originally by venture capital. They scaled up really fast. They got into a lot of new sectors. Baidu, Alibaba and Tencent are no longer just in their original e-commerce and gaming areas, but they are in totally new areas that are impacted by technology. And they went public. They went public either in Hong Kong or New York, and they’ve scaled up. We’re continuing to see lots of venture capital going into China, creating startups. The startup culture is very alive and well in China.

Knowledge@Wharton: Was there something specific that these VCs were seeing, even in the early stages, that made them believe that investing in China was important, maybe even more than investing in the U.S.?

Fannin: You have to look at the impact of Alibaba. That was funded by some Silicon Valley investors, and they made a lot of money on that. The same thing with Baidu and some of the other original internet startups. That was the first generation. Now we’re seeing a whole new group of newcomers coming up, such as Toutiao, the 15-second video app; Meituan, [an app connecting users to local takeout food and service providers]; DiDi in car-hailing or taxi-hailing; Xiaomi, the smartphone maker; and SenseTime in AI. [SenseTime in early October was banned by the Trump administration from operating in the U.S. because its face-recognition technology allegedly has been involved in human rights violations in some parts of China. The move threatened to upset a planned $1 billion IPO for the company, which is backed by Alibaba.] These companies are funded by venture capitalists in the West and also from other places such as Japan. SoftBank is a major player.

Knowledge@Wharton: If some of the barriers could be broken, the potential for growth through partnerships of companies on both sides of the Pacific Ocean would be unbelievable, right?

“The spending of venture capitalists in China is almost equal to the spending in the U.S.”

Fannin: Correct. China has been investing in U.S. technology companies. They have invested in Uber, Lyft, Magic Leap, Tesla and many other technology startups in the U.S. In the meantime, the U.S. has been funding Chinese startups. At the same time, we’ve seen a lot of collaboration and cooperation in Silicon Valley, where U.S. and China investors group together and go behind the startup. They push it forward. I’m beginning to see a [disruption] of this long-time collaboration and cooperation, which I think is unfortunate because it will eventually slow down global innovation.

Knowledge@Wharton: There is talk that the Chinese economy will slow down, and there have been questions on the reliability of the growth numbers reported by the Chinese government. Those numbers are enviable.

Fannin: Yes, they are. There has really been no country that has come up like this over the past 15 years so fast and become the world’s second-largest economic power in very little time.

Knowledge@Wharton: Can you tell us about the development of drones and robots in China?

Fannin: I write about a startup called DJI that is the biggest in Shenzhen in Southern China, just across the border from Hong Kong, and it’s the world’s leading drone maker. They make drones for all kinds of purposes — for consumers, hobbies, filming weddings, to doing agricultural oversight and many other uses. They have a 75% market share. There’s another company that I write about in the book called EHang, which is making a drone that people can fly in. It’s kind of a helicopter drone. That’s one to watch.

Knowledge@Wharton: What is the state of entrepreneurship in China?

Fannin: It’s on the go all the time. There are a lot of incubators and accelerators in China, just like there are in the West. You see these incubators creating new startups and funding them. And I think you see a lot of co-working spaces, too, where startups are hanging out. There are a lot of conferences, a lot of forums where there’s an exchange of ideas among entrepreneurs. Information moves really quickly in China through WeChat, the messaging app that’s ubiquitous. The information flow is one of the things that I think really has helped China’s tech startups to develop.

Knowledge@Wharton: You also dive into the ride-sharing business of DiDi in China. How strong is that company in China compared with Uber here, which still is not profitable?

Fannin: DiDi is still private, but the interesting thing about DiDi and Uber is that they were in a fight for the market in China. DiDi’s local Chinese competitor actually won that fight and ended up taking over Uber’s business in China and folding it into DiDi. So, now you have this giant ride-hailing company in China. It really just dominates the market. Eventually it will go public, but I think maybe not immediately.

Knowledge@Wharton: What is the state of the chip market in China?

Fannin: This is an area that China needs to improve in — the whole chip/semiconductor area. The U.S. and other markets — Korea, Japan — have the leadership in these areas. China is advancing, but their chips are not as advanced as what we see in the West. They’re working on this. This is one of the things that is in the “Made in China 2025” policy. They’re going to catch up in these core technology areas.

Knowledge@Wharton: How much influence and support is there from the Chinese government towards these companies?

“The startup culture is very alive and well in China.”

Fannin: There’s definitely influence in the state-owned companies, and then there are these privately financed, venture capital-backed companies that have gone public. The leaders of companies such as Alibaba in some ways need to answer, or feel that they should answer, to the Chinese government, so you do see situations where there is influence. And you do see the Chinese government also regulating these technology companies, just like we have in the U.S. They regulate the number of hours that kids can play Tencent games. They’ve also regulated some of this whole click bait content that has become so pervasive in China with mobile apps. The click bait content is just kind of racy or gets a lot of clicks immediately. They’ve cracked down on some of these things. The government is the overriding influence, I think.

Knowledge@Wharton: You also bring up WeWork, which has found a level of success in China that maybe it hasn’t found yet here. Is that because the IPO here keeps getting pushed back?

Fannin: China is a huge market opportunity for WeWork, and I have been in several of the WeWork facilities in Shanghai, Hong Kong and Beijing. In fact, my group, Silicon Dragon, has even held events at WeWork in China. But I think it’s a wide-open opportunity field in China today. Whoever gets there first can dominate that market. WeWork is in there; they’re racing for it. There are local competitors such as Ucommune, a company that I profile in the book, as well.

It’s really interesting because some of them have included technology advances within these co-working facilities that we don’t really have here in the U.S., such as using facial recognition to sign in. You get your face recorded, and you’re allowed entrance. Of course, facial recognition is much more prevalent in China than it is here in the U.S.

Knowledge@Wharton: LinkedIn is one of the rare U.S. companies that still is working in China. What is it about LinkedIn that has enabled it to grow in that country?

Fannin: It has to do with business professional networking, so it’s not the kind of exchanges that you might see on Twitter or Facebook or Instagram. LinkedIn is wide open in China. In fact, when I go to China, which I do regularly, I’ll use LinkedIn a lot. I also use WeChat in China quite a bit. But LinkedIn has persevered in this very competitive marketplace in China. I do think LinkedIn still struggles somewhat to get to the local Chinese community. It’s more popular with the expat community in China.

Knowledge@Wharton: Are there the same concerns around social media in China that we’ve seen here recently, such as privacy and data sharing?

Fannin: That’s very interesting because the WeChat system already has private group sharing. That was already baked into WeChat. Facebook copied that element of WeChat and put it on Facebook as an option. I think the whole privacy concerns in China are not as pronounced as they are in the U.S. It’s not something that the average Chinese citizen ponders a lot.

Knowledge@Wharton: You note in the book that these battles between the U.S. and China go all the way down to the coffee level. How so?

Fannin: Oh, they do. Starbucks is in a race for the market in China. Starbucks has been in China for many, many years, and they’re on almost every street corner. But they now have a new challenger called Luckin. The coffee does not taste as good as Starbucks, but it’s a little less pricey and very convenient. It’s on-demand coffee by mobile app and scooter delivery directly to your office. Now, Starbucks is having to copy that model of instant delivery or on-demand delivery, and they’ve partnered with Alibaba to do that.