Observations from the east

In January 2016, Leading Edge Forum released the report Clash of the Titans – Can China Dethrone Silicon Valley?

Observations from the east

So it is more than two years since we examined the rising strength of China and how, as a nation, it is using exceptional strategic gameplay to compete on a global scale. In the early part of that report our advice was that you shouldn’t just treat China as another geography; you should adapt yourselves to it.

It was time for the team to head back to the East and speak to people on the ground.

 Just as the digerati have moved into traditional industries and disrupted them by leveraging the latest wave of innovation, so at LEF we believe that China is well placed to ride the next wave of innovation and disrupt on a global scale. We felt it was time for the team to head back to the East and speak to people on the ground to see how things had moved on.

The LEF/CIO Connect partnership

June 2018 was significant as LEF has entered into partnership with a Hong Kong and Singapore-based CIO membership network called CIO Connect. Having worked with its team for the last few years, it is evident that our synergies bring additional value to all our members, so an LEF delegation kick-started the official partnership in Hong Kong with a very successful joint launch event. Simon Wardley presented Clash of the Titans, the springboard to many great conversations and observations and our travels through Hong Kong and into China.

What we learnt ...

The US/China trade war bites

Our intent was to dive deep into China and learn first-hand from the large technology companies, as well as a mix of start-ups and educational facilities. In the run-up to our visit, the US/China trade war was escalating rapidly, meaning the openness of Chinese business was diminishing by the day. Most of our work had to be done across the border in Hong Kong, working with companies and people very familiar with China. This doesn’t bode well for international businesses looking to create new relationships with Chinese companies, where the foundations of business are still enshrined in the values of trust and respect, and appropriately sponsored introductions are the only reliable precursor to building confidence and a successful relationship.

Hong Kong as a bridge

We met with several companies that have a presence in both Hong Kong and mainland China. Hong Kong is seen as an ideal location to launch into international markets and mainland China has a wealth of talented cheap workers that could meet their workforce growth targets.

For example, we visited Hanson Robotics, creators of Sophia the robot; based in Hong Kong but with facilities also in mainland China, so it can access the technical talent needed to design and build the component parts of its robots. As well as being a super-capable humanoid robot, Sophia has an impressive AI capability which gives ‘her’ the ability to interact autonomously.

Observations from the East

North America and Europe are considered of not much interest to companies in China, except for the largest players.

We also felt that China is being smart in testing ways to do business with the international, non-Chinese companies based in Hong Kong. This experimentation will lead China to repeatable models to use when looking to do business in international markets. At the same time, we heard on several occasions that North America and Europe are considered of not much interest to companies in China, except for the largest players; the local market is massive in size, as are the broader Asian markets. When you also add in India and the Middle East, then there is enough to go after without having to worry about doing business with the Western markets and cultures.

Indeed, we spent time with Huawei exploring its technology ambitions. It was no surprise to us that its mobile-phone handset sales have recently overtaken Apple’s to take the global number 2 slot behind Samsung – and it has achieved this without being able to sell handsets into North America.

The privacy controls in Europe are in direct contrast to the complete transparency expected when working in China and therefore the validity of Chinese business models reliant on easy access to individual data won’t work well in regions where that isn’t possible. We were told several times that Hong Kong is not China – and that cultural and political difference is quickly obvious when you step across the border. That said, anecdotally we understand that in the (nearly) 20 years since Hong Kong was handed back to the Chinese, the Beijing regime is slowly and carefully, but unquestionably, tightening its grip and changing the characteristics of this unique gateway between East and West.

Belt and Road

The national strategy is still relatively simple, and yet ambitious. Everyone talks about the Belt and Road initiative and it is easy to see why. The amount of money invested in projects relating to Belt and Road is eye-watering. It’s the largest infrastructure investment the world has ever seen, with trillions of dollars of investment ready to loan to companies to enable them to build the physical infrastructure necessary to allow the member countries to trade and move resources to where they’re needed. At the same time, a different investment fund is used to accelerate the companies building out the capabilities needed to deliver the infrastructure.

According to Wikipedia (citing 2017 sources), this strategy covers more than 68 countries, including over 65 percent of the world’s population and 40 percent of the global GDP. Notably America and many European countries are absent from this arrangement, though political lip-service is being paid there to the Chinese state initiative, undoubtedly to assess the impact of this policy on the world stage. And most significantly, despite the absence of Western countries as signatories to this initiative, assorted Western companies (including GE, Caterpillar and DHL) have signed trade agreements to build and deliver Belt and Road projects.

As well as being a global (bricks and mortar) construction superpower, this two-pronged approach reinforces China’s position as a trade superpower, with the nation acting as a financial platform orchestrator that enables a global ecosystem of players that are helping to strengthen China’s position at the centre.

China and the Matrix

LEF’s very own Dave Moschella uses the term the Matrix to describe vertical industry disruptions combining with horizontal technology disruption. The next wave of technology disruption is upon us, and in Clash of the Titans we stated that China is extremely well placed to take full advantage of these enabling technologies.

China is benefiting from directed investment into key technologies that will ensure it is the global leader in blockchain, robotics, artificial intelligence and IoT.

China is benefiting from directed investment into key technologies that will ensure it is the global leader in blockchain, robotics, artificial intelligence and IoT.

On the ground in Hong Kong and China, this is very much apparent. Smart city projects are all the rage – greenfield new developments as well as brownfield transformations of existing cities. Urbanization is on the up as entire populations migrate into these technology-enabled environments. The race between organizations to play their role in this evolution is highly contested and China is benefiting from directed investment into key technologies that will ensure it is the global leader in blockchain, robotics, artificial intelligence and IoT.

We visited Ping An Insurance, the world’s third most valuable integrated financial services company. It is investing hard in a mix of emerging technologies and is already applying them to customer solutions today.

Observations from the East

With over 4000 developers in Shenzhen, it has built solutions leveraging AI to perform micro-expression recognition which can be used to build customer profiles and detect false statements made as part of a credit application.

Our visits to many of the sprawling campuses, where universities are co-located with venture capital funds, showcased many technology-focused start-ups well-positioned to play their role in the smart cities programmes. The scale of these campuses has to be seen to be believed. At the Hong Kong Science and

Technology Park (HKSTP) we were able to see first-hand what happens when you combine 680 technology companies, 9,000 people and over hk$1.2 billion of investment. The China University, plus others in academia that have a presence there, link their graduates to programmes, whilst the VCs keep a watchful eye open to see who’s next to add to their portfolios. This is demonstrated by companies like Blockchain Solutions, which we spoke to and helped us understand the benefits of working on the campus, with the talent it has access to, the infrastructure it could leverage, and the partners it could work with.

In parallel, there was much evidence of China’s wider ambitions as a technology innovator on the world stage. Attempts to engage these start-ups, and indeed most companies, are met with immediate questions about business opportunities and potential ROI, to satisfy the seemingly ubiquitous ‘KPIs’ that concern most engaged in commerce. In the West this is usually an implicitly understood outcome; in Hong Kong and China we found it a very explicit question that had to be answered, and in some way, this helps to explain the laser-focus on innovation and success for China PLC that is clearly evident.

In summary

The strategic gameplay China is employing as a nation-state is showing tangible results. It has access to a well-educated workforce, has a global government and private investment in plentiful supply, and opportunity abounds for companies that form part of this orchestrated ecosystem.

China is operating as a venture capital organization and making large and informed investments to secure its dominance in industries and services that make use of the technologies that are fuelling the next wave of disruption.

The observations made in our 2016 report Clash of the Titans are even more relevant today, and we take this opportunity to extend our earlier advice: You shouldn’t just treat China as another geography; you should adapt yourselves to it and learn from it to remain relevant in the 21st Century.


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