Tech Frontiers: Opportunities and challenges for the internationalization of Chinese technology enterprises

US-China Technology Frontier Series – This Q&A is the third in a series of articles developed by the AI+Web3 Research Center of CKGSB alongside industry experts on the US-China technology frontiers. The series aims to introduce the most cutting-edge theories and practices at home and abroad on the theme of digital technology and internationalization, open up the mindset of students, discuss new business opportunities brought about by the development of science and technology, and identify new opportunities for the technologization and internationalization of Chinese enterprises. You can find the first article here, and the second here.

Interviewer: Professor Sun Baohong is currently Dean’s Distinguished Chair Professor of Marketing and Head of the Web3+AI Research Center at CKGSB

Interviewee: Larry Zhou is a Fellow and Chief Network Architect at AT&T. In his forward-looking research, Larry focuses on on a number of topics, including Artificial Intelligence, the Internet of Things, Blockchain and Web3. Larry has demonstrated exceptional technical and architectural vision in the telecom industry as a true innovator and industry disruptor.

Chinese technology companies have employed a number of different innovation and development strategies in the era of globalization now passed, in order to cope with competition and restrictions from the US amid the current geopolitical climate. In this interview, Larry Zhou, Fellow and Chief Network Architect at AT&T discusses the strengths of, and challenges faced by, Chinese companies across the global technology landscape, especially within the context of the government mandate to “develop the country through science and technology.” He also discusses how to achieve broader growth through open innovation, support for SMEs and integration with international markets.

For readers concerned about the future direction of Chinese companies, this interview provides not only insights but also actionable strategic advice for dealing with global technology competition.

Q: What do you think is the way forward for Chinese enterprises given the call for “developing the country through science and technology”?

A.Fundamentally, I think Chinese companies should be based in China. But we also need to ask ourselves: Is our local development model going to stress single national champions or blossom into an ecosystem? Is it heading towards domestic interreliance or should we have more global ambitions and look out at the world?

Tackling the first question, I think that there needs to be more support for developing an ecosystem made up of both larger firms and small- and medium-sized enterprises (SMEs). At present, the Chinese market reflects a government inclination towards supporting large state-owned or private enterprises that end up as monopolies in their respective industries. For example, in the telecommunications industry, Huawei and ZTE have received large amounts of policy support, while many SMEs are struggling to survive.

I would argue, however, that smaller businesses actually have an advantage when it comes to technological innovation. The history of technology development in the US is good evidence of this, with the blossoming small business environment helping stimulate innovation, while large companies often lack an incentive to change due to their existing market monopoly and have more moving parts to manage, making it harder to steer towards change. I believe that if we want to speed up the scientific and technological progress of a country, it is of the utmost importance to support the development of SMEs.

Second, we should look to strengthen China-US co-operation and capitalize on our complementary skillsets. For example, the US is way ahead in terms of zero-to-one innovation, which has been evident in the development of AI given that basically every emerging part of the sector has its origins in that country. At the same time, the US has not been able to develop sufficient depth in many of these areas, while China’s performance in one-to-ten or even one-to-one-hundred innovation is unparalleled globally. Future technological and scientific collaboration, as well as healthy competition, is arguably the ideal way forward.

Additionally, it is undeniable that China is home to world-leading manufacturing capacity and the most complete industrial chain. In the US, I have personally seen it take years to build even a road, while in China a building can be constructed in as little as a few days. This is something China should be proud of.

The combination of zero-to-one and one-to-one-hundred innovation strategies will be a huge benefit to global development, so I sincerely hope that China and the US can stregthen their cooperation across science and technology.

Third, China should look to develop markets across the globe. The fierce competition among Chinese technology enterprises in the domestic market has led to ever-lower prices and ever-thinner profit margins. This raises the question of whether this mode of internal competition is conducive to the long-term quality development of enterprises, and highlights the importance of global market development.

At present, China’s economy is facing significant headwinds. The demographic dividend we have enjoyed for years as the most important growth engine, is gradually disappearing. China is no longer the most populous country in the world, with India surpassing China in 2023. In addition, from a GDP perspective, the EU’s GDP has surpassed that of China if the bloc is counted as a whole. We’re actually now in third place, with the US way ahead in first.

In terms of employment costs, China’s labor costs have been rising, and the gap between domestic wages and those in the US is narrowing, particularly in the technology industry. At the same time, China’s population growth rate has plummeted, aging is intensifying and the willingness of younger generations to work is less strong, resulting in the ‘lying flat’ phenomenon.

Under such circumstances, it is obvious that involution is not the way forward, and excessive internal competition will hardly provide impetus for the long-term development of enterprises. Although the external environment is not as friendly as it used to be, I still believe that internationalization and reform and opening up are the only options for Chinese technology firms. After all, with the global population exceeding 8 billion people, expanding means more market opportunities.

Many Chinese companies are already moving to, and succeeding in, international markets. This is especially so in developing countries, such as in Africa, the Middle East, Southeast Asia, South America and Eastern Europe, where China’s scientific and technological strengths and product competitiveness far outstrip local competitors.

For developed markets, China has the same advantages in terms of price and technology, despite the fact that these countries hold larger market shares. Due to extremely high labor costs in developed countries, it is difficult to lower product prices, while Chinese products can be significantly more competitively priced at the same level of quality. The most important overseas market is obviously the US. It is the largest single market in the world with a population of over 300 million people and the highest GDP and GDP per capita in the world. Once you break into the US market, you can basically enter any market in the world.

It is for these reasons I suggest that Chinese tech companies should not give up on the US market, even with the current increasingly competitive relationship between China and the US. The US has a large consumer base, with strong spending power in almost every household, so with cost-effective products and a focus on consumers rather than on government or military-related sectors, China can create more brands, both OEMs and ODMs, that can enter the US market.

When entering markets, companies need to tailor their strategies. Given that labor costs in developed countries are high and maintenance of products can be expensive, products must be designed to be highly automated and intelligent. For example, zero-touch products such as equipment with auto-configuration and auto-repair functions can significantly reduce the need for human intervention, resulting in reduced labor costs. Such automated and intelligent product design will help Chinese firms gain a foothold in developed markets.

Q: What are your suggestions for Chinese enterprises when it comes to modes of thinking in the current business climate?

First of all, Chinese technology enterprises should actively participate in global open source and open network projects. Ideally, Chinese technology companies can “flow like water,” adapting to various internal and external environments and flexibly responding to changes in the global market. Even with the current external environment as it is, Chinese firms still need to insist on opening up and going global. The world of the future is an integrated whole, and no country can develop in isolation, so I hope that China can play a major role in the development of that whole.

I also firmly believe that the world needs China, especially its existing leadership in manufacturing. But there is definitely a role to play in new developments, and the best way to take part in that is to participate in open source and open network projects around the world, of which there are many.

In the field of AI, for example, many of the widely used models in China were developed based on open source models, and although some Chinese companies claim that their models are self-developed, a closer look reveals that many are actually improvements based on Meta’s open-source model Llama 2. Such open source projects provide a starting point for us to stand on the shoulders of these “giants,” further optimize and develop.

Second, we should emphasize sharing and avoid the idea of “overtaking on a bend,” a term I do not really like as it makes people feel like they are trying to steal the achievements of others. “Standing on the shoulders of giants” is preferable to me, as it emphasizes the idea of incremental progress. We can learn from anything in the globalized world, especially open source projects, but we should also contribute our results to the open source community to promote wider progress.

It can be said that open source may seem to lack any immediate financial benefit, but what is actually to be gained are reputation and trust. Over time, a better reputation will lead to more opportunities and recognition for a business, making open source both a way to share technology and also effectively advertise your business. Therefore, we should seek to both make use of global open source programs as well as open up our technologies.

As I mentioned earlier, China’s strength in one-to-one-hundred innovation is clear to see, but I am concerned about whether China can maintain its world-leading position in manufacturing. With the demographic dividend disappearing and labor costs rising, China could face problems similar to those in the US during the 1980s. Prior to that time, the US had also been a manufacturing powerhouse, relying on its capacity to prevail in the Second World War. But the US subsequently shifted focus to the financial and service sectors, gradually abandoning the manufacturing sector, leading to China’s rise. It is key that China does not follow a similar path in favor of quick gains in the financial and services sectors.

Nonetheless, today China remains well-ahead in manufacturing and China and the US are well placed to complement each other’s development across the fields of science and technology. The marketplace of the future is full of both competition and cooperation, and this will be the best way to drive global technological progress.

Third, we should avoid involution and encourage innovation. In the domestic market, it is important to avoid unlimited competition for limited resources, involvement in which will erode the profitability of each enterprise and likely lead to few, if any, surviving. Instead of this fierce competition in the same space, we should encourage innovation and expand through “creative destruction” [a process in which new innovations replace and make obsolete older innovations]. The emergence of artificial intelligence has made talent development particularly important, and we need to rethink the role of academic qualifications and whether we need to train more people through ideas and passions.

The mathematician Shiing-Shen Chern once told his students not to pursue perfect scores because they required a lot of time and effort, whereas 80 points was sufficient to understand the essence of the problem. He believed that getting 80 points in half the time and spending the rest of the time learning something else would better promote innovation. This philosophy of education emphasises the development of individual traits rather than the tendency for all to homogenize.

With the rapid development of science and technology, lifelong learning has become increasingly important, we cannot stop learning and need to constantly update our knowledge to keep up with the times. At the same time, the development of science and technology also provides us with more opportunities, and encourages us to not be afraid of failure, because there will always be something new waiting for us to seize.

To sum up, the future is full of uncertainties and challenges, but also countless opportunities. We have to face these challenges, embrace the opportunities and become a driving force of positive change. Hopefully we can be the last line of defense for humanity against AI. Generally, only 1% of the population have been able to develop with AI and become the leaders of the future, and the other 99% will be replaced by AI. So, we hope that each of us will be able to be part of the 1% of superior humanity and the crucial protectors of human civilization.