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Mar 28, 2018 @ 08:03 by Olaf Rotax

Don’t look at the Valley, look at China!

Eight tips on how founders in Germany can benefit from Chinese entrepreneurship.

The new hotspots in Hangzhou and Beijing are startups, accelerator and incubators. Of this year’s 66 unicorns (startups worth at least a billion US dollars or more), 22 come from China. Only the US does it better, with 28. Germany on the other hand, has only one (Otto Bock Health Care). Of the total 232 unicorns, 62 are from China; 4 come from Germany. Based on predictions, China will soon host be home to more Unicorns than the US - the pioneering role is changing its owner.

We believe that German startups can learn a lot from Chinese founders - despite their cultural differences. In the Middle Kingdom, conditions for startups are much better - that is mainly caused by the cultural and political differences between China and Germany. Unlike in Germany, ‘digital’  does not have to be mentioned explicitly in China – it is part of everyday life.

Chinese culture has integrated Internet and smartphones, laptops and desktop PCs in a way that Germany would hardly recognize. To access the internet, the Chinese intuitively use their smartphones. Consider this: in 2017, one billion people in China used the internet (China has a population density of 1.4 billion).

WeChat

Due to the ubiquity of smartphones and internet, simple mobile apps have had the critical mass to warrant developing complex ecosystems that span the various aspects of daily life. The best example is Tencent’s WeChat. Having started as a simple messenger, WeChat has evolved into a daily companion, with which users can - among other things - book doctor’s appointments, order taxis or settle invoices with the internal payment service WeChat Pay. WeChat now has over one billion user accounts worldwide.

Western messenger apps like WhatsApp and Facebook Messenger boast even higher numbers, but it’s important to not forget that these apps are truly international, while WeChat focuses almost exclusively on the Chinese market and its users. Therefore, most functions of the Mandarin-oriented app abroad can only be used to a very limited extent.

Free startup support

The Chinese government is showing an increasing interest in leaving behind China's image as a "copycat" and instead becoming known as an innovator. With its latest five-year plan, China aims to strengthen entrepreneurship, in particular to promote SMEs. Government-sponsored incubators like Dream Town in Hangzhou are heavily promoting digital innovation and new business models. Amongst other things, founders are not only offered free office space and consultancy services but are also supported administratively so they can fully focus on developing innovative business ideas. Funding opportunities are provided by state institutions and private investors. All in all, around 7,500 incubators and makerspaces have produced around 220,000 small and medium-sized enterprises in the past few years.

The Chinese government's strategy is also encouraging students to become entrepreneurial: Students who found a startup in addition to their studies automatically receive better grades. Moreover, China is pushing universities to make it easier for founders to take a break from studies and devote themselves fully to building their company.

Another unexpected windfall for the Chinese startup scene is the fact that Chinese law and regulations make it incredibly difficult for foreign companies to compete (or even establish themselves) in China. The biggest obstacle is China’s Great Firewall, characterized by state surveillance and the censorship of certain content. This makes it almost impossible for Internet giants like Google or Facebook to establish their business in China, while most Chinese startups either do not face the same scrutiny – or already expect it to begin with. The ‘BATX’ companies have risen to become the equivalents to GAFA in the West. Baidu is a Chinese version of Google, Alibaba, the antagonist of Amazon, Tencent (which includes WeChat) as a Chinese Facebook. Not to be outdone, phone manufacturer Xiaomi is comparable to Apple.

Three New Unicorns from China

Beijing-based Toutiao (also called Jinri Toutiao) has risen to attention a news and content platform that provides its users with an individualized list of latest news, videos, GIFs and even live streams with the help of Artificial Intelligence and Machine Learning. Toutiao was one of the first Chinese services to use algorithms instead of pure manpower. Launched in August 2012, the service last year reached a business value of $ 20 billion.

Meanwhile, its platform, which is part of Beijing Bytedance Technology group, unites 120 million active users. According to Bytedance, they spend an average of 74 minutes a day on the platform - more than twice as much time as on Snapchat. The content is primarily provided by bloggers; through an algorithm, with the service recognizing which content the users prefer and assembles a newsfeed accordingly.

The Chinese government attracted attention earlier this year when it interfered with Toutiao's business. It accused Toutiao of spreading pornographic and vulgar content which encouraged parent company Bytedance Technology to block the platform for 24 hours and temporarily or permanently suspend more than 1,100 bloggers from its service. In addition, the "Society" section was renamed "New Era" and is now under strict state supervision. Another 2,000 content reviewers (most of whom are supporters of the Communist Part) are now being hired by Bytedance as a precaution. Not to be (entirely) deterred, over the years, Toutiao has also bought additional services, including Musical.ly and Flipagram, with which they want to build a bridge to the American market.

Mobike: 200 million users and growing

Mobike is a bike-sharing service that works without any stations. The Beijing-based company was founded just three years ago and is already worth three billion dollars. Just last year, social media giant Tencent invested 600 million US$ in this unicorn. No similar service worldwide has as many bicycles as Mobike: the startup counts 30 million rides per day and 200 million registered users.

This past year, the company began to expand to foreign markets, beginning in Florence, London, Washington D.C., Rotterdam and Berlin. The company’s bikes can be parked and picked up anywhere. The bicycles are equipped with a safety lock directly on the wheel, which unlocks automatically as soon as you want to start the rental (e.g. via a QR code). But co-founder Davis Wang said at the Guangzhou Fortune Brainstorm Tech International Conference that they are already considering entering the carsharing business. Despite all these efforts, mobike’s business is currently not profitable.

NIO: valued at five billion dollars

NIO, a startup founded in 2014, specializes in the production of smart electric cars and autonomous vehicles. What distinguishes NIO from its competitors? The company sees itself as a so-called "user enterprise". The goal is to redefine the function of a car: "In the past, cars have given people the freedom of mobility. In the future, cars will go one step further and free people from driving, giving them the freedom to spend their time more efficiently. A future that we’re excited to shape ".

The breakthrough came in December 2017: NIO launches its first electric car - the ES8 model. According to the NIO’s vision, the model focuses on the user. With the help of artificial intelligence and the company’s own software ‘NIO Pilot System’, user needs are precisely addressed. However, in order to realize its ideology, NIO does not only focus on improving driving experiences through artificial intelligence and various other technological developments, but also on optimizing the overall experience of the brand - from buying a car to customer services to facilities that do not deal with the car itself.

With the introduction of user centers, the so-called NIO-Houses, NIO creates new living spaces for its customers. NIO-Houses fit in into local environments and host various possibilities for their users, for example, an open kitchen or a library. After three years, the company now has 20 locations with more than 4,000 employees worldwide. Investors include China's Internet giants Tencent, Baidu and Xiaomi. As a result of the firm’s achievements, NIO reached a valuation of $ 5 billion after its last fundraising round in November 2017. More recently, the startup has hired a number of investment banks for its IPO in the US, where it looks to have its eyes on a like-minded competitor: Tesla, starting with its aim to raise two billion dollars to continue its development.


Eight Tips from the Far East

One of the main reasons for the differences between Germany and China's startups might be found in the different mentalities. But putting that aside, what can German founders take from their Chinese counterparts that will make them stronger?

1. Chinese Speed

China's companies are faster at setting up new start-ups. Why? Heavy competition forces them to bring ideas to market faster than their competitors. While a product takes about eight months to a year from the idea to the market launch in Germany, the same process takes 2-3 months in China.


2. Iterative processes as a secret of success

The ability to develop offers so quickly was due to China’s former role as a copycat. Many companies initially made products they did not develop themselves. The focus of their activities was therefore on the optimization of the manufacturing process itself and the distribution on the market. They had learned to quickly launch prototypes to meet short-term demands.

This leads to a flexibility that is still manifested in the minds of Chinese founders, with their activities now also extending to the development itself. Thus, the core competence of a Chinese founder lies in his adaptability and the ability to react quickly to changes. An ability that pays off - especially in product development since iterative processes can help drive innovation steadily. Bringing out a non-perfect product has many advantages - a fact that German startups need to bear in mind. In the early stages of development, constant customer feedback makes it easy to find out what works and what does not.

3. Funding options drive growth

A major enabler of Chinese startup success has been its access to a broad range of funding. According to the German Startup Monitor 2017 (DSM 2017), around 82 percent of German startups are still largely financed through their own resources. Just under a quarter of startups do not know at all whether there is a regional network / cluster for funding. The startups, who are part of such a cluster, rate their added value as very high. In particular, state subsidies are not yet exhausted in Germany. The Chinese, however, show that getting an overview of possible funding programs is worthwhile. For almost all areas there are funding opportunities at regional, national and international level.

4. The user should be in the focus

Why are Toutiao, Mobike, NIO & Co. so valuable? They effectively connect their product or services to their user needs’ - a reason why they are not only highly rated, but also successful with their target group. They identify themselves with developing innovative technologies, but use these as the basis to offer products that perfectly meet the needs of their target audience.


5. Innovative technologies is key

Almost all successful ideas from China are based on leveraging recent technologies. There is a general understanding in the startup community that Artificial Intelligence further increases the value of innovative companies. In combination with big data and algorithms, AI starts by solving the issues that often doom other companies to failure.

Hans Tung, Partner at GGV Capital, on the situation in the Middle Kingdom: "In my opinion, pure AI research companies and providers are not as exciting as companies that provide consumers with a real solution and apply Artificial Intelligence in order to personalize the consumer experience. Pure AI startups are overrated. If you look at companies like Toutiao, they have focused on AI to serve the end user."

6. Lack of know-how can be an opportunity

Chinese startups do not see a lack of skills as a limiting factor. Instead, they work with other founders or external partners. Competencies that the Chinese still rely on are mainly downstream steps. Although upstream processes such as the development of technology are becoming more important, they are not yet core competences, and therefore, the Chinese are accustomed to acquiring technologies through license agreements or reverse engineering. Experiments and production itself are then carried out again in-house.

Chinese are looking at innovation in a completely market-oriented way, technical aspects are used as a tool to succeed in the market - that's what makes Chinese startups so successful. With the help of bundled know-how, synergies that will make a big breakthrough can be created. One way that Chinese startups use to broaden their knowledge is to use the country’s support opportunities. The numerous accelerators and incubators provide resources, so that the founders do not have to worry about missing know-how and can focus on their ideas.

7. Integrated digital and physical ecosystems

A common feature in Chinese companies is their orientation towards producing self-contained systems that combine digital and physical components. Mobike, for example, integrated the physical bicycle rental with various digital components such as Artificial Intelligence and Big Data. This means that China's Unicorns do not only focus on the development of specific digital products such as algorithms, applications, chips, etc., but also on a combination of different elements, which can then be sold as a complete package. In parallel, the Chinese are also focusing more and more on technological innovations and developments. However, the approach has changed: Once the Copycat, Chinese companies have learned to look at the market holistically, to reinvent and improve business models and processes.


8. Open Source as a necessity

Shenzhen, the Silicon Valley of Hardware in China, strongly believes in the free development of innovation. Manufacturers in Shenzhen identify themselves through open source hardware and software, where people share information online. In turn, this drives innovation. The goal is to give everyone access to information, so they can collaborate on the product. In Shenzhen, this is referred to as the "Maker Movement".

The problem many other nationalities see here: how to protect our intellectual property; the result is that companies spend tons of money on lawyers to protect their ideas. In the end, the products are often not even manufactured. In China, the strong network of people working together on innovations and sharing ideas has created the industry's unique ecosystem of ideas and innovation.


The next level of digital transformation - powered by Silicon Dragon

Every day, new start-ups are popping up in China, with and towards the west, and its markets. To gain exclusive insights into the digital transformation of China, dgroup is organizing the INSIDE CHINA SUMMIT in Autumn 2018.

The annual Digital Thought Leadership event provides significant insight into digital success factors of China's tech giants, and both inspires and encourages participants to shape the way to a digital future through Chinese approaches and technologies. In Germany, Chinese companies are not only a role model, but also a strategic partner. Further information about the event can be found at www.insidechinasummit.org.

Olaf Rotax is managing director at dgroup, one of the leading consultancies for digital transformation in Europe and part of the global Accenture network.

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