Bennett Voyles Authors

Will China Overtake Silicon Valley?

June 23, 2014

Maybe not so soon… but the tech scene in China is big—and getting bigger.

For the past 40 years, Silicon Valley has been to the digital revolution what Detroit was to the automotive revolution–or Manchester to the first industrial revolution, for that matter.

But will it last? A growing number of technology executives now believe that Chinese tech hubs such as Beijing, Shenzhen or Shanghai will eventually overtake Silicon Valley. In 2013, 33% of global technology executives surveyed by KPMG believed that another country will become the tech leader as soon as 2017. Of that a third, or 39%, believe that China is best-positioned to take the prize, followed by 19% for India.

Others argue that it won’t happen for decades, if ever, and say that Silicon Valley’s ecosystem for technological development is so rich that no other location will ever be able to replace it.

A closer look suggests that the China bulls are right in thinking that technology companies are gaining sophistication with incredible rapidity, but whether they will overtake Silicon Valley any time soon is debatable. A number of factors may keep Silicon Valley ahead of the Silicon Dragon. Not because Chinese geeks are any less innovative than their counterparts on the other side of the Pacific, but because of the fallout of some old cultural habits.

Growth in China

Until recently, Chinese technologists have had a reputation for building knockoff versions of successful Western companies.

This is often seen as a weakness but Yu Zhou, a professor of geography at Vassar College in Poughkeepsie, NY who studies industrial clusters, argues that there’s no reason it should be. “It doesn’t make sense for China to spend a whole lot for extremely new things,” she says. “From a company perspective, why would you spend a whole lot of capital, develop something that there is no clear evidence that it has commercial benefit?”

In any case, that’s starting to change, according to David Chao, co-founder and General Partner of DCM, a leading Silicon Valley venture capital firm whose past investments include stakes in, an early US information site now owned by The New York Times, and Renren, the Chinese social network.

Just a year ago, Chao said, 95% of the Chinese companies his team evaluated were “me-too” companies, offering a copycat version of a Western model. Now the ratio is probably 80% me-too, 20% developers of an original idea or business model.

Chao, a familiar name on Forbes’ Midas List of the world’s top 100 venture capitalists, says that over the next 10 to 20 years, he expects Chinese companies will take the lead in a number of industrial sectors.

What do investors like about China’s tech market? A workforce with good technical skills for one thing. For another, Chinese start-ups all grow up in the world’s biggest technology market. Nearly a quarter of the world’s internet users are Chinese, and in some categories, internet start-ups have an advantage because government policies keep their natural competitors on the other side of the Great Firewall. A second factor is the fact that China is also the world’s largest cellphone market–1.2 billion cell phones and counting, according to a 2013 Reuters estimate.

Not So Soon…

But as promising as those advantages might sound, Chao and other observers who know both markets are skeptical that Silicon Valley will be displaced any time soon.

“It’s not going to happen in the short run; for the foreseeable future, China is not going to be a leader in technology,” says Zhou.

“It is very hard to imagine in my lifetime that Shanghai or Beijing overtakes Silicon Valley as a hotspot for global innovation, because Silicon Valley has just a unique combination of the right infrastructure, legal framework, and history to continue to support the creation of entrepreneur-driven growth businesses,” notes Scott Anthony, the Singapore-based Managing Partner of Innosight, a global innovation consultancy.

That’s not to say they don’t believe that innovation isn’t happening in China–several cities, especially Shanghai, are already hotspots. “As success begets success there’s no reason to expect that not to continue, just as I expect Singapore, Manila, Sydney, Jakarta, London, Boston, Berlin, and more to continue to be fruitful homes of innovation,” Anthony says.

“Will China become a strong, innovative power? Yes it is, and will be,” says Zhou.

However, others argue that a few factors may hold Chinese companies back.

Education is at the top of Chao’s list. Stanford University and the University of California at Berkeley have played crucial roles in the development of Silicon Valley, both as a source of research and talent. China has some strong universities too, but Chao says the Confucian tradition of deference to elders stifles dialogue and experimentation, slows down the circulation of ideas. “Asian colleges have a very hierarchical professor system. It’s difficult for juniors to promote their works relative to senior professors,” he says.

Ironically, Chao thinks the age preference inside the academy may contribute to an extremely youthful startup culture outside. Silicon Valley has traditionally been a topsy-turvy place from a Confucian point of view, where young people with fresh ideas are prized and old people with traditional points of view shown the door with very little ceremony. William Hewlett and David Packard were recent Stanford University graduates when they started Hewlett-Packard; Steve Jobs was 21 when he started Apple; three decades later, Mark Zuckerberg was 20 when he launched Facebook. But the Chinese start-ups’ aversion to old people may go too far. Chao says he thinks a distrust of age may increase the founders’ reluctance to hand off their company to more experienced executives as it grows, a common strategy in Silicon Valley.

Chao speculates that this youthful self-segregation may lead entrepreneurs to focus development on areas where the underlying code is not actually very complex, neglecting the kind of complex sectors that can only be run by very experienced managers, such as the semiconductor business.

Language skills may be another challenge. In Silicon Valley itself, for instance, one anthropologist who has studied Chinese-run local start-ups found that language skills made it more difficult for them to make deals, according to Bernard P. Wong, author of the book, The Chinese in Silicon Valley, and a professor of anthropology at San Francisco State University.

But they aren’t the only limitation. The picture Wong paints of the typical local Chinese-owned high-tech firm is of a small, isolated company that short-changes itself in a variety of ways, such as failing to put enough money into marketing, failing to make itself visible to the community through social involvement, failing to adopt Western work schedules and wage structures, and not institutionalizing its business practices.

This mom-and-pop approach tends to be overly concerned with hierarchy and “face”, Wong says, instead of focusing more on business logic and developing economies of scale. Such personalization hurts the company in other ways too, according to Wong. On average, he says, Chinese entrepreneurs “tend to keep their firms too long and miss the opportunity of selling their firms for a good price.”

But Zhou says she thinks Westerners often underestimate the level of innovation that is actually going on in China. “The problem is that the Chinese internet world is not the same as the American internet world…. Unless you live there, you don’t know what’s going on. It’s like you’re eating American food and you go to China and you can’t find it, you say, ‘well, there’s no good food here.’”

Made in China

In the beginning of the PC era, Apple made its own computers, at a factory in California. Now its devices are produced in Asia. “Designed by Apple in California, Made in China,” read the boxes of many Apple products. Over time, this state of affairs also seems likely to become more complex, given the growing sophistication of tech centers all over the world, concerns about US government surveillance practices, and a burgeoning demand for products that meet the needs of non-American markets.

“Eighty percent of netizens are outside America, whereas 80% of internet services are provided in America. This is… not only… a huge challenge,… but an opportunity as well,” said Wang Jian, Chief Technology Officer of Alibaba, as quoted in an interview with the Xinhua news agency last November.

Finally, Zhou argues that it’s important to not let talk of competition between the tech centers obscure the reality that more innovation is always better. Innovation is not a zero-sum game, she says. In fact, the more ideas flow and the more they are exchanged, the better. “The thing about ideas is that you can combine them and work with each other. It doesn’t have to be that my idea is owned by me and nobody else,” she adds. “That’s the point of ideas.”

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