Guest Post by Angelina Cheok
Back in 2015, China’s economy appeared to be at a crossroads. Its slowing growth seemed to herald a death knell for the country’s start-up boom, while the outlook for its tech sectors look equally grim. Think tanks, academics and journalists like the Harvard Business Review and Foreign Policy published scathing critiques of China’s inability to innovate, bemoaning the stifling political atmosphere for hampering the creative capacity of Chinese entrepreneurship. Others even dismissed China as merely “pirating” innovation by copying Western models rather than developing their own ideas and technologies.
Fast forward to 2018, and China seems to have proven these naysayers wrong. The manufacturing powerhouse once regarded as the world’s factory for cheap labour and knock-off goods has risen as a global leader in tech and startup creation, touted as the “next Silicon Valley.” Emerging technologies define Beijing’s startups, with many of them specializing in artificial intelligence and self-driving cars, making the country a heavyweight competitor to the U.S. in these industries. In Beijing alone, Chinese startups have brought in $72 billion in funding since 2012, and this year Chinese entrepreneurs took the lead in venture fundraising. The steady increase in the number of China’s “unicorns,” privately held startups valued at $1 billion or more, further exemplifies the robust growth and success of Chinese innovation.
According to 2018 reports by CB Insights, Pitchbook and TechCrunch there are well over 260 unicorns in the world, with the majority of these once mythic success stories based in the U.S. and China. Based on the sheer number of unicorns it has alone, one can easily see why China is slated to catch up to the U.S. as the world’s entrepreneurial hub and tech giant. Notably, China is also home to the world’s highest valued unicorn, with Jack Ma’s Ant Financial, an offshoot of the Internet giant, Alibaba, worth almost double that of Uber. Moreover, in the last couple of years China has experienced a steeper surge in the birth of new unicorns compared to the U.S. ; in the U.S. it takes an average of seven years for a startup to achieve unicorn status, but in China, that figure is only four years. This trajectory, if sustained, challenges U.S. dominance.
Much of China’s startup success, in spite of the initial international pessimism, can be attributed to the CCP’s shift in strategy, with its leaders pivoting toward policies conducive to nurturing innovation and knowledge-intensive industries as a source of economic growth. Since 2015, President Xi JinPing has increasingly emphasized the government’s active support of tech startups and research-oriented enterprises, with initiatives like China’s Internet Plus and Made in 2025 rising to the forefront of the country’s priorities in order to achieve this vision of China as the next technological hegemon. While governments all over the world have historically partnered with private and tech sectors in facilitating innovation, China presents a somewhat unique case where politics and technological progress are not just intertwined, but almost interdependent. As President Xi himself has noted, China’s “biggest advantage is that [it], as a socialist country, can pool [its] resources in a major mission.” The $279 billion that China poured into R&D this year alone illustrates just how serious the CCP is in its commitment to using the weight of the State to propel China forward as the “major scientific and technological power.”
Although this State-backed push has been working, it’s a double-edged sword. Venture capitalists and research firms alike have raised concerns about the overflow of capital being pumped into startups from both the government and the private sector causing “bubble-like” valuations. “There is too much money in China, ” says William Zhao, vice president of Bertelsmann Asia Investments. “The not qualified startups are getting funding, and the qualified startups are getting even more funding. They are good companies, but are they worth that much?” The “sharing economy” in particular has been criticized in an editorial by XinHua for mass-producing product-sharing schemes trying to emulate the likes of Didi and Hellobike but lacking viable paths to profitability. The data on unicorns corroborates this somewhat cavalier attitude to funding. This trend of throwing money indiscriminately at tech companies and budding businesses is troubling because these risky investments fuel massive debt, and have ominous implications for the economy as the seemingly bottomless well of money shows signs of drying up. According to Beijing’s Zero2IPO Research, Beijing, VC and private equity funding this year has been unprecedentedly weak, raising less than two-thirds of what they had raised over the same period a year ago, and their investing activity has dropped by nearly half. Amidst all of this, the trade war with the U.S. also threatens the tech and venture capital industries.
So much State involvement in China’s development has begotten another problem: one of global marketability. Because Chinese tech companies are so tangled up with the state’s national interests and incentives, many of their overseas endeavors have been met with wary resistance over fears of cyber-espionage. In August, Australia banned Chinese phone firms Huawei and ZTE from supplying technology for its 5G network, citing “national security concerns.” This decision came following allegations that China had been spying on the African Union, and captures the mistrust limiting Chinese innovation from international expansion. (Although “Made In China” being associated with sophisticated spycraft instead of shoddy craftsmanship is perhaps in itself emblematic of the nation’s technological progress). Additionally, many nations, especially the U.S., have denounced the CCP’s collaboration with tech companies as unfair state intervention in the Chinese economy.
“The problematic aspect is how they go about doing it … The government heavily subsidizing development, or discriminating against foreign companies or forcing technology transfers from foreign companies – these are elements of unfair competition and should be opposed,” said Jacob Parker, China operations vice-president at the US-China Business Council. China has always struggled with a soft power shortage, and its issues with image politics will continue to hinder China’s ability achieve its tech goals unless it more clearly delineates the line between startup and state.
China’s A.I. ambitions are a test of its capacity for innovation and the sustainability of its state-sponsored approach. Artificial intelligence may be the primary battleground for tech supremacy between the U.S. and China as the latter pursues its plan to “lead the world” in A.I. by 2030. Although the U.S. has long been the source for the bulk of A.I. innovation, the collaborative efforts of Chinese tech firms, including behemoths like Alibaba, Tencent and Baidu, and the CCP has China poised to rapidly close this gap. In 2017, China’s A.I. industry had grown by 67 percent, producing more patents and research papers than the US, while also accounting for 48 percent of the world’s total A.I. startup funding, compared to America’s 38 percent. In April 2018, Chinese A.I. start-up SenseTime raised $600 million in a deal with Alibaba, giving SenseTime a valuation of more than $3 billion. Additionally, while the U.S. may be home to more A.I. startups overall, China has more A.I. unicorns, with the 14 companies worth a combined $40.5 billion.
China has been making enormous strides towards achieving its A.I. aspirations. In an effort to break China’s reliance on foreign technology, particularly with regard to the semiconductor, microprocessor, and high-performance computing technologies that are the backbone of successful A.I. development, China has invested an estimated $300 billion in A.I., chips, and electric vehicles. Chinese companies have also taken advantage of the U.S.’ crackdown on H1-B employment visas to poach highly skilled engineers of Chinese descent from Silicon Valley to return to China as part of its efforts to recruit A.I. talent from around the world to its cause. Cities like Beijing, Hangzhou and Tianjin have plans to launch “A.I. development parks,” with Beijing investing $2.1 billion into their campus, which could house up to 400 businesses, all focused on high-speed big data, cloud computing, biometrics and deep learning, and equipped with 5G mobile internet, a supercomputer, a national A.I. lab and cloud services. China’s real trump card is the sheer volume of human data that it has access to–a necessary ingredient for “training” A.I. systems– as a result of its staggering population, somewhat minimal privacy and security restrictions regulations, and business data it gleans from U.S. startups in exchange for entering Chinese markets. For example, Tencent’s WeChat platform alone has over one billion monthly active users. Multi-purpose apps like WeChat also integrate payment and transportation functions, which thus allows for all of a person’s data to be concentrated in one place. With its abundance of government funding, investments in infrastructure, thriving research community, and a massive population providing access to both enormous amount of data and a host of driven entrepreneurs, Xi’s “Next Generation Artificial Intelligence Development Plan” may be well within China’s reach.
Despite the progress it has made, there are still obstacles China needs to surmount if it is going to meet its ambitious goals in the next decade. For all of its expenditure on core technologies, its investments have yet to yield tangible results; in fact, according to the Taiwan Institute of Economic Research, its trade surplus for hi-tech products in 2017 fell from 2015, suggesting that Chinese manufacturers’ reliance on foreign core technologies had actually increased. Furthermore, China’s slowing economy and disappointing stock market performance this year may have chilling ramifications for the amount of money it can pump into these endeavours. China will also need to assuage apprehensions over the ethical implications of China’s A.I. approach, specifically its impact on privacy and surveillance. Already, Western media outlets have been quick to decry China’s plan to implement a “social credit score” system that utilizes Big Data and A.I. to determine a citizen’s “trustworthiness” based on aspects like their financial standing, criminal record and social media behavior, reminiscent of an episode from the sci-fi thriller, Black Mirror.
To China’s credit, as of the recent World Artificial Intelligence Conference it seems to have toned down its rhetoric about “dominating” the global A.I. and tech spheres, and adopted a more cooperative tune. In a statement issued at the conference, Xi acknowledged the need for China to work alongside other countries in sharing and developing A.I. knowledge, as well as the complicated issues the new technology would entail: “It requires deepened collaboration and open dialogue among countries to deal with new subjects such as legislation, security, employment and governance.” Echoing this sentiment, Chinese vice-premiere Liu He called for countries to “show inclusive understanding and respect to each other, deal with the double-sword technologies can bring, and embrace AI together as members of a global village.” Recognition that A.I. advancements aren’t a zero-sum game is not only good for China, but the global economy as a whole.