In 2008, I had the pleasure of experiencing massive stomach pain one night in Shanghai. Not knowing how the Chinese medical system worked, I was taken to a local hospital in downtown Shanghai. To be honest I did not know what to expect…all that I knew was it was probably going to very different terms of the service and quality that I would receive compared to American hospitals. My low expectations were instantly dashed when I was ushered into an almost completely empty lobby. I was quickly attended to do by a doctor and with some rapid exchange of Chinese I was put on an IV drip and told that I had the stomach flu. It turns out this hospital was especially for foreigners but the level of service and apparent quality was impressive. Fast forward a couple of years and another visit to a hospital showed another side of the very unique nature of the Chinese healthcare system. This time the experience was less than comfortable with 100’s of people crammed into the lobby and different rooms. But this was more than offset by the mere 50 RMB ($8 USD) I had to pay to see the doctor and the efficiency of getting my tests and diagnosis in under 30 minutes.
Although far from being perfect the Chinese Healthcare system has advanced by leaps and bounds in the last 10 years. In 2004 only 23% of the population had any form of reimbursable health care. In 2015 over 95% of the population is now covered. This rapid modernization is just one of many examples of the unique characteristics of the Chinese government which for the last 2000 years has taken many forms from empires to communism to socialism but with one common thread….top down control and management. The central government is obsessed with 5-year, 10-year and longer plans. These plans are meticulously laid out, furiously debated and skillfully executed. The healthcare system was just one of many on the list in the year 2000 and when these objectives are put in place, all forms of government from the top government officials down to the township mayors are measured and rewarded by their support of these objectives.
One of the classic objectives of the Chinese government over the last 30 years has been the industrialization and modernization of the country. Before 2010, you can see the result in the simple metric of industrial output where cities and district government officials are awarded and careers advanced based on GDP growth. In fact, in the city of Jiading they would award companies with different levels of prizes and prestige based on their contribution to the tax base and employment. Anybody that supported these objectives were looked on favorably. Today though, industrial output is now longer a key driver from the central government. Priorities such as health care and the environment are now being driven from the top and being executed by local government.
Although it may seem odd that the government still has so much control and influence over the economy their management style is actually no different than Google. Google’s OKRs (Objectives and Key Results) and many Fortune 100 company’s other popular styles such as MBO (Management by Objectives) are just flavors of focus that allows a lot of people to get behind some common goals. Foreign companies that enter the Chinese market would do well to heed these governmental top-down goals because that could make a big difference in the access to resources and good-will that is generated by the Chinese consumer, businesses and government.
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Investments in the stock market can be a very complicated affair. Depending upon the level of rigor that is taken in looking at the business performance, understanding the management team, competitive understanding and customer value…it could be a long time to come to any conclusion to invest in any given company. Or maybe it is as simple as figuring out what your neighbor, colleague or friend is doing and just copy them.
Sitting down with an Ad Tech company based in Shanghai it was interesting to find out the profile of the Chinese investors that decided to invest in their company. It turns out most of the motivation for their Chinese investors was a reflection of their friends desire to invest. But not because of the rigorous analysis of the market opportunity that these friends had done or that they were good past investors, it was simply a reaction to the fact that these friends were of the same or lessor economic status as them. The attitude was “if that guy is investing, then we can definitely invest”. Now this could be simplifying things but there is a very real historical and cultural importance of “face” or reputation in China.
Maintaining face and reputation is important in China and is an implicit tool that could be used to market and sell to the Chinese consumer. Here are a couple of clever examples of this:
- A microfinance company based in China that provides student loans and requires a family member to be a co-signer on the loan. The co-signer in this case does not necessarily have to own collateral but is mainly used as a form of social pressure to ensure payback of the loan. If the student does not payback the loan, the co-signer loses face or their own reputation.
- One of the more popular Restaurant Review Apps in China (similar to Yelp) is called DianPing. The people that reviews these restaurants number in the 10’s of millions. Unlike Yelp though, the reviewers are also rated by the App which motivates them to do even more reviews. An example of their rating system goes from 1 to 5. The more reviews you do the more your level goes up. A system of reputation and face for reviewers.
- Taobao.com which operates under the Alibaba brand has an even more complicated level system for reviewers of products that are sold on their site. Taobao.com is the equivalent of Amazon.com in China. Their system has over 5 levels in each of the major categories going from heart, white diamond, gold diamond, white crown and then golden crown. That’s over 25 levels which are used as a sign of reputation and status for these reviewers!
Using these subtle “face” techniques can be an important part of any marketing and sales tool targeting China consumers and businesses.
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By some measures the Chinese government budget for internal security exceeds that of their armed forces. This security budget includes such things as electronic information monitoring in addition to the use of security forces to manage the internal safety of their citizens. One common view of Google’s pullout of China was primarily due to Chinese regulations and restrictions around information flow which is a central foundation to Google’s search business. While not as important to Amazon’s business, information and data is still central to many decisions to the value of their online shopping platform. So will Amazon succeed in navigating the online terrain in China where Google did not? So far, they seem to be doing a good job.
In a recent presentation to a Tech incubator called DreamT located in downtown Shanghai and in suburban Jiading, I had the opportunity to understand more deeply how Amazon’s EC2 Cloud infrastructure is being deployed. The incubator does specific cash and in-kind investments to tech companies who are deploying apps or websites that need access to fast, secure and reliable cloud infrastructure. One of the main in-kind investments is access to EC2 servers for one year which is funded entirely by the China based Amazon cloud business. Although not a significant investment to the startups this does provide some great benefits to Amazon including exposure to start-ups, china based tech entrepreneurs and goodwill to the government. The Amazon EC2 infrastructure allows internet based companies to bypass the 8 firewall points that regulate internet traffic in and out of China. This allows a better consumer experience for any foreign based companies that want to setup a ecommerce, app or website to access the Chinese consumer.
It remains to be seen how the online shopping platform of Amazon in China will do as they compete head on with local favorites Taobao.com and Alibaba.com but this strategy of co-investments, co-branding and partnerships with local incubators seems to be a good long term bet in the world of Chinese cloud infrastructure.
Shenzhen was the Chinese epicenter of a massive economic shift to manufacturing in the early 1980s and the attraction to most foreign manufacturing companies setting up there was the promise of inexpensive labor. On a visit to Shenzhen City (near Hong Kong) a couple of years ago I was surprised to learn how much that is changed when a large US optical manufacturing customer was in the process of moving its operations to Vietnam due to the rising cost of labor in China. The shift of manufacturing from China to other countries has also signaled a shift of Chinese companies focusing more on technology and business innovation. Nowhere is that more obvious than in Shanghai where smaller districts are all setting up innovation hubs and incubators to build the foundation for this innovation economy.
Impact10x had a recent opportunity to speak at one technology park called Keiji50 in the Jiading area of Shanghai. The main focus of this park was IOT/wearable devices and housed probably 10-20 companies on its campus. Companies building versions of Google glass, Smart Mirrors and even Smart Coffee machines adorned its demonstration room. Especially interesting was the fact that the center also did China based VC investments through a quasi-government funded organization. We had an opportunity to talk to their Partners to find out a little more about how their VC investments worked in China. It seems most investments were made after a working prototype had been demonstrated and with maximum investments of 3M RMB (approximately $500K USD). Seed capital financing did not seem to be something that they were particularly comfortable with as some of the frameworks/tools they used to evaluate innovations were based on mass appeal to a broad consumer audience. Most true breakthroughs start with a small core of leading edge customers which then lead to growth.
Another piece of their investment approach was the emphasis on patents or other more basic scientific intellectual property which could be a competitive barrier to entry. Although this has traditionally made sense 5-10 years ago, with the massive shift to more open source platforms, crowd sourcing and any new innovation being circulated around the planet at light-speed…basing your competitive advantage solely on protection of information is quickly being eroded. As Bill Gates recently said “intellectual property has the shelf life of a banana”.
Stay tuned for the next couple of blog posts as we will be posting some more of our discoveries on China and Shanghai based incubators and technology parks.
The enormous transformation of China from the starving Chinese farmers of the 1960’s to having skylines full of gleaming skyscrapers in 2016 is a testamount to the incredible power of perseverance and experimentation. Deng Xiaoping who rose to lead in China in 1978 is generally accepted as a key figure who lead and drove this transformation. His philosophy was a simple one “to experiment, to take risks, and to not be afraid of making mistakes; when you make them, just correct them”. In Ezra Vogel’s biography of the leader “Deng Xiaoping and the Transformation of China”, the word “experiment” happens no less than 78 times throughout the book. This book was recently promoted by Bill Gates as one of the best books to read on China.
The Impact10x team had an opportunity to share our views on innovation to China tech entrepreneurs and engineers on invitation from IC CAFE, a technology incubator and china venture capital fund located in the east part of Shanghai. The best known innovators of our time like Steve Jobs and Elon Musk were the standard part of our discussion but Deng Xiaoping took a special place as an example of a leader who emphasized execution over guessing. It maybe the hottest thing now in Silicon Valley to be a “lean startup” but lets not forget that this idea of experimentation and fail fast was what started the incredible transformation of China over 30 years ago.
Thanks to Xiaoming, Sean and Yixin from the Impact10x team in joining and supporting the seminar!
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Shanghai literally means “On the sea” (shang: on, hai:sea) which shows up in its very distinctive flat coastal landscape. In fact, the highest hills you will see are the roads that lead up to massive bridges in the city. But go about 2 hours driving west to a city called “Hangzhou” and you get to see some of the greener more mountainous areas of China. Known for its tourism and lake district this city is now getting known for its new innovative technology companies including the global giant Alibaba which has its headquarters there.
The Chines government recently built a massive technology incubator there under the “High Tech Zone Plan-5050” initiative which is to create even more tech companies. The incubator finances IOT, Internet and software tech companies through competitions and local china based venture capital. The young companies that we met were impressive doing innovative App services to companies serving the up-and-coming DIY generation of Makers.
What was clear on our visit is the government still seems be the main actor in most financing and promotion activities but that there is definitely a generational reversal going on between older workers concerned about money, health, emotion and entertainment (in that order) and the younger generation being more concerned about entertainment, emotion, health and money (in that order). Those innovative tech companies that can satisfy these emerging Chinese needs have the potential to be the next big winners.
China is facing the largest migration in human history of 400 million people moving from rural to urban areas in the next 10 years. Urban areas especially along the coastal areas promise higher wages and a better standard of living as compared to the interior of China. To manage this mass migration, the Chinese government has made a high priority the development of cities interior to China to stem the flow to coastal areas. In some cases, this accelerated thinking has led to interior cities which are heavily built out with shining apartments and office buildings but has a feel of a ghost town.
On an invited visit to a Technology Park in the Yixing area of China (a city 1 hour west of Shanghai) some of this was painfully obvious. Wide streets, massive buildings, large beautiful courtyards, tree lined gardens but with a scattering of people walking around. This particular Technology Park was recently recognized as a National Research Park by the Government in which only a handful have been given this honor. The officials who ran the Park enthusiastically welcomed our conversation around bringing internet and IOT technology into the Park.
As the government continues to invest heavily into building out these innovation parks the question for this strategy is whether these gleaming towers will attract and grow the right innovative companies or whether its just putting some lipstick on a pig. What is for sure is that the approach being taken in investment models, company management and technology development is uniquely Chinese with no shortage of ambition to build out this next phase of China’s growth.