Will China Lose its “Innovation Moment?”

Letter from Shenzhen

I recently went to China to speak at a conference on innovation and to launch the Mandarin edition of my book Creative Intelligence. I knew I was flying into China’s booming “Innovation Moment” because the conference topic was “disruptive innovation in banking.” And it was being held in the city of Shenzhen, where dozens of start-up incubators and maker spaces have grown in in the shadow of shuttered shoe and toy factories.  What I didn’t understand fully was that this burst of creativity was facing powerful political and economic forces that could easily destroy it. China’s “Innovation Moment” may well be fleeting.

The banking conference itself was fun. Alibaba and Tencent, China’s online ecommerce giants, have been rocking the traditional state-owned banking world of marble and glass buildings, long lines and serious-faced guards with online personal mobile payments and investment platforms. To my surprise, instead of middle-aged men in suits, the banking audience was composed of mostly young women and men in their late 20s and 30s who clearly were deep into the digital, social world in their personal lives. They were confident and willing to disrupt the business models of their own banks, if given the chance.  At dinner, a copy of Creative Intelligence was put on everyone’s seat and we played at book-signing (books make very good swag).

For me, what really makes this China’s “Innovation Moment” is the depth of the creative capacities in companies. It’s not just about harnessing the latest technology or the exploding local venture capital market or even Alibaba’s incredible IPO that’s so exciting.  It’s that Chinese innovators can go beyond a tech-centric approach to innovation to understand what is emotionally meaningful to their customers. They can reframe the conventional business model narrative to fashion new b2c engagements with people. And of course, being Chinese, they can scale like crazy. In banking, retail, communications, media, there is enormous disruptive innovation going on in China.  

Take virtual hongbao. Hongbao are the red envelopes filled with cash that Chinese give to relatives and friends on holidays. Companies use hongbao in a big way. There is no more important ritual exchange in Chinese culture, especially on Chinese New Year. Tencent was the first to design “virtual hongbao” by allowing people who use its WeChat messaging app to send digital hongbao that put real money into the bank accounts of others.  It was a brilliant integration of a tech innovation—online mobile money transfers—with a deep cultural practice to generate a powerful user experience.  With people linking their bank accounts and credit cards to WeChat, Tencent also boosts its online businesses, such as taxi-hailing and ecommerce.  And retail companies can open new branding and marketing channels through WeChat by giving hongbao that are linked to New Year’s events. Very smart.

Innovation is moving so fast in China that the disruptors are disrupting themselves. Tencent disrupted Alibaba, the pioneer in mobil money transfers, with this product. Alibaba has since come back to offer, on its Alipay platform, virtual hongbao exchanges on its social networks, Laiwang and Sina Weibo, China’s Twitter.  Of course, we know the disruptive innovation Alibaba has unleashed in recent years—crowdsourcing movie/media investing, offering higher rates to Chinese savers and opening up whole new areas of investments for China’s upwardly mobile. There are now Chinese companies—big ones including computer giant Lenovo, as well as thousands of tiny new startups– that are doing innovation on a global par with American and European companies. 

But I have doubts about whether it can continue and they began just as I walked into  my hotel room. In Shenzhen (like everyone who travels), the moment I checked into the (pretty fancy) hotel, I checked my gmail and knew something was wrong. It was so incredibly slow. I couldn’t Google. I couldn’t get the NY Times. I’ve been to China before and this has never happened. In fact, this had never happened to me anywhere else in the world, including Russia. So I went down to find out what was wrong and a Chinese guest in the elevator told me. The government censors were finally into the Virtual Private networks (VPNs).  For years, the deal in China was that the government would censor the internet for the masses but permit the elite to use VPNs (virtual private networks) to get around government controls. That allowed foreign and local business people, engineers, scientists, Communist Party bosses and bureaucrats, students, professors, the military—China’s elite—to breach the Great Firewall of censorship. Since the start of 2015, that is no longer the case. For China’s business class, including its many young entrepreneurs, China is increasingly cut off from the world.

That’s what I felt in Shenzhen—cut off. No Facebook, Google, New York Times, Bloomberg News, the Wall Street Journal and my gmail of course (a month after I returned to the US, Beijing cut off access to Reuters as well). That’s cutting me off from pretty much all the global economic and political news I use in my life. The only site I could access was the Financial Times, which is great but a singularly British lens on the world.

In addition, everything was so slow on my computer. It felt as though a government censor was in my room, at my keyboard, reading everything first and giving me permission to see just a little bit of the flow. The slowness itself freaked me out.

And it is disturbing Chinese innovators, as well.  The Great Firewall is now so high it is preventing China’s innovators from accessing global networks.  That means being cut off from the latest technology, business models, concepts, trends, talent, tools and capital. It means not being able to be on Facebook with your friends and workmates.  The South China Morning Post (2/18/2015) quoted Pin Wang (@pinwang on Twitter), a video game designer who founded Substantial Games, (http://substantial-games.com) as saying “something that should take 15 seconds takes three or five minutes, and it screws with the way you flow or you work. We don’t have the resources to move because we’re a startup but we talk about it all the time.” Pin’s team can’t access their email, share documents, talk on Facebook or use other online services blocked by the internet censors.

This can’t be good for innovation.  

At the banking conference, a friend who knew the city took me to visit the electronics part of Shenzhen. It’s a great part of that city, with towers after tower, 10, maybe 15 floors each full of electronics stalls, selling the latest in Chinese, Korean and American cell phones. It was a mob scene. China is huge market for mobile technology products. People love them.  On our tour, we walked to the back and there was another scene—dozens of stalls with three or four people each assembling new “Apple” iPhone 6s and putting them inside fresh “Apple” boxes, wrapped perfectly.  It was all done in public and I was stunned. It’s one thing to read about copying and counterfeiting in China, it’s quite another to see it being done so openly. 

Counterfeiting clearly hurts foreign tech companies but it is now seriously undercutting the growing number of Chinese startups as well. In the ChaiHuo co-working space in Shenzhen, Ryan Liang (formerly of Philips and ZTE) developed a VR (virtual reality) headset (SMCP. March 3, 2015). Premier Li visited ChaiHuo in February to support the government’s drive to generate economic growth through innovation. What Li did not see were the cheaper knockoffs of Liang VR headset that were killing the product in the marketplace. “The economy has relied too much on copying other people’s creations and selling them at cheaper prices,” Liang said.


“It will take a lot of change for people to realize the true value of innovation.”

This can’t be good for innovation.

Neither is what I call the “Russification” of China’s economy.  In this visit to China, I kept hearing about “who’s behind” this business, “who’s behind” that entrepreneur. By that phrase, people meant, which family and/or political faction secretly owned and favored different companies.  Innovation depends on original thinking that is able to harness resources to scale in order to generate profits and rewards. If those rewards are then captured and taken away by powerful political groups, the incentive for innovation goes away. This is what has happened in Russia, with politically connected groups grabbing control of companies away from their founders.  It began in the oil industry and has now spread to high-tech.  Pavel Durov, 29, founder of Russia’s largest social network (with 100 million users), Vkontakte, left for Berlin recently after his two co-founders were forced to sell their stake to United Capital Partners, which the FT describes as “ a fund whose senior employees have strong Kremlin connections” (FT April 25, 2014). Durov is being joined in Berlin by a small army of Russian startup entrepreneurs who are fleeing the politicization of innovation.

It appears to be happening in China as well. Politically-connected families dominate the private sector. Ownership is opaque and crossing the wrong people can end a startup’s future. Caixin, the only significant independent China-based media organization, reported (2/9/15) that police from Hangzhou, Alibaba’s home province, went to Shenzhen province to scare Xiang Jun, the CEO and founder of Shenzhen Dimeng, a website that is involved in the sales of heavy-duty machinery. The company had posted accusations of Alibaba selling counterfeit goods and in doing so, evading 5 trillion yuan in taxes. Caixin quoted  Xiang saying the police told him “do you have any idea who is behind Alibaba? If we told you, you would be scared to death…”

Actually, we don’t know who’s behind Alibaba.  Founder Jack Ma didn’t reveal his co-owners to the investors of his IPO.  But they appear to be powerful and connected. And they may have enemies. Xiang’s accusations came after the State Administration for Industry and Commerce (SAIC) publicized a private meeting with Ma where they accused Alibaba of selling counterfeit products online and not doing enough to end the practice.  By going public, SAIC has undermined Alibaba’s New York IPO and unleashed a series of investor lawsuits. I don’t know what’s going on—and neither does anyone else—except to believe that there are political forces we cannot see that could be acting against China’s most successful innovator.  Since SAIC’s action, Alibaba’s stock has languished. It hit its low of 81 ½ on March 3, down from its high of 120.

Russification also extends to foreign high-tech companies in China who are coming under attack for “corrupt” business practices that identicle to those of all Chinese companies, local as well as foreign.  Glaxo, Apple, Daimler, Qualcom are all great global innovators, forced to pay billions in fines, offer their technology to local competitors and publicly humiliated. When the CCTV ran a TV show slamming Apple for bad service in China, it wasn’t clear whether the attack came from local rivals who paid CCTV journalists to attack Apple, from the government itself which uses CCTV as a propaganda vehicle or from reporters trying to shake down Apple. People in the high-tech/startup scene believe it is only a matter of time before Apple comes under serious attack again and made to pay a huge fine and cough up more technology.

Again, this can’t be good for innovation. 

So it’s a pivotal time for innovation in China. On the surface, innovation is boiling, with swarms of startups and much disruption. Beijing is strongly pushing innovation to replace exports as the engine of economic growth.  Ma Xingrui, the head of China’s highly successful space program, has just been appointed party boss of Shenzhen. We are looking forward to Ma energizing Shenzhen’s ambition to be the next world-class innovation hub,” said Guo Wanda, vice-president of the Shenzhen-based China Development Institute. “ I think Ma’s reputation in academics and aerospace could attract overseas talent and capital.”

Perhaps. But his reputation will have to outweigh many policy negatives if he is to successfully stimulate an innovation revolution in Shenzhen. I wish China’s many startup entrepreneurs good luck but I can’t help worry that China’s “Innovation Moment” may be ending just as a thousand flowers are beginning to bloom.