At a recent technology conference in Hong Kong organized by TechCrunch, young rising stars of China’s technology business, such as Didi Chuxing and Ofo, overshadowed the established internet giants Baidu, Alibaba and Tencent (BAT). Didi pushed Uber out of the Chinese market, while Ofo is a bicycle-sharing service seeking to become an international company.

Just a few years ago, China was perceived as a country that could either imitate the West or produce counterfeits. But the situation has changed: a new wave of high-tech companies has emerged in the country, driven by a generation of young and ambitious entrepreneurs.

Venture capitalists are betting on them as well. In 2014–2016, investment in Chinese companies amounted to USD 77 billion, USD 12 billion more than in 2011–2013. Last year, China led the world in the number of investments in fintech startups and was gradually catching up with the global leader, the United States.

The combined value of 89 Chinese “unicorns” was around USD 350 billion, only slightly below the value of comparable US companies. China had 669 billionaires, compared with only 552 in the United States.

Lee Kai-Fu, former Chief Operating Officer of Google China and now head of Beijing-based venture capital fund and accelerator Sinovation Ventures, says that innovation is developing faster in China than anywhere else. The “Copy to China” and “Good Enough” approaches have already outlived themselves. Young innovators are using world-class technologies, from supercomputers to gene editing. Having strengthened their positions in mainland China, they are seeking to enter international markets.

There are three reasons why determined Chinese entrepreneurs can scale their businesses within a short period of time.

First, succeeding in China is already an enormous achievement, since the country has the world’s second-largest economy. Its culture and language are more homogeneous than in Europe, while infrastructure such as roads and wireless broadband is newer and better than in the United States.

Second, Chinese consumers like to spend money and try new products, creating favorable conditions for entrepreneurs offering interesting products under unknown brands. Chinese consumers are also more open to technology. Startups can gain relatively inexpensive access to a huge market thanks to the country’s high penetration of mobile devices and broadband internet.

Cash is falling out of use in China. The volume of mobile payments almost quadrupled last year to USD 8.6 trillion, compared with USD 112 billion in the United States. This is one reason fintech startups are developing so quickly in China. China is also home to some of the world’s most valuable fintech companies. According to some estimates, Ant Financial, an Alibaba subsidiary, was worth more than USD 60 billion.

Third, industries dominated by the state — telecommunications, banking and healthcare — are extremely inefficient and even unfriendly toward consumers. Such conditions allow agile newcomers using the latest technologies and customer-centric business models to overtake traditional companies much faster than their counterparts in developed countries.

Moving at China Speed
The state’s inability to manage industry is offset by its willingness to support innovative companies bringing radical changes to sectors such as transport. KPMG consultant David Frey believes that the only reason China is far ahead of the United States in the number of electric vehicles and charging stations is that the government effectively performs the role of a “market maker.”

The recent announcement of a ban on gasoline engines, supposedly by 2030, will help secure China’s leadership in the global electric vehicle market. But the most useful change was the government’s decision to allow venture-backed startups without relevant experience to operate in a sector previously dominated by companies producing mediocre electric vehicles.

Take NIO, an automotive company founded in 2014. Its headquarters and research center are hidden in a complex of low-rise buildings in Shanghai’s Jiading district, an area seeking to become China’s Detroit.

The company was founded by Li Bin, one of China’s leading serial entrepreneurs. He made his fortune by creating BitAuto, the first online car-trading platform. Li Bin also conceived and created Mobike, Ofo’s main competitor in the rapidly growing bicycle-sharing market. He remains chairman of the company’s board.

NIO attracted investment from some of the most forward-looking venture capital funds, including China’s Hillhouse Capital and the US-based Sequoia Capital. The company was valued at USD 3 billion.

Mr. Li estimated that the impact Chinese automobiles had on the planet over the previous ten years was comparable to the impact of all automobiles over the previous hundred years. He believes that from 2000 to 2017, the joy of car ownership declined. Traffic, air pollution and accidents are to blame. He also notes that the automotive industry still uses a century-old way of doing business.

Using Innovation
His solution consists of three parts.

First, cloud computing, artificial intelligence and sensor technologies should be combined to develop autonomous driving. He believes this would not only help overcome traffic congestion, but also give drivers a great deal of free time.

NIO has already presented the Eve concept, a vehicle that is essentially an AI-powered living room on wheels.

Second, electrification must be accelerated. To expand charging infrastructure, he proposes fast battery swapping in major cities.
Third, and something Li Bin sees as an advantage of startups, vehicles should be designed specifically for the digital age.

The company developed many of its technologies in-house. It employs people from 40 countries, some recruited from well-known automakers including Ford and Volkswagen.

Last November, NIO unveiled its first car in a spectacular presentation at the Saatchi Gallery in London. The EP9, the fastest electric vehicle and holder of a speed record for such cars, was designed to impress critics and was not intended for the mass market. “But that should change over time,” Li says.

Over the next ten years, he predicts that sales will grow into the millions, half of them outside China. NIO has a Silicon Valley division headed by Padmasree Warrior, former Chief Technology Officer of Cisco. The division planned to raise funds independently that year.

“We consider ourselves an international startup and therefore aim to solve international problems,” Li says. As for competitors, Li believes NIO can achieve better results than Tesla.

Adventurous consumers play an important role in stimulating innovation. Chinese consumers are curious about new products and, unlike Western consumers, are more forgiving when a product is imperfect. Having been deprived of many consumer goods and luxury products for many years, they are eager to experiment.

Affluent Chinese consumers are young: the typical Audi buyer in China is 30 years old, compared with 50 in Germany, and is therefore much more receptive to technology.

Since a car in China is not a symbol of wealth to the same extent as in the United States, local consumers are less attached to driving themselves and are open to new forms of mobility, such as ride-sharing. This was one of the reasons behind Didi’s success.

With a reported valuation of USD 50 billion, Didi was the world’s most valuable startup after Uber. This followed a USD 5.5 billion funding round from a group of investors led by Japan’s SoftBank. Didi’s other investors included BAT and Apple.

As Connie Chan of the well-known venture capital firm Andreessen Horowitz says, Didi is much more than a mobile taxi-hailing application. Local consumers’ willingness to experiment helped shape its business model.
Didi provides not only taxi and premium car services, but also operates fleets, minibuses and buses. The company offers services for elderly people. In addition, a company driver can take you home in your own car.

The company handled 20 million trips per day in China, several times more than Uber. It planned to use AI to forecast customer demand, whether for cars, public transport or bicycles.

Didi’s platform included 200,000 electric vehicles, a number expected to reach 1 million within several years. Another objective was the development of autonomous transport.

According to Didi President Jean Liu, the company was intended to become international. It held stakes in similar companies abroad: India’s Ola, Southeast Asia’s Grab, Brazil’s 99 and the US-based Lyft.

In July, Didi and SoftBank jointly invested USD 2 billion in Grab. In August, the Chinese upstart invested in two Uber-like companies: Estonia’s Taxify, operating in Europe and Africa, and Dubai-based Careem, operating in the Middle East.

The company showed no shortage of ambition: over the following five years, Didi planned to move beyond mobility services and become a global operator of vehicle networks and a leader in new transport technologies.

Didi’s success demonstrates how local companies can drive global change using sharing models tested in China. Urban residents were already using smartphones to rent umbrellas, phone batteries, basketballs and other small items.

The companies behind these services were pioneers in micropayments and microlending based on social media analysis.

Accelerating Business Cycles
The battle between Ofo and Mobike, bicycle-sharing services each valued at more than USD 3 billion, was not only one of the clearest examples of competition in the sharing economy, but also turned the bicycle into a smart device connected to the cloud.

China’s major cities became crowded with brightly colored bicycles belonging to competing companies. Tracking technology eliminated the need for dedicated parking stations: a bicycle could be picked up and left almost anywhere.

Of course, such convenience creates new problems. Ofo was developing a customer rating system that rewarded responsible users and penalized customers who, for example, left bicycles in the middle of the road.
Dai Wei, head of Ofo, believes that his company’s rise was driven by the growth of smartphones, mobile payments and the Internet of Things in China.

Three years earlier, the founders had been poor students in Beijing frustrated by having their bicycles stolen. They later had 18 million bicycles at their disposal, used for 25 million rides in the United States, Singapore, the United Kingdom and China. The company planned to expand to 200 cities in 20 countries by the end of the year.

Ofo was developing at China speed, but the road ahead could be uneven. Several dozen similar startups were operating in the country. All were investing in growth, and almost all would fail.

“The probability of failure in China is much higher than in Silicon Valley,” says Xiang Bing, Dean of Cheung Kong Graduate School of Business in Beijing.
Many heavily funded companies are developing breakthrough ideas. If they succeed in the domestic market, they may become global leaders.

Another force stimulating entrepreneurship in the country is the inefficiency of the state-dominated economy. Young companies are using new technologies and innovative business models to displace state-owned companies.

Healthcare, for example, had long relied on outdated practices. Long queues at public hospitals were normal, while access to medicines was complicated by an opaque distribution system.

AliHealth, an Alibaba subsidiary, became a leader in online pharmaceutical sales. WeDoctor helps patients make appointments with doctors using smartphones. Venus Medtech has developed a heart valve intended for patients with severe arterial calcification.

But perhaps the best example of a regional company with international potential is iCarbonX. The Shenzhen-based company works with big data in healthcare.

Its founder, Wang Jun, believes iCarbonX should promote an active lifestyle. Wang Jun previously headed BGI, one of the leading genomics research companies.

Chinese companies participated in the global race to decode the human genome and at one point controlled half of the world’s gene-sequencing equipment.

Healthy Competition
Asked why he left, Wang Jun says he became disappointed with the limitations of academic research, even in private companies such as BGI. A breakthrough in genomics usually does not result in changes in real life.

In his view, the better solution is to combine genomics with data on lifestyle, nutrition, gut bacteria, blood and other factors in order to identify stable relationships and better treatment methods.

This requires an entrepreneurial approach, because “business strives for efficiency.”

iCarbonX planned to create an intelligent digital avatar for each customer. Within a couple of years, the company aimed to have 1 million avatars, and eventually between 10 million and 100 million or more, depending on progress in AI algorithms, supercomputers and data analytics.

Within six months of iCarbonX being founded in 2015, Wang Jun received investment from Tencent, allowing the company to become a unicorn faster than any other company in the world.

To obtain high-quality healthcare data, iCarbonX invested USD 400 million in a network of medical startups. SomaLogic would help analyze human proteins. PatientsLikeMe, an online platform serving 500,000 people with chronic illnesses, would provide information about patient experiences. AOBiome would contribute its expertise on interactions between bacteria and the human body.

The Advantage of Rapid Development
Western competitors IBM and Google had similar goals, but Wang Jun was not intimidated:

“We collect more data. Our data is better. And we do it faster.”

With Tencent as a partner, the company could potentially gain access to information collected through WeChat, a messaging and payment application with around 1 billion users.

This was a major advantage because Chinese consumers were more willing to share personal data than consumers in Western countries. The Chinese government’s position on “personalized medicine” also supported the project.

Other inefficient industries with a large share of state-owned companies were also gradually changing.

Logistics services accounted for 15% of China’s GDP in 2016, more than the GDP of Brazil or India. Many private trucking companies missed orders because of insufficient information, but the situation was changing rapidly.
Richard Zhang, CFO of Huochebang, a Chinese transport unicorn, said:
“Our target market is ten times larger than Didi’s market.”

He estimated China’s empty-load rate at 40%, far above the comparable figure in the United States.

Huochebang’s online platform connects drivers with freight orders free of charge. The service was expected to become a major source of revenue once the company began charging fees.

The platform also offered truck sales, leasing, insurance and other services. Richard Zhang planned to take the company global.

Many mature companies are often tied to their domestic markets, while the best newcomers are born international and aim to enter the global market.
The founders of many such companies studied abroad, and some companies received funding from foreign investors.

China innovation expert Edward Tse says local companies have access to world-class talent and technology:

Li Bin believes that China’s enormous and growing market, with its extreme urban density and legions of talented young people hungry for technology, is a better testing ground for new entrepreneurs than the stagnating markets of the developed world.

He is convinced that China has the hardest-working entrepreneurs and the boldest venture capitalists. China’s winners will “inherit a substantial share of the global market.”

The number of new entrepreneurs in China is growing, but there are also a number of problems. External factors such as a sharp recession or a banking crisis could cause venture capitalists to panic.

The rule of law in China remains an open question. Many new companies, for example in online finance and the sharing economy, operate in gray areas vulnerable to the discretion of the authorities.

Even popular bicycle-sharing companies could one day find their business models prohibited by new regulations.

The turbulent nature of Chinese innovation carries certain risks. The rise of some companies may occur alongside the collapse of others. However, there are many reasons to believe that companies able to succeed in such a competitive environment will be capable of overcoming obstacles and entering international markets.

A Chinese startup may even introduce one of the most fantastic inventions to the world: a flying car.

Kuang-Chi Science was already earning money from helium-filled airships equipped with various sensors. Company head Liu Ruopeng explains that an airship is a low-cost alternative to a satellite for a smart city, capable of monitoring traffic and environmental pollution while also acting as an Internet of Things hub.

Improving balloon technologies could, within several years, allow tourists and cargo to be sent to near-space altitudes at a fraction of the cost of a rocket.
The company also owned a majority stake in a New Zealand company producing a one-person flying car.

Liu says:
“Everyone should have the opportunity to fly cheaply, easily and safely.”
The new wave of Chinese entrepreneurs is gaining altitude.