Interview China Innovation Entrepreneurship
I recently had the fortune to sit down with Mr. Dickie Liang-Hong Ke, a highly accomplished business strategist, investor, and educator, to probe his mind on innovation and entrepreneurship in China. Mr. Liang-Hong Ke studied to become a software engineer, but his real passions lied in business. He built his first startups while still in college and later switched into sales, marketing, and telecommunications. Since then, he has led projects for industry leaders such as Ericsson, Microsoft, and Nokia, before becoming a Sloan Fellow at London Business School. During the interview, we discussed misconceptions about Chinese innovation, hot tech topics like blockchain, and market strategy for Chinese and non-Chinese companies. The following is the transcript of our fire-side chat and Mr. Liang-Hong Ke’s fascinating insights.
CH: You dabble in a lot of areas. From your LinkedIn page, it appears you’ve been a manager, entrepreneur, writer, and speaker in various capacities. What are some of the most recent projects that you’ve been working on, professionally or personally?
DL: I’ve been splitting my time into three main areas: advising, investing, and lecturing.
As an advisor, I advise numerous startup and fast-growing businesses, and incumbents in TMT and FSI sectors in creating innovative digital businesses as well. I recently served as a mentor for Startup Bootcamp’s Insurtech event in London, one of the largest such programs in Europe. In 2017, I was also selected from industry leaders to mentor for the Schwarzman Scholars program at Tsinghua University.
As an investor, I also helped take an A.I. and big data unicorn to IPO (initial public offering) in Hong Kong. I am raising a new fund for tech investment, and visit Israel and U.K. quite frequently to find good projects.
In terms of lecturing, I gave a guest lecture in December 2017 at London Business School on a business case of Tencent’s Digital Strategy, which I co-wrote with Professor Julian Birkinshaw (one of Forbes’ Thinkers 50 and Deputy Dean of London Business School). In fall 2017 I was also invited to speak at the Yenching Academy of Peking University and for Oxford University’s Rhodes Scholars.
Finally, I was recently invited by a leading Chinese think-tank to write about Chinese innovation and entrepreneurship going abroad, which will be compiled into a handbook on China’s role in globalization.
CH: As China’s economy continues to grow, many people in the West are talking about the need to better understand innovation in China. In your opinion, what are the biggest misconceptions foreigners have about Chinese innovation? How can we think about Chinese innovation more accurately?
DL: These questions are something my new book talks about. First, in the past 30 or 40 years, many people around the world have had the impression that China is an imitator that struggles with IP (intellectual property) issues, not an innovator. I actually think that label is somewhat correct. At least with regards to the internet, China started out by replicating the business models of other places, and by copying or counterfeiting foreign products. But, starting five or ten years ago, things have changed – Tencent and other top Chinese companies have become real innovators. Plus, people in the global tech sector still copy each other’s products quite often, with changes and customization – imitation is not exclusive to China.
If you want to determine whether the Chinese are imitators or innovators, you should try to be objective rather than subjective. First, can China innovate? If you look back at more than 3,000 years of history, since the Shang Dynasty, the answer is yes: China was a world-leading innovator. Only about 500 to 600 years ago, when the country became very closed-off, did this progress stop. China only began to seriously learn from the West about 150 years ago, during the late Qing Dynasty, and is finally innovating again today. So there is a long history to keep in mind.
When we talk about innovation, we also need to look at the numbers. You can learn a lot from input and output indicators, such as R&D (research and development) investment as a percentage of GDP (gross domestic product). China’s R&D investment as a percentage of GDP is not too bad right now, at just over two percent, whereas Israel and South Korea are around four percent, probably the highest in the world. Looking more closely, parts of China, such as Shenzhen, are already at four percent and want to ramp up to six percent. With many of the major tech companies in China based in Shenzhen, I am sure they will reach six percent sooner rather than later.
There are several more indicators. Firstly, when you look at individual companies’ investments in R&D, Huawei and ZTE represent the top two in the world. Secondly, in the last couple of years, I believe China represented almost 70 percent of new patents filed globally. Thirdly, many new Ph.D. students coming from China are in engineering and computer science, rather than liberal arts. Chinese universities are investing in different programs to drive innovation. Fourth, there is Made in China 2025, a top-down government initiative to drive domestic high-tech manufacturing and innovation.
Basically, there’s now a whole innovation ecosystem involving government; top tech firms such as Alibaba, Tencent, Baidu, and DiDi; and the Chinese education system. Top firms are investing a lot in A.I. (artificial intelligence) labs, big data, and cloud computing (I think Chinese authors have published about 40 percent of all peer-reviewed papers on artificial intelligence – that’s a lot). We should use all these indicators to avoid being subjective about Chinese innovation.
CH: Do you think the size of China’s population and industries, compared with other countries, are reasons why some of the domestic indicators are so large?
DL: I think that’s a very good question. In terms of quantity, China’s overall economy will catch up with the U.S. in the next ten to twenty years. R&D spending as a percentage of GDP will also be on par with the U.S. in ten years’ time. But China’s spending on basic research as a fraction of the country’s total R&D spending is still quite small when compared with that of US or advanced economies like Europe or Japan. That’s far from sufficient. With further effort, I am sure that Chinese innovation will accelerate in terms of both quantity and quality.
CH: Shifting gears, I understand you have an interest in blockchain and IoT (Internet of Things). There seems to be greater discussion and excitement around those technologies and their applications. What about blockchain and IoT excite you, and in what ways do you see them being innovated in China?
DL: Tech companies and people in tech have been talking about these technologies for several years, as they need to be thinking and working ahead of the general public. Even though there are a lot of public discussions now around blockchain, AI, and machine learning, people in the industry were already exploring technical feasibility and business opportunities some five or six years ago. Discussion might also be greater now because of better applications. For example, I visited Israel four or five months ago to speak on a panel and judge a start-up competition. There was a strong company applying IoT to fashion, i.e. integrating technology into clothing and allowing wearers to control their devices.
As for blockchain, I think the technology is still in the early stages. But it could become another internet, or as important as the internet. What makes blockchain exciting is that it gets rid of the middleman. If blockchain becomes more widely adopted, I am not sure companies like Uber and DiDi will still exist. With blockchain, people can trust each other without middlemen such as companies or banks. Transactions will be quicker – if not immediate – and secure, as nobody can get rid of the data in a blockchain.
We still need to find more applications for blockchain. People have already discussed its usefulness for bitcoin and other cryptocurrencies, but those are only a few of thousands of potential applications.
CH: If you had to bet, what are areas aside from cryptocurrencies where you think blockchain will be most impactful in terms of future application?
DL: Some areas include law, property management, car rental, and health care. For instance, blockchain could allow someone to securely share their medical history. Five or ten years from today, I’m sure other applications will become more obvious. Just as IoT is much more talked about today than it was five or ten years ago, when it was confined to tech circles, blockchain will pick up in the near future. But we still need more pilot projects to test smaller applications.
CH: Ok, last set of questions: You’ve advised MNCs (multinational corporations) on market entry into China. Generally speaking, what should foreign MNCs be aware of before attempting to break into the lucrative Chinese market?
DL: That’s a very good question. Twenty years ago, I would say many foreign MNCs didn’t really understand China or its market. Microsoft struggled for 10 or 15 years in China and finally managed to survive. Other MNCs didn’t spend as much effort to understand how to do business locally and either failed or quit. For instance, Google decided many years ago not to do business here in China, but it is now trying to return.
One challenge is that most foreign MNCs come to China with the mindset of their home country’s market. People need to understand that the scale of China is totally different from European countries or even the U.S. – we’re talking about 1.4 billion people. I often need to remind my Western counterparts about the scale of the Chinese market. For example, when I worked with Nokia and Ericsson, they needed to adjust their expectations to China. In Nordic countries where Nokia and Ericsson originate (Finland and Sweden, respectively), they might be satisfied with 10 million domestic users. But in China, a single province can have tens of millions of users, not to mention the population of the whole country.
CH: Given what you mentioned about the importance of scale, should a foreign MNC coming into China be thinking about how to break out of a small market segment and scale quickly into larger markets?
DL: A large MNC will normally target several market segments. Traditionally, MNCs have the resources to do several things at once. At first, they will look at several different areas in China and focus more and more on smaller areas with ROI (return on investment) in mind and conduct pilots for proof of concept. But in the long term, they will scale to different provinces by copying their success stories. Nokia and Ericsson were quite good at this.
But small companies will have to face fierce competition in China. These companies really need to go for a niche market in the early stages, or they need to be very good at a specific technology, product, or service. Or, they can provide an enabling technology to big MNCs in China that already operate at scale – regardless of whether they are local Chinese companies or foreign companies.
CH: Based on your experience advising Chinese start-ups in the past three to four years, what would you say are the biggest challenges that Chinese tech companies have in entering foreign markets?
DL: First, I think Chinese companies are similar to American companies when going abroad. Both the U.S. and China have large, strong domestic markets, so Chinese and American firms may have very ingrained “home country” mindsets. On the other hand, companies from Europe rarely have large domestic markets and must expand abroad, so they learn to be humble and adapt to foreign markets.
Despite the strong home country mindset, a few Chinese companies are going abroad and doing very well, such as Huawei, Xiaomi, Haier, DiDi. Another example is Dajiang, a drone manufacturing company that dominates the global market with a 70% market share – that’s huge. They often begin expansion in South and Southeast Asia, since countries like India and Indonesia have large domestic markets like China. In return, these countries learn from Chinese business models and technology.
To summarize: I generally think Chinese start-ups should first focus on the Chinese market, which is really big, taking off, and can comfortably leverage local business networks and know-how. Naturally, Southeast Asia is easier for Chinese companies to expand to, followed by Europe; and then the U.S., which already has very strong tech companies.
Many thanks to Mr. Dickie Liang-Hong Ke for sharing his entrepreneurial and business wisdom with readers!
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