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Hangzhou: it's the ecosystem, stupid! Frederik Simoen - March 16, 2017

China Hangzhou Bridge Lake Architecture 1871458

Exploring the Chinese Silicon Valleys - Part II. 

China is quickly catching up with, or even overtaking, the biggest innovation forces in the world. Chinese megacities, such as Shenzhen, Hangzhou and Shanghai, are demonstrating their capability to create platforms, develop disruptive technologies and turn business models upside down. These cities are growing into the new Silicon Valleys of the world. Each in their own special way.

This series of blogs will discuss the stories of each of these innovation hubs up close: what enabled their rapid growth, what can we learn from their thinking and acting at scale, how are they influenced by their historical and social backgrounds. This series will give you a broader view on innovation in China. Today: Hangzhou.

THE STORY OF HANGZHOU

For over 100 years during the 11th, 12th and 13th century, Hangzhou is believed to have been not only the most populated, but also "the finest and most splendid [city] in the world", as Marco Polo so eloquently put it. Surrounded by the beautiful West Lake and mountains, with many canals and stone bridges, it reminded him of Venice. After more than 1,000 years, it still is a center of Chinese entrepreneurship and commerce.

THE RISE OF THE ENTREPRENEURS

Today, the role of entrepreneurs in the Chinese startup ecosystem is to be bold innovators, to have a crazy idea and go for it, all the way. And they are not alone in this endeavor. Simply because of the size of the Chinese population, you know thousands of others are probably doing the same thing as you are. In this competitive ecosystem, the motto is 'innovate or die'.

Because it takes thousands of losers for every winner, we can observe some behavior among Chinese startups that’s similar to those in Silicon Valley. Chinese startups treat a lot of their technology and knowledge as open source. Not because of a strong internal conviction, but because they are coerced to by competitive forces. Copycats will always be laggards. The cumbersome process of protecting IP is often considered a waste of time, holding you back from moving forward.

EMPOWERING THE CUSTOMERS

Ever since the abundance of technology and digital skills, the Chinese consumer has become the real cause of this vigorous drive for innovation. As access to consumer goods increased, so did demand. A market with hundreds of millions of consumers is an enticing proposition for any business. But Chinese consumers today have developed ever-increasing expectations for extreme convenience in all the products and services they buy.

Because there are so many companies offering the same products, hundreds of millions of Chinese consumers are willing to change suppliers in the wink of an eye. Chinese entrepreneurs have to stay in close contact with their customers, all the time. Testing out new products, launching new versions and creating new markets are not one-off projects but day-to-day business. When Chinese kids ask their parents when their packages will arrive, they will only accept a number of hours, rather than a number of days, for an answer. The clock is ticking, and Chinese companies must stay on the ball or… they're out. Opening up access channels to both goods and customers has clearly accelerated innovation in China. 

THE RISE OF ALIBABA

One of these innovators, Jack Ma, founded Alibaba in Hangzhou in 1999. He saw the opportunities afforded by the speedy growth of the Chinese economy and the proliferation of technology and digital skills in China. Alibaba would help small Chinese sellers find (inter)national customers and guide (inter)national businesses to the abundant and cheap Chinese products. Online reviews made the need for cumbrous scouting trips to Chinese factories obsolete with the click of a button. Unfortunately, for some, the copious amounts of alcohol consumed before signing deals also disappeared. But nobody really misses the poor translators.

Today, Alibaba offers a wide array of services to "make it easy to do business anywhere". The Alibaba Group sells advertising on its free-to-use C2C shopping platform (Taobao) as well as additional services on its global B2B marketplace (Alibaba.com). Tmall is a B2C platform where major global brands sell directly to Chinese consumers. Alibaba also provides all services supporting these platforms. AliPay manages escrow payments while Alimama offers Big Data marketing services. The Cainiao platform has made the fragmented Chinese logistics industry accessible to all. Through a network of integrated providers, it lets sellers and buyers select their preferred suppliers for journeys spanning thousands of miles. All deliveries can easily be planned and accurately be predicted based on historical observations, massive amounts of real-time data and live tracking. Naturally, the instant messaging platform AliWangWang, through which buyers and sellers interact, is also provided by Alibaba. Additionally, Alibaba has major investments in other social media platforms (Weibo, Youku Tudou) and so much more. 

Through its many different businesses and revenue models, the Alibaba Group generates impressive revenues and profits. Its superior analytics, segmenting and targeting skills and its proprietary ecosystem will enable it to continue to grow far beyond its current size in the years to come.

EMPOWERING THE CORPORATES

It is not uncommon for Chinese corporates to be a collection of seemingly unrelated businesses. This can be explained by the way companies grow. Today, many Chinese startups develop their product or service in omnipresent accelerators and incubators. Once they get market recognition, the BAT (Baidu, Alibaba, Tencent) are very happy to acquire them, or to start a partnership. Chinese corporates are focusing on customer adoption, rather than dreamy roadmaps or engineer's wet dreams. Startups need the bigger companies for their customer base and integrations with other technologies.

This, for example, explains the partnership between Alibaba and Megvii. Megvii is a startup which is very strong in AI, especially facial recognition. Their technology showed some early successes, so Alibaba came along. Would there be an opportunity to use facial recognition in the identification process for mobile payments? They tested it, it worked, and it was soon implemented as 'Smile to Pay'.

IN A NETWORK, IT'S ALL ABOUT EMPOWERMENT

Jack Ma truly understands the power of ecosystems. He once said: "When you have $1m, that's your money. When you have $1bn, that's not your money, that's trust society gives you." That's why he not only invests in his own company, but grows the broader ecosystem. Alibaba now prefers partnerships over acquisitions, because this empowers their partners to become powerful, too. Jack Ma even co-founded an entrepreneurial university to train the business leaders of the future.

Nexxworks and Business Leaders are organizing  ‘The Day After Tomorrow tour’ to China to explore the innovation track record of the East as well as the speed and scale of the Chinese innovation approach. Find out more about this trip to the Chinese Silicon Valleys here.

This article is part of a series about the Chinese Silicon Valleys to give you a broader view on innovation in China. Read part I

Frederik B W
Frederik Simoen

Frederik only aims for high impact results. No fluffiness, no mediocrity, no business as usual. In the age of hyperfluid networks and ever faster changing customer expectations a clarity of...