This content is from: Corner Office

China’s Internet Sector Grows Up

For years, Internet companies in China have had a reputation for copying their peers. Now some are blazing trails that their Western peers may have to follow, investors in the region say.

Chinese Internet companies have long had a reputation for merely replicating technologies invented by their Western peers. But that may be changing.

Leading investors who specialize in financial technologies and are taking stakes in new technology startups in the country say China is no longer an innovation laggard and in fact is taking a commanding lead in specific areas.

“Many American investors are quickly realizing that the leading Chinese technology companies are no longer just simplified replicas of their American counterparts,” says Jason Jones, co-founder of the New York–based LendIt Conference, a leading event organizer that specializes in putting on investor gatherings for the financial technology industry. “Rather, the leading Chinese technology companies have made major advances, especially in mobile technology and artificial intelligence, and are leaders in global innovation in those fields. The world has a lot to learn from the sophisticated technology coming out of China right now.”

Take online payments. Two Chinese Internet giants, Alibaba Group Holding and Tencent Holdings, already hold strong leads over their U.S. counterparts in this area. Alipay, for instance, is Alibaba’s online escrow payment system that now counts more than 630 million users globally, of which 450 million are in China. Tencent’s messaging app, WeChat, boasts 900 million users, and its WeChat Pay service has about 600 million active users. Both Alipay and WeChat Pay allow their users to make transactions all over the world using their mobile phones, notes Jones, adding that at present not a single U.S. rival can offer a similar global product.

“We’re seeing an increasing trend of Chinese core technology companies exporting all over the world,” says Yinglan Tan, the Singapore-based founding managing partner of Insignia Venture Partners and a former Asia venture partner with Sequoia Capital.

Tan, who also is the author of Chinnovation: How Chinese Innovators Are Changing the World, published by John Wiley & Sons in 2011, notes that about a decade ago, a vast number of Chinese factories copied Western technology, producing low-cost knockoffs. Many of those companies have graduated, moving on to produce highly innovative technologies of their own, he says. One example is Xiaomi, a privately held mobile telecom equipment manufacturer based in Beijing that is now outselling Apple in many emerging markets. Its Mi smartphones are the third most popular, behind Apple and Samsung, according to research firm IDC.

Many Americans may not have heard of Mi, but Tan notes that the mobile handset brand is No. 1 across emerging markets, where many consumers find Apple iPhones and Samsung handsets prohibitively expensive and technologically not that much better than Mi handsets.

Another example of a leading-edge Chinese company is Da-Jiang Innovations Science and Technology Co., or DJI, the world’s leading manufacturer of recreational and industrial drones, says Tan. “We’re seeing many companies born in China but growing worldwide with leading-edge technology of their own that they developed,” says Tan, who adds that many investors on Wall Street still mistakenly hold on to old stereotypes about Chinese enterprises without realizing that many long ago graduated from the copycat phase.

Calvin Choi, chair and president of Hong Kong–based financial conglomerate AMTD Group, says many investors on Wall Street — especially bearish hedge fund managers — tend to have outdated views on China.

“In the U.S. market right now, especially in the hedge fund world, there is still so much misunderstanding about China,” says Choi, who recently co-hosted the second annual AMTD-LendIt Global Fintech Investment Summit with LendIt’s Jones. “So when they look at China, they see only the old China, dominated by old state-owned enterprises, and not the new, emerging China that is dominated by private enterprises and technology entrepreneurs.”

Many on Wall Street also fail to recognize that Asia — especially major markets like Japan and China — has surpassed the U.S. in terms of infrastructure buildout, Choi adds. The U.S., in particular, is still highly reliant on infrastructure developed early last century. Meanwhile, Hong Kong authorities are working with their mainland counterparts to build high-speed railways linking to 11 major cities in South China to form a region called the Greater Bay Area, which is in the process of establishing a dozen incubation and development zones that will foster high-tech enterprises with the aim of competing against counterparts in the Tokyo Bay and San Francisco Bay areas.

The region’s energy is “palpable,” according to music industry entrepreneur Dana Leong, an electro-jazz cellist, composer, and two-time Grammy Award winner who until recently was based year-round in New York. Leong says he decided a year ago to divide his time between New York and Shanghai in part because he wanted to tap into the energy driving Asia’s renewal.

“China spent the past few decades building hardware,” he says. “Now it is building content, software. It’s quite exciting, and that’s why I decided to open a creative space in Shanghai. I wanted to become a part of the process.”

A number of high-profile Chinese financial technology companies are in the final stages of preparing for initial public offerings this year or next year, according to Choi and others. Chief among them are peer-to-peer lender Shanghai Lujiazui International Financial Asset Exchange Co. (Lufax), which has an estimated market value of $18.5 billion; and Alibaba’s Ant Financial Services Group, which has an estimated market value of $60 billion.

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