With the Trump administration’s trade war with China making headlines every day and Chinese companies leaping ahead of their global competitors in key technologies, there is plenty of interest in how the country’s tech sector got to its current level of dominance and where it’s headed in the coming years. Veteran journalist Rebecca Fannin, who was one of the first American journalists to write about China’s entrepreneurial boom, provides some answers in her new book Tech Titans of China, which has detailed of some of the key players and companies in sectors ranging from social media platforms and AI to the sharing economy and e-commerce.
Fannin spent many months reporting from China’s venture and tech ecosystem, which includes bustling incubators, accelerators, workshops, and networking events, where she interviewed venture capitalists, investors, and entrepreneurs to capture how the country has leapfrogged the U.S. in key areas. And she warns that China’s shakeup of the status quo should be a wakeup call for American business leaders. As one of her sources tells her, “China is going to eat Silicon Valley’s lunch.”
Fannin spoke with Fast Company about China’s most dynamic tech sectors, most impressive startups, and what she would advise the Trump administration.
Fast Company: You delve into such detail, and there’s such a breadth of technologies you describe. In what areas, whether it’s 5G or AI, is China most equipped to overtake the U.S. in a way that will have an impact for decades to come?
Rebecca Fannin: For one, electric vehicles. I think the new Detroit is over in China and that the U.S. is just not in the same category in terms of where they are.
It’s interesting because there are a number of Chinese electric vehicle makers that have set up in L.A. So there’s this cross-border element going on between L.A and China. And so BYD is in L.A., and Nio has a place in L.A., and several other ones do that. Karma does. There are something like 40 Chinese electric car makers that have some kind of R&D hub or some kind of facility in the U.S.
It’s not necessarily leaving the U.S. out; it’s bringing the U.S. in. And so for instance, Xiaopeng Motors, the company that I write about in the book, they have an AI lab in Silicon Valley that I visited, and they’ve been hiring from Silicon Valley. In fact, they’ve been in the middle of some lawsuits from Tesla over engineers that have moved from one place to another to their companies.
So it’s a very close tie. But I think China is the production hub for electric vehicles going forward. And also there’s a lot of AI development of autonomous driving happening in China. So I think the electric vehicle market is just poised to give China the lead. And if you look at what’s happening in Shanghai and in Shenzhen, their entire bus fleet is electric. They are getting ahead in autonomous driving research, and they’re getting ahead in this application of AI and electric together for public fleets. They’re way ahead of that, and they can just dictate it, so it’s more easily done than in the U.S. It’s the same thing with high-speed rail, where in China you can easily go from one city to another by high-speed rail. It’s not a big hassle. That’s just another area.
FC: And what about partnerships? You mentioned that 40 companies are operating in different parts of California and have labs set up. Do a lot of them have partnerships set up with American companies or American startups or American car companies? Or not really.
RF: Honda is working with Baidu on autonomous driving. So that’s one example . . . I believe that GM and Ford also have some alliances coming forward in China where they’re going to be working with Chinese companies. Ford entered into a new joint venture to produce electric vehicles in China and plans to start producing self-driving vehicles in Michigan by 2023. And Toyota’s first electric-only cars will go to China first and then to the United States and Europe.
It’s all relatively new, the American involvement, that rain chime in and development of electric vehicles is pretty new.
FC: In what other areas—maybe not quite as impactful as electric vehicles—is there such a potential for a huge advance by Chinese companies?
RF: I see it in the e-retail space. Alibaba is so far advanced, and so is JD, another big e-commerce company. I visited those big retailing outlets in the big cities in China. They’re very impressive. They’re much more advanced than what Amazon has with Amazon Go, with Whole Foods, for instance. It’s all very automated and just very crisp and fresh looking, and everything is mobile payments. You can use AR to look at ingredients of foods, digitally, right above the countertop where you’re buying the food. And there’s no cash. You can eat inside the supermarket. They have in-store restaurants where the food comes to you. You order it electronically and then the food comes to you on these trays on a robot-controlled conveyor belt and it lights up next to your table and you take the food out and the little robot goes away.
Anyhow, I think all this is going to come to the U.S., but China is just way ahead on it and way ahead on on-demand delivery, too. An example is Starbucks and Luckin Coffee. So Starbucks is basically copying the Luckin Coffee model of instant delivery and on-demand delivery, all by mobile. Instead of going in and standing on line, if you order it by mobile app, a scooter comes and delivers your coffee to you in the morning. Same thing for takeout lunches, everything is done by a mobile app. So the mobile app generation in China is very advanced, everything is mobile. China just skipped right past the PC era. And it went straight to mobile, and China has a young, digitally savvy population who like to try new things.
FC: Is that what accounts for how far advanced that technology is developed, that there is a much more kind of automatic transition to mobile whereas here it took a little bit longer?
RF: Yeah, definitely. I mean here we’re still using credit cards and we’re still using cash. Apple Pay is not nearly as in use as WeChat pay or Alipay in China. Everyone is using mobile payments. It’s pervasive. It just caught on really quickly, and it’s all very convenient. We have legacy systems in the U.S., so that’s more difficult to get around.
FC: And what was the most impressive startup you came across in your reporting? You know, it could be something really small. It doesn’t have to be a big company like Alibaba, but one that you were really blown away by—the technology they were developing and what its implications are.
RF: I like the drone company DJI in Shenzhen. They have well over half the market share globally. That’s a breakthrough for a Chinese company to have that kind of global impact. They gave me a demo of all these various drones that they have at their headquarters in Shenzhen, and they’re moving to a new space, one that would make Steve Jobs envious.
Their founder is very visionary. He started at the Hong Kong Science and Technology Park as a student, and then he developed this technology into a business, and he’s very secretive. And he’s raised a lot of money, and he has the breakthrough technology. Has the capital. He has managed to fight back a U.S. competitor who broke off from DJI. And so I give him a lot of credit.
FC: This is a very broad question but, what lessons do you think can be learned from what you observed, this huge renaissance in Chinese tech companies and how they’re developing so fast?
RF: Well, definitely there’s an entrepreneurial culture that’s alive and well and is very strong, stronger than I’ve seen in the U.S. So China has been playing catch-up for a long time, for about two decades now since the entrepreneurial boom began. And now they’ve gotten to the level that they are in many in many cases on par or close to being on par with the U.S. The U.S. will continue to be the global leader, I think. But China has that entrepreneurial energy, that work ethic. They have the venture capital, they have entrepreneurial heroes like we have in the U.S. They have their equivalent of Steve Jobs, Jeff Bezos, Bill Gates.
FC: And it seems like there’s more government backing. Like the government will throw billions at a technology?
RF: No, the government is not really backing these privately financed companies. What’s interesting about them is that they have financing from both China and the U.S. and Europe and Japan. So SoftBank has been there quite a bit. And Sequoia and Draper and NEA. If you go down Sand Hill Road, all the major players have invested in Chinese startups. So the government has this overall overarching plan to boost technology. And they also have a fund that invests in technology, but they’re not investing directly into these companies. Companies have money from the venture capital and private equity funds, who are financed by the pension and endowment funds in many cases and family offices. Look, the government has encouraged this technology to develop in China and they have also blocked U.S. companies from getting in, including some leading U.S. digital companies like Google and Facebook and Twitter and several media outlets as well.
So you could argue, these companies like Baidu and Alibaba and Tencent and Xiaomi, they got ahead because the American companies were blocked. But on the other hand, in some cases, I think the American companies were outmaneuvered by their Chinese counterparts. So if you look at Uber and Didi and the ride-hailing space, that’s what happened. Didi just kept bulking up. They bought a Chinese competitor, they won the price war with Uber. Uber said, ‘Well, OK, we’re just losing millions, billions over here. At some point we have to either win this market or give up,’ and so they sold out to Didi in China. And the same thing happened with eBay and Alibaba. What happens in many cases is an American company still struggling to get the right management into China and can react quickly enough to local changes know what the local market needs.
I think they’re getting smarter at that. I think Starbucks did. Their fast reaction to Luckin coffee is a good example of a company that says, ‘Hey, we know what we have to do, we have to get into this on-demand delivery and this mobile generation. We’ve got to get in there.’ Even Amazon, they’ve largely failed in China. And eBay failed, too. You just go down the list. Google claims it withdrew because of censorship, but they were also losing the market to the local competitor, Baidu. Look, these Chinese entrepreneurs are fierce competitors.
FC: And they know their market obviously a little better than Amazon or eBay would.
RF: Yes, and they will cut prices. They will go after your share, no matter what. I mean, I spoke to a venture capitalist who was working at eBay back at the time. He said the Alibaba people would stand outside their company door at the end of the day and try to persuade them to come work for Alibaba. To stand right outside where you work and say, “We can give you all better salaries, better this and that,” they’re very, very fierce competitors. I don’t think we’re quite used to that level in the U.S.
FC: What kind of advice would you give, I guess—given this intense trade conflict we’re in now—for the Trump administration in terms of helping develop our own tech, from 5G to AI? And with this trade crisis, how to negotiate a deal here?
RF: Well, the trade issue is a whole other aspect of it. But with technology I think there’s something to be said for the way that China has a top-down government mandate for advancing technologies. Like, you know—and we used to have this—we’re going to go to the moon.
FC: And with renewables, too. They’ve been very aggressive with that.
RF: Well, that’s true. I wish we had more mission-oriented policies to push our technology. What we’re doing now is we’re fighting back. We’re saying, ‘We’re not gonna let you in, we’re not gonna sell you our components. We’re not gonna let you come into the market.’ And that’s a defensive maneuver. I wish we had a more proactive stance. This country needs internet throughout the country. Large portions of the country don’t have internet. Also, look at our highways. When you go to China, all the infrastructure works. Our infrastructure is failing. We have a defensive policy, not a proactive policy.
I think that we need to pay more attention to national R&D spending. China is on the same level as the U.S. now for national R&D spending. And it’s about on par as well with scientific academic papers. If you look at patent applications, it’s about on par, too. China’s caught up considerably, and I quote this in my book that China has 21% of the world’s patent application patent filings. And the U.S. has 22%. All of these things are real indicators.
Look, we need to get our act together. We need to have some sort of centralized or visionary technology program, not necessarily like China. We’re not going to be a communist country, we’re not going to have top-down . . . It just seems that we don’t have anything today like “let’s go to the moon.” And China has that.
FC: What about intellectual property concerns? I mean, is that something that should be pressed by the U.S., as it has been by the administration? I mean, that’s obviously a central issue that’s always talked about in tech.
RF: Definitely. Well, this is an issue that always comes up with China. The Chinese have come to the U.S., they have gone to our best universities, worked at our best technology companies for numerous years, and then gone back to China and created copycats. But it goes deeper than that because of technology that’s being stolen from U.S. companies. The FBI is investigating about a thousand instances right now, and we’ll see what they find.
Look, the Chinese have become better when you’re an American company or a foreign company going into China. Now that China has its own IP to protect, there’s more recognition that IP matters. This was kind of a new concept in China. But now that China has its own, the Chinese are bringing their own [IP] cases. And so this what I hear from the lawyers—and they’re winning them.
When you have knowledge workers and you have an exchange of information as well, which often happens when you have new technology that’s developing, the information flow is really key to the development of new technologies. Having the U.S. and China and Japan and other leading countries all contributing to technology advances is good overall. Individual companies can be protected—that’s the other side of it.
The whole trade issue, I think what the market needs globally is for the best products and the best services to come from the best places. Right now, the U.S. doesn’t have a replacement for the China market. China has a replacement for the things that they can get from the U.S. They can turn to other countries for agricultural products.
The U.S. can’t find another China opportunity. The U.S. did a lot of these joint ventures with the Chinese in the early days, and they traded their technology for market access to China. And that’s still going on. Today, you do see Chinese buyers coming into the U.S., and some of these deals are getting blocked by the U.S. government in sensitive areas. I don’t have an issue with that. I think we do need to protect those kinds of technologies, particularly anything to do with military uses. IT is an area to watch. Each market is deciding whether they’re going to go with Huawei or not. And we may see a situation where we’re going to see a division over 5G—some going for the China side and others going for the Western side.