Blog The Land of Unicorns

The Land of Unicorns
China must become more innovative to grow over the long term. Beijing is investing billions in the start-up and maker scene with just this in mind. Out and about in Shenzhen, the Silicon Valley of southern China.

The robot arm turns in a series of jerky motions. Coming momentarily to a halt, it rotates in the air as though installing an invisible screw, before skipping back to its original position. Song Junyi looks admiringly at the black metal structure anchored to the ground in front of him.

Song has been working on this prototype for two years. The 26-year-old founded Elephant Robotics with his colleague Wu Qilin. Now they tinker with industrial robots destined for Chinese factories. Where unskilled workers by the hundreds of thousands are still sewing buttonholes by hand, Song’s robots will soon take up needle and thread. “Wages in China are climbing, and before long, factories will no longer be able to afford the workers,” says the inventor. Meanwhile, China currently has a mere 19 industrial robots per 10,000 workers. Germany has over 300. Song’s robots have a strong selling point: They are inexpensive. At around 10,000 US dollars, even smaller factories can afford them. 

"The pace is extremely fast": Benjamin Joffe supports start-ups in Shenzhen (top); Wu Qilin and Song Junyi in the HAX offices (bottom).

Reorganization of the Economy

Young founders like Song are the hope of Beijing. China has undergone rapid growth over the last three decades, and things have only been getting better for many years now. But rising wages are dulling China’s competitive edge. Simply put: The workshop of the world has become too expensive. Exports are falling; the economy is flagging. Last year, economic growth was at its lowest rate in over 25 years. Today, the economy is running on cheap funding and gigantic infrastructure projects. China needs to re-organize its economy to be able to grow over the long term.

To ensure that the restructuring succeeds, Beijing is relying mainly on growing the services sector, utilizing more technology in industrial applications and improving innovation for “made in China.” The country is investing billions in the start-up scene to achieve these goals. President Xi Jinping is calling for “national, mass entrepreneurship.” In the future, students will be able to take a break from their university degree programs to start a business. Throughout the country, start-up companies have easy access to up to 100,000 yuan (15,000 Swiss francs) in seed money, and if they hire university graduates, the government will pay their social insurance contributions. There are also tax incentives and billions available in start-up funds. Development centers and high-tech parks at universities aim to provide students with the chance to work on their own ideas at an early stage.

These policies are showing signs of success. The number of start-up companies is exploding mainly in the services sector, online retail and in the gaming and entertainment industry. Around 10,000 new start-ups are purportedly founded every day in China. 

The Workshop of the World – and Now?

Shenzhen is one of the places where the president’s vision is to become reality. When devices like mobile phones and computers are “made in China,” that usually means they come from here. Economic reformer Deng Xiaoping designated this city surrounded by rice paddies as the country’s first special economic zone in 1980. Located only minutes from Hong Kong by train, the location was to benefit from its proximity to the international financial metropolis and bring new growth to the still closed nation. The plan worked. In just a few years, Shenzhen became one of the country’s key economic hubs. China became the workshop of the world, and the Pearl River Delta became its manufacturing heartland. Factories sprouted up like mushrooms, and Shenzhen, the world’s hardware capital, was born. The city only had a population in the tens of thousands during the ’70s, but that has grown to an estimated 12 million today.

The proximity to factories no longer attracts just manufacturers from around the world, searching for cost-effective production sites. Young founders have also discovered the city, like the ones who founded Elephant Robotics. Song and Wu work on their robot in the workspaces of the American accelerator HAX. In addition to its location in Shenzhen, HAX also has offices in San Francisco and is part of the venture capital firm SOSV. The US company was founded in 1995 by electrical engineer Sean O’Sullivan and has already invested in over 500 start-up companies around the world through a number of different accelerator programs. The motto of the accelerator firm in Shenzhen: “When building hardware, all roads lead to Shenzhen.”

Benjamin Joffe heads the program. He has been working in Asia for ten years and already considers Shenzhen a rival to Silicon Valley. “The pace of Shenzhen is extremely fast,” says Joffe. The offices of the seed accelerator are on the eighth floor of a glass high-rise, and elevators provide direct access to the city’s underground markets below. Rows of countless small, informal stands representing the area’s factories are tucked away in floors under the glass skyscrapers. Hard drives, batteries and power supply units are available in ten-thousand packs, directly from the manufacturer. If Song needs a screw for his robot in the morning, he will have it by lunchtime. “That can’t happen in Silicon Valley, or in Berlin or Bangalore,” says Joffe. “Our start-ups in Shenzhen can get more done in a week than companies located elsewhere can do in a month."

Start-up founder Song studied robotics in Xi’an, in northern China. He was already working on intelligent robots capable of executing complex movements and able to react to variations on the production line during his time at the university. He met his business partner Wu at his first job in a factory that manufactured robots for children. Making the leap to self-employment was not easy for Song. His parents would have preferred for their son to find a position at a state-owned company. Jobs there are secure, and there is a good retirement pension down the road. “But we knew that we could build a better robot,” says Song.

That can’t happen in Silicon Valley, or in Berlin or Bangalore.

Drones for Hollywood

Song and Wu are part of an investment program lasting four to six months. They received 100,000 US dollars and, in return, gave the accelerator a nine percent stake in the business. In addition to the funding, they also receive support in establishing their company, developing prototypes and finding potential follow-on financing. They can use the HAX offices free of charge. Around 20 teams are working on their ideas there. They spend their breaks playing tennis or cooking together. HAX is considered to be one of the most successful accelerators in the world.

Hard drives, batteries and power supply units in ten-thousand packs: the electronics market in Shenzhen.

Innovation and China – some think these two things don’t go together. For years, China was seen as the land of cheap products and counterfeiters. But in the tech area in particular, there have been huge gains in recent years, and it is developing into a competitor to the established industrial nations. China is the only start-up market outside of the US where there are “unicorns” in almost every industry. Unicorns are companies worth over a billion dollars. China’s unicorns include the taxi-hailing service Didi Chuxing, valued at 17 billion dollars, the delivery service Ele.me, valued at 3 billion dollars, and the group-discount provider Meituan-Dianping, which, at 18 billion dollars, is valued at nine times its American counterpart, Groupon.

For many young Chinese, the founders behind these tech giants are role models. Frank Wang is one such example. The “Steve Jobs of China” founded Chinese drone manufacturer DJI Innovations. Headquartered in Shenzhen, the company holds a 70 percent share of the global market and is valued at an estimated 8 billion dollars. Whether in Nepal in the aftermath of the earthquakes or in Hollywood on the set of a film, Wang’s drones provide the images. The messenger platform WeChat is yet another example. With its system of interlinked online apps including a messaging service, a social media platform and the app’s own WeChat Wallet payment service, the company dominates its international competitors Facebook, Snapchat and WhatsApp. More and more of the functions now being introduced to social media in the West have long been standard in China.

Just how far China’s start-up scene has come is evident on a visit to the Chinese tech start-up Youquan, roughly translated as “property.” Che Keda founded the company in San Francisco in 2015 together with managing director Chen Kai, but he soon relocated to Shenzhen with his team. The company develops an ID to help manufacturers prevent product piracy. If a shoe manufacturer produces a pair of loafers, for instance, they need to be able to trace the product’s transport route from factory to sales floor and verify that the product in question is an original. The shoes can be lost at any point along the supply chain, replaced by or mixed with counterfeit products. “The problem is not the cheap knock-offs, but rather with copies that can be passed off as the originals,” says Chen Kai. With a chip for each individual product, the ID system can prevent this from happening. The company’s backers include Sanjeev K. Mehra, a former investment pioneer at Goldman Sachs.

Here, we determine who we are, who we want to be and where we are headed.

Born in China, Raised in the US

The 25-year-old Chen Kai was born in China. When he was still a baby, his father fled to the US and was obliged to borrow money in the village to pay for the nine-month passage, with his son remaining behind as collateral. Luckily, the father got a work permit, and Chen’s mother followed one year later. When his parents had saved enough money, they were able to repay the loan and bring their son to live with them. While his parents ran a Chinese restaurant, Chen studied business at the elite Yale University. Although countless career opportunities were open to him, Chen decided to start his own business. “Here, we determine who we are, who we want to be and where we are headed.”

“The problem is not the cheap knock-offs.” Che Keda and Chen Kai of Youquan.

The team has support from up high for its anti-piracy ID chip. Along with five other companies, including DJI Innovations and the Chinese real estate colossus Vanke, the newly founded company is mentioned in the city’s five-year plan, the economic plan for the years ahead in Shenzhen. “The fight against product piracy is one of the government’s main priorities,” says Chen. The city therefore pays for the company’s offices in a high-rise building in the city center. Heavy wooden chairs and antique tea services are reminiscent of the old Imperial Palace in Beijing more than a new start-up. Yet relocating from Silicon Valley to Shenzhen would have made sense for Chen even without the government support. “Nowhere else in the world is there more happening than in China.”

Like Chen, many Chinese with international educations are coming back home. According to a study by growth enterprise board Chuangyeban, only around half are here for the money. Of the other half, almost 90 percent are more interested in realizing their dream and doing work that they believe in. Their own dreams, independence and a vision – these are no longer utopian ideals for many Chinese. The young generation has often studied abroad, has traveled extensively and has an idea of what makes life in another country special. And surprisingly, most of them come back home, either to work at a Chinese company or to start their own business. 

Beijing’s hope: start-up metropolis Shenzhen.

55 Percent Women

That was the case for Sonya Zhang. She sits in a white chair, relaxed, a steaming cup of tea in front of her. She speaks rapid English with a British accent. When Zhang is not in Hong Kong or the US, she works at one of the long wooden tables in SimplyWork’s coworking space, tucked away in Shenzhen’s western district. Founded in 2015, SimplyWork is still a start-up itself. The company now runs seven coworking sites, and the offices and flexible workspaces are very popular among young entrepreneurs, who crowd the space on weekends, working laptop to laptop.

A pair of young women stand in the kitchen discussing a new app as Zhang prepares her tea. The 28-year-old feels at home here. The percentage of female founders in China is relatively high. According to information provided by the Chinese government, one quarter of all founders are female. In the tech sector, that number rises to 55 percent.

One quarter of founders are women: Sonya Zhang of MYH.

Zhang comes from Nanyang in eastern China and studied for six years in the UK. She now works at a major consulting firm headquartered in the eastern Chinese city of Hangzhou. For the past year, she has also been working with nine friends on the start-up company MYH. With this business, they plan to help with the orientation of exchange students overseas. The name is an acronym for “make yourself at home.” Each year, hundreds of thousands of Chinese students go to the US, Australia or Europe to study there, just as she did. Arrival in those foreign countries is often difficult due to the significant language barrier as well as cultural differences. Zhang aims to help with that. The company picks students up from the airport, rents apartments and helps them register at the university or school. “More than anything, the parents feel better when they can hire a service like ours."

Zhang is responsible for operations in China. Even though she does not come from Shenzhen, she has chosen to make this city her home for the time being. She likes the entrepreneurial spirit, the fast pace of life and the openness of the people. Because not long ago, the city was only a small fishing village, there are no strangers here.

As the saying in Shenzhen goes, “you are a Shenzhener once you come.”

Source: Credit Suisse Bulletin “The New Asia” published in March 2017