In the past, China blatantly copied ideas and products from the West. Over the past decade, however, the energy and intelligence powering China’s catch-up “imitation economy” have begun to spill over into greenfield spaces not yet seen in the West. Key factors driving China’s “creation economy” include new wealth and China’s love affair with mobile technology. Today China has thousands of nimble upstarts in an ecosystem with valuations and access to capital that rivals Silicon Valley.
5. China – a perfect storm for innovation
Mass market of early adopters
Chinese consumers are impatient and
sophisticated mobile gadget enthusiasts always
ready to try out new tech
700+ million mobile internet users
Huge China market spans super-rich elite
consumers and third-world mass market, mirrors
global market
China market size and diversity challenge its
highly competitive tech companies to adapt,
creating world-class competition
Chinese consumers are relatively forgiving of
mistakes, allowing firms to experiment and learn,
accelerating innovation
Xiaomi low-cost smart products line for China’s
sophisticated mass market of early adopters
6. China VCs fund “incremental innovation”
Venture capitalists in China focus on “good enough” hardware, “scaling to market”, and execution of
valid ideas, rather than funding moonshots
7. Xiaomi – “fast commoditization”
Xiaomi pioneered the fast commoditization of connected devices through its online-only, low-margin, no-advertising
flash sales, and by rapidly scaling its product lines through acquisition, and “open-source” collaboration with its geek
fan base. Huawei, Vivo, and Oppo are now copying the Xiaomi strategy, commoditizing innovation at unprecedented
speed and scale
8. Apple stores are a celebration of the devices. Mi
Home stores are an on-ramp into a what can best
be seen as a modern lifestyle enhanced and
simplified at a hundred points by digital devices. . .
. A growth-focused Apple would be advised to take
notes – for their product development teams, not
their lawyers.
- David Wolf, Silicon Hutong
9. Shenzhen: Making hardware sexy again
The city Shenzhen has morphed from “copycat central” to an ecosystem of collaborative, fast-learning
suppliers and factories – the world’s first “open source” electronics supply chain.
Tech entrepreneurs now flock to Shenzhen to develop prototypes and produce for mass markets
Shenzhen 22% average GDP growth 1980-2016 and more patent applications than Britain or France.
Nanshan District: 125 listed firms with $400b market cap and higher per capita income than Hong Kong
Silicon Valley = rich world problems, Shenzhen = affordable hardware solutions for the masses
10. Huawei outspends Apple in R&D
Shenzhen-based telecom equipment maker and
global leader in 5G networks, Huawei now
moving into smartphones and cloud computing
2016 global revenue $76b, up 32% YoY
82,000 of its 180,000 employees in R&D
One of highest generators of international
patents; Huawei IoT connectivity protocol
recently named global standard
Global innovation network includes two dozen
R&D centers and collaborative hubs with
multinationals and universities worldwide
11. China becoming global patent leader
China surpassed the United States in 2015 in total number of patents, but ranked third in international
patents in 2017, according to OECD Ecoscope. China IP licensing income, however, is still just1/100th
that of the US, and continued weak IPR protection hampers innovation
12. China extends its lead in drones
Shanghai-based Ehang wowed
CES 2017 audiences with its self-
flying air taxi drone 184, which is
set for deployment in Dubai this
summer
Developed in Beijing, the Hover
Camera selfie-centric drone is
available exclusively with Apple in
a $500 bundle
Early leader in drones, Shenzhen-
based DJI accounts for 70% of the
global consumer drone market
and in 2016 earned $1.5 billion in
revenue
13. Electric Vehicle (EV) innovation
China targets 5 million charging stations installed in the country by 2020, and 80 million by 2030.
507,000 new-energy vehicles were sold in China in 2016 with the five top-selling EV models all local:
BAIC, Zhidou, Kandi, Geely, and BYD (not Tesla, which announced it will build a Shanghai factory.)
Beijing aims to make its taxi fleet electric and avoid battery charging hassles by swapping out
depleted ones for freshly charged battery units in a mere five minutes, rather than charging at the
site, which takes at least 90 minutes.
14. China taking lead in urban agriculture
Confronting overcrowding and polluted traditional farmland, China is at the forefront of innovation in
urban and “vertical” agriculture to produce safe food that relies less on insecticides and chemical
fertilizers
15. China innovation by global acquisition
Chinese companies are playing catch up by buying
inventions, brands and distribution networks globally.
China’s big three internet giants Baidu, Alibaba, and Tencent
(BAT) spent nearly $40b over the last year (see graphic)
Appliance maker Midea bought Germany’s industrial
robotics pioneer Kuka for $4 billion to prepare for a robotics
future
Lenovo bought IBM’s PC division, Geely bought Volvo,
ChemChina bought Pirelli and Syngenta, and Fosun bought
Club Med
League of Legends and Clash of Clans are now both owned
by Tencent
Ninebot raised $80 million and bought Segway to settle its
patent battles and secure a great brand name and
distribution network.
17. Sharing economy: Didi out-ubers Uber
China has 168m people using mobile ride-hailing apps, and Didi was booking more rides than Uber
globally even before acquiring Uber in China last September. China’s sharing economy includes cars,
bikes, electric charging stations, umbrellas, washing machines, and even basketballs
18. China bike sharing app innovations
Innovations: dock-less bikes (users use GPS to located nearest one), GPS system powered by
pedaling, locks that open when QR code on bike is scanned, convenient mobile micropayments
(15 cents for 30 minutes), lucky subsidy lotteries for riders. Cost per mile: car 60 cents; bike 12 cents
19. China: 67% global (car + bike) ride shares
10 billion annual trips forecast for China alone. Shenzhen user study shows 50% of bike rides are
commutes, 29% leisure/exercise, 12% shopping. Five rides per bike per day Source: Hillhouse Capital
20. Ofo bike share startup valuation tops $1b
With over 30 million riders at 1 yuan per ride, investors bet on China’s massive micropayments market
21. Xiaozhu one-ups Airbnb
Xiaozhu provided total travel planning for outbound tourists far ahead of Airbnb, subsidizes
installation of smart locks to help with key transfer issues, and sends consultants to help
home owners prepare houses for rentals.
Xiaozhu is rumored to be an Airbnb acquisition target, but will it end like Didi-Uber and
Taobao-eBay with the China company coming out on top?
23. China ecommerce: A great leap
Growth at scale
China’s online retail market is the world’s largest at $752b in
2016, more than double the US in size and nearly double the US
in growth rate*
Goldman Sachs forecasts China ecommerce will top $1.7t in
2020
Ecommerce accounts for 15.5% of China retail sales, but just
8% in the US
Alibaba tops Walmart as world’s largest retailer for two years
running, handles more transactions than Amazon and eBay
combined, and can process 4x more packages than Amazon
Top growth sectors: cross-border import, fresh food, and brand
retailing
58% of JD.com orders delivered within one day
*Source: National Bureau of Statistics
24. 71% of China ecommerce is mobile
Source: Hillhouse Capital
26. Challengers taking share from Alibaba
Source: iResearch
Alibaba continues to dominate China’s ecommerce
market, but well-funded challengers are taking more
share
In B2C, Alibaba’s Tmall still controls 56.6% of the market
(see chart), but has dropped from 61% share in 2014.
Walmart has upped its stake in #1 competitor JD.com,
and seven other major challengers continue to rise
In fast-growing verticals like cross-border and fresh food,
energetic new growth leaders include overseas
shopping tip app Xiaohongshu, and global fresh fruit
importer Fruitday (Tiantianguoyuan), both backed by
over $100m in venture capital
In China’s C2C market (which still makes up an
incredible 45% of total ecommerce GMV volume),
WeChat’s personal “Weidian” stores are taking share
from Alibaba’s Taobao
27. China omnichannel originates online
Omnichannel enables China ecommerce players to bring online advantages like data to the offline
environment, increase customer touchpoints, and solve logistics issues
While Amazon has just three physical bookstores and one convenience store, Alibaba invested $4.6b in
China’s largest electronics retailer Suning in 2015, is controlling shareholder in department store chain InTime,
and partners with Bailian across 4700 physical stores.
28. Extending online best practice into retail
Simple Style is an O2O retailer that features over 60 original “Tao”
created-online brands in fashion and lifestyle
First store opened Sept. 2016 in Chengdu
Leverages Alibaba data to select brands, styles, and products to
reduce inventory and risk.
Uses location based technology to segment customers and
allocate store space to best meet customer preferences
Employs optimized logistics pioneered by online retailers for supply
chain production and product delivery
Places large digital screens throughout stores to enable QR code
purchases
29. JD.com to open 1 million stores
Unlike the West, the energy in retail in China is flowing from online players that are
capitalizing on China’s massive O2O space
30. Pioneering social commerce
China leads in social commerce. With a few clicks on their phones, WeChat users can establish “Weidian”
online shops and conduct “in-feed” promotion to their social networks, complete with payment and fulfilment.
China has 10m microstores*, where buyers and sellers transact in more trusted relationships. In addition,
“Cewebrities” or online influencers often set up stores, direct traffic to online sales, and even establish their
own brands. The current craze for interactive Livestreaming further drives online commerce
*Source: Renren
31. China leads world in fintech
China has nearly ubiquitous mobile payment,
several thousand peer-to-peer (P2P) platforms
that allow internet users to lend to companies
and people, and a growing array of digital
financial services for investment.
China is home to the world’s four most valuable
fintech unicorns – Ant Financial is the largest
In 2016, Chinese used their mobile phones to
make purchases 50x more often than those in
the US*
Second in scale to Alipay, WeChat has more
than 300m WeChat bank account bonded
users and is connected to over 1m merchants.
*Source: Forrester
33. 469m Chinese use mobile payment
Alipay is the leading payment app, but Chinese exchanged 14.2b red packets (cash gifts) via the mobile
app WeChat during Chinese New Year 2017, up from 8b in 2016. Apple is even adding a QR reader in the
native camera app for China because QR is such an efficient and popular way to do mobile payments
35. “I have a hard time
thinking of an industry
we cannot transform
with AI.”
Andrew Ng, former chief
scientist at Baidu, and
Google Brain, the company’s
deep learning project
36. China moving rapidly into AI
AI is a new field that has come of age just as China’s tech
revolution hits full speed
AI firms in China took in $2.6 billion last year, second to the US
at $17.9 billion and ahead of Britain at $800 million*
Key focus areas include voice and facial recognition, self-
driving cars, and machine learning
China’s AI-related services market to grow from $203 million
in 2015 to $1.3 billion in 2020, according to iResearch
China’s 700+ million mobile internet users create a huge pool
of data with limited restrictions on privacy and corporate use
in AI development
Huge government AI investment and incentive program
partnering with private sector
At the research level, China leads the US in published journal
articles in areas like Deep Learning (see chart)
Source: White House Office of Technology Policy, Aug. 2016
*Source: WuZhen Institute
Journal articles mentioning “Deep Learning”
or “Deep Neural Network” by nation
37. Facial recognition in the real world
China has a large centralized database of ID card
photos that can drive unprecedented real-world
applications of facial recognition technologies,
including scanning for criminals across surveillance
camera networks
Baidu, which cracked a 20+ year kidnapping case
using facial recognition, is trialing a system that
identifies people before picking up train tickets.
Beijing-based Face++, which analyzes the
distances between 83 points on a face, is being
employed by Alipay and Didi to verify ID for
payments and to verify drivers, and has a $1 billion
valuation
Other projects include scanners in coffee shops
that identify customers and buying habits to staff,
as well as security systems for female dormitories
38. Infervision uses AI to detect cancer
Beijing-based Infervision uses sophisticated image recognition to detect early-stage lung cancer in CT scans
that humans may miss. Infervision has installed programs in 20 hospitals across China, and is expanding to the
US and Japan and developing programs to help doctors analyze images of the heart, brain and stomach.
39. 3 Top AI Labs: Tencent a waking giant
Despite losing AI kingpin Andrew Ng in March, Baidu
has invested more than $1 billion with over 1,700
people dedicated to the field, as well as a joint lab
with the government’s NDRC. Baidu is an established
global leader in voice recognition
Didi, the $50 billion ride-hailing service that last year
acquired Uber in China, will drive AI frontiers through
its recently opened AI lab in Mountain View focused
on self-driving cars,
Making up lost ground, over the past year Tencent has
established AI labs in Shenzhen and Seattle, poached
Baidu big data head Zhang Tong, and partnered with
AI university labs like one at HKUST providing funding
and data in return for access to research and talent
41. WeChat app forms center of daily life
The app for all occasions
WeChat users have tripled over the past four
years to reach nearly 900m
Usage continues to climb with over 1/3 of users on
the app more than four hours per day.
WeChat accounts for nearly 1/3 of all mobile
internet time in China
Chinese users collectively spend 1.7 billion hours a
day on Tencent apps, more than they spend on
all other apps combined.
WeChat has been called “the operating system
for everyday life”, replacing phones, email, cash
payment, ride hailing, as well as online media.
While China has gone app-centric, the US
remains cell-phone, TV, and email-centric
43. WeChat chat groups: meet people online
Chat groups create a semi-private
environment, are interest-based, and
capped at 500 members
Any user can create any kind of group and
then invite others to join
Friends bring other friends into the group
where they can observe others in a group
setting
Users present themselves with a profile
photo or have the option to substitute
another image
Users can archive chat for binge reading
and easily remove themselves from groups
Nothing like this exists in the West – a
controlled way to meet people online that
leverages existing social networks
44. Mobile live-streaming and gifting
Everyone’s a star
Sites like Kuaishou allow viewers to gift money
to their favorite hosts, driving $2.5b in revenue
last year
In 2016, China had well over 325 million
livestreaming viewers
Kuaishou closed $350m in funding led by
Tencent
Brand advertisers are getting into the act,
sponsoring grass roots stars and livestreaming
their own events
17 year old Qi Zhihang is a star on
Kuaishou, singing for fans with his mother
45. Screenshot: Livestreaming new apt tour
In May, web celeb Xing Xiaoyiao gave 820,000 fans a live tour of her new apartment in Shanghai.
Virtual gifts appear at the left and comments appear at the right during the live feed.
47. Livestreaming eSports: 100m viewers
Live broadcasts of multi-player video game competitions by pros have taken off in China
China’s eSports gamers numbered 117 million in 2016, with the market size reaching RMB 40
billion, according to iResearch
High fees for popular hosts and events cause rapid cash burn
In May 2017, eSports broadcaster Panda TV, founded by the son of China’s richest man Wang
Jianlin, completed RMB 1 billion in Series B financing
Valued at US$1.2 billion, Tencent-backed Douyu TV took in RMB 2.2 billion in capital in 2016
48. Short video re-surges in popularity
While 2016 was a banner year for livestreaming,
2017 may see a challenge from re-surging
interest in short video
Advantages include more polished production,
and easier distribution via sharing
Platforms and users are finding synergies with
both formats
Fast-talking Shanghai comedian Papi Jiang is
the reigning short video queen with 44 million
followers across various platforms
50. China leads ad world in shift to digital
China’s passion for online media and mobile combined with its laggard government-run TV
industry create conditions for an incredibly rapid shift in ad budgets from TV to digital with
eMarketer forecasting digital ad spend will quadruple TV spend by 2020 and be 75% mobile.
23.6
31
40.4
50.5
62.1
73.3
83.6
20 19.6 18.9 18.6 18.7 18.8 18.9
0
10
20
30
40
50
60
70
80
90
2014 2015 2016 2017 2018 2019 2020
China ad spend ($b)
Digital TV Out of Home Print Radio
Source: eMarketer
51. China has highest % of mobile ad spend
In 2015, China began leading the world in percentage of ad spend over the mobile platform.
Personalized, algorithmic mobile newsfeeds such as Toutiao are driving growth
52. Alibaba tops Baidu in ads; Tencent rising
2016 overall online ad revenue hit RMB 277
billion with market growth of 30%, down
from 36.5% in 2015, but still robust
Alibaba’s performance-driven ad division
Alimama ranked #1 in 2016, overtaking
Baidu in size and growth rate
Tencent video led all growth with success
in self-produced content and by
leveraging its strength in social
Qihoo continues high growth using big
data and its diverse ad products
Source: iResearch (size of bubble is ad revenue, X-axis is ranking, Y-axis is YoY growth
53. BAT controls China’s online ad market
China’s digital and mobile ad markets are largely automated and under the control of Baidu, Alibaba,
and Tencent (BAT), leaving less than a quarter of the market for traditional brokers and overseas players
54. But Baidu is stumbling of late
China’s big three internet giants Baidu, Alibaba, and
Tencent (BAT) have dominated from their respective
strengths in Search, Ecommerce, and Social/gaming
However, Alibaba and Tencent are pulling away in
market cap and revenue, while Baidu has lost steam
due to lack of innovation and management missteps
Baidu 2016 revenue grew only 6% YoY to $10b, less
than half Alibaba at $23b and Tencent at $22b.
Huawei posted $75b.
Some speculate BAT may become HAT with phone
and cloud powerhouse Huawei replacing Baidu to
dominate China’s digital ecosystem together with
Alibaba and Tencent
62
352
331
0
50
100
150
200
250
300
350
400
Market Cap
Baidu Alibaba Tencent
Market cap data: June 9, 2017
55. China media innovates beyond ads
Ad revenue models in the US are under threat due to
user irritation with ads, ad-blocking software, and
“banner blindness”
Chinese online media are more innovative than their
US counterparts when it comes to non-ad revenue
Tencent WeChat, often considered the Facebook of
China, is prepared for a no-ad future: ads make up
only about 10% of Tencent revenue
Alternative non-ad revenue models include gifting
over mobile livestreams, a market already topping
$2.5b in China
Breakdown of revenue per user
56. Beauty app maker Meitu sells phones
Chinese companies look beyond ads for revenue. Wu Xinhong, founder of Meitu, the Snap of China,
enables users to beautify selfies and even apply virtual makeup, but makes most of his revenue
selling branded phones and has an $8b market cap.
57. Key trends in China adtech
Mobile programmatic becoming mainstream, but
advertisers still lack confidence in programmatic
Market moving toward transparency and more specific
value chain roles for each player that eliminate conflict
of interest issues, more like western markets
Better attribution modeling becoming available to
calculate ROI, so less focus on CPC/CPM in vendor
evaluation, and more on overall tech capability
Apps moving toward content, news, live broadcasting,
and away from utilities like browsers and security
Continued balkanization of traffic making it hard for third-
party DSPs who cannot get API access
Chinese players going abroad to acquire overseas
players with good tech and lower PEs
58. 3 major overseas adtech M&As last year
In August, Beijing-based Miteno
bought Media.net For $900 million
and aimed to help it expand into
China
In September, Shanghai-based
Orient Hontai Capital bought
AppLovin for $1.42 billion.
In June, Beijing-based Spearhead
bought Mobile SSP Smaato for
$148 million, and aims to allow
continued independent operation
60. China rushing into AR/VR ahead of US
China as early adopter
China AR/VR market expected to hit $8.5 billion
in next four years with 400% growth in 2015 and
300% growth in 2016
China accounted for 1/3 of global VR headset
sales in 2016 according to Goldman Sachs.
Taobao has been selling over 300,000 virtual
reality (VR) sets every month in China, and social
gaming giant Tencent plans to launch its AR
hardware in 2H 2017
More than 3,000 VR arcades are already
operating in China
61. VR marketing of luxury products
Dior and Tommy Hilfiger have been equipping their China stores with VR headsets in order to
transport shoppers to front row seats at their latest fashion show or event
62. Alibaba AR game: 1.7b interactions
Alibaba used augmented reality (AR)to drive traffic to offline stores in China prior to 11.11. Over
30,000 stores participated in the “Catch the Tmall Cat” AR game and more than 70 million people
played the game via the mobile Taobao app, generating more than 1.7 billion interactions.
63. Conclusion: Innovation China
China is a perfect storm for innovation:
✓ Diverse mass market
✓ Highly competitive tech private sector
✓ Abundant venture capital
✓ Digitally sophisticated and impatient consumers
China innovation is incremental: the execution of valid ideas and “fast commoditization” that
scales to mass markets
From Shenzhen to the sharing economy, from ecommerce to fintech, from livestreaming to
eSports, mobile advertising, and AR/VR, China, though still early on the curve, outshines and
out-innovates the world
65. China GDP growth slowing
After years of investment-led growth, China is shifting to a consumption-driven economy with
annual GDP growth rates rationalizing in the 6-7% range, still double or triple that of most
developed economies.
67. Service rises to 52% of China GDP
Source: National Bureau of Statistics and Hillhouse Capital
68. The rise of China’s middle class
Unprecedented wealth creation
Urban disposable income continues to rise at
near double digit rates
Consumer confidence is high
Commodity spending on items like food is
dropping, while leisure and travel are rising
China’s urban population surpassed rural in
2012 and McKinsey forecasts that by 2022, 76%
of China’s middle class will live in tier 2 and tier 3
cities
Percent of middle class households
rises from 4% in 2000 to 68% in 2012
Source: McKinsey
China middle class households
69. China internet users: 731m
53% of China’s
population is now
online and 95% of
them access the
internet via their
phones
Source: CNNIC
70. Global VC in resting mode
VC investment in Q1 hit $26.8b, an uptick from Q4 but below 2015- 2016 highs. Deals are fewer in
number, but larger in size. Exits are tougher due to investor caution and muted capital markets.
Lots of undeployed capital due to healthy fundraising over the last 3 years.
Source: KPMG
71. VC in China: Dry powder
China VC investment in Q1 hit $3.6b, up from $3.5b Q4 with undeployed capital (dry powder) of
almost $300b. Exits remain muted due to government regulations on capital markets.
Source: KPMG
72. Withinlink
Withinlink is a China-based marketing technology incubator and early stage venture fund founded
by the former CEO of WPP China. www.withinlink.com