Those that follow technology closely have noticed a significant trend in the field, China. The more you read, the more you encounter increasing coverage on China's tech dealings.
In the last few weeks, we've seen Tencent's market capital surpass that of Facebook; Venture Capital activity reach US VC levels; LinkedIn's Chinese rival MaiMai, outperform LinkedIn in the country and the amount of Chinese Women in Tech pass that of the US.
According to the Forbes list, out of the top 10 largest companies in the world, four are Chinese, five are American, and one is Japanese.
If you narrow the scope to tech-only companies, China has seven companies in the top 20. Two of them, Tencent and Alibaba, among the top six.
The China that most people imagine has nothing to do with the current technology superpower that China is now. Andrew Ng, former Chief Scientist at Baidu, hits the nail when he states,
“China has a fairly deep awareness of what’s happening in the English-speaking world, but the opposite is not true.”
This asymmetry is helping China fly under the radar. Most organizations are so focused on the Silicon Valley dream that they're missing the elephant in the room.
Education
Education is a critical aspect of any country. This is especially true when we're speaking of innovation. Historically, China's educational levels have been subpar with the rest of the world. This hasn't been the case for a while now. The truth is, China's university are already outperforming many of their international peers.
While institutions like Stanford still hold on to their perch of the global ranking, universities like Pekin's University, are closing in. Stanford outranks them in specific scores but lags in others like technology transfer.
In comparison, it's worth noting that there are precisely zero European universities among the top 30 (excluding the United Kingdom due to Brexit).
China's educational institutions still have a pending subject; attracting foreign talent. The country is trying to fix the lack of an international crowd applying a mixture of strategies with various degrees of success.
Technology Innovation
But better universities aren't the only reason for China's ascent to the innovation Olympus. In 2006, the Chinese General Secretary of China Communist Party Hu Jintao, and Wen Jiabao, President of People's Republic of China declared their intention to transform China into an 'Innovation-oriented' nation.
These declarations brought forward the term 'Indigenous innovation.' It refers to the capacity to produce innovative products and services from within a national context.
To achieve such a lofty goal, they knew they needed better local knowledge that the one they had. Improving their university system was strategic to making this, but it wasn't enough.
At the time, Chinese researchers and professors lacked knowledge in critical fields. To reduce the gap, they decided to bring foreign experts to the mainland through what's called the 1000 Talents Program.
The results of the program, though, were mixed. While the program is still active, the government decided to try a different approach.
“The way the government is putting money in is getting smarter and smarter,” says Ming Lei, one of the co-founders of Baidu and now co-director at Peking University’s AI Innovation Center.”
“Before they just gave money to research projects or big SOEs or universities. But now they are more likely to give it to a private company, to one that is more active and can produce the products and services.”
Enter the Chinese startup scene.
China's startup talent
As with Chinese education, for years, Chinese startups have been looked down upon due to their lack of competitiveness. Local startups grew mostly as American copycats. Despite the negative connotations, these companies brought a wealth of knowledge to the entrepreneurs. It taught them how to build products, and how to do it fast.
“The velocity of work is much faster in China than in most of Silicon Valley,” says Ng. “When you spot a business opportunity in China, the window of time you have to respond usually very short—shorter in China than the United States.” – Ng
China might have started as the land of the copycats, but it quickly evolved and started developing their innovations. New Chinese startups emerged that, not only served the local market's need but did this at a scale never seen in the US.
"Chinese companies experience both much larger scale than anything seen before in the US and no holds barred domestic competition."
Such has been the evolution of the Chinese startup ecosystem that their products and services are starting to outperform their American peers.
“Weibo is a better product than Twitter, same for Taobao and eBay, WeChat and Facebook Messenger. Better features, more robust business model.” Today, Chinese companies are coming up with innovative products not seen in America such as customized news or distance learning using “underpaid American teachers” to teach English. We are now entering the age of copying from China, says Lee.
All this was happening, while Internet and Mobile penetration were increasing. In a way, China skipped an innovation step and went directly to mobile.
This leap has created some unique mobile behaviors that are giving a massive edge to Chinese companies.
"The data gap between the US and China is “dramatically larger” than the actual gap between the respective populations or the number of active mobile users. Chinese use their phones to pay for goods 50 times more often than Americans, he says, and orders for food delivery are ten times greater than in the US."
China's Artificial Intelligence moment
At the heart of the rise of the Chinese startups lies the field of Artificial Intelligence. As I've written before, Artificial Intelligence (AI) is becoming the de-facto disruptive technology. Any company that wants to compete needs to be deploying AI systems.
China's innovation efforts have squarely targeted the development of AI and Deep Learning technologies. Nonetheless, attaining AI expertise isn't easy. Investing in AI demands spending on the three building blocks that make it possible; hardware, data, and talent.
Hardware infrastructure
People know China for their hardware production. Even so, their expertise on the design aspect of high-tech semiconductors has remained elusive. If China wanted to up their game, they needed to increase their knowledge in the space.
That's what they started doing via foreign investments. Such was the pace that the Committee on Foreign Investment (CFIUS) issued a warning to Congress about it and started blocking some of these operations.
Data access
Access to massive amounts of data is paramount for AI. Yet, data is one thing China has in excess. With an Internet population of 731 million users (2,5x more than the US) and very lax privacy regulations, they're well equipped to train their systems with large swaths of information.
“When it comes to government data, the US doesn’t match what China collects on its citizens at all,” says James Lewis, fellow at the Center for Strategic and International Studies. “They have a big sandbox to play in and a lot of toys and good people.”
Talent
Data and hardware aren't enough. You need people to man the algorithms. The government started doubling down on AI research money to increase the number of skilled AI and Deep Learning researchers. In contrast, the Trump administration began slashing the 2017 National Science Foundation budget by 11.2%. The effect has been dramatic.
In October of 2016, the US National Science and Technology Council released a paper titled "The National Artificial Intelligence Research and Development Strategic Plan" (PDF). The document indicated that China had surpassed, for the first time, the US number of peer-reviewed publications mentioning Deep Learning. It also sets the first US Artificial Intelligence R&D strategic plan ever.
The rise of Chinese AI researchers has been felt worldwide.
“When Rao [Subbarao Kambhampati, current president of the Association of the Advancement of Artificial Intelligence, AAAI] first started seeing Chinese researchers at international AI meetings, he recalls they were usually from Tsinghua and Peking University, considered the MIT and Harvard of China. Now, he sees papers from researchers all over the country, not just the most elite schools. Machine learning—which includes deep learning—has been an especially popular topic lately. “The number of people who got interested in applied machine learning has tremendously increased across China,” says Rao.
The trend not only hasn't reverted, but it's widening. According to a recent analysis by The Financial Times,
"In 2016 China increased its output of AI-related papers by almost 20 per cent compared with the previous year, while EU and US output dropped. […] However, the quality of fundamental research remains a problem. Although China leads the world in quantity of AI research, it lags behind the EU in terms of number of AI papers in the top 5 per cent of most cited research — but still overtook the US in this metric last year."
One of the unspoken advantages of many Chinese researchers is that they have access to the best of both worlds,
“Chinese researchers usually speak English, so they have the benefit of access to all the work disseminated in English. The English-speaking community, on the other hand, is much less likely to have access to work within the Chinese AI community.”
This increased research is starting to yield incredible results. Some of the current Chinese startups are becoming the AI reference in their fields. Such is the case of Face++, whom recently won the first place in the International Conference of Computing Vision 2017 (ICCV), ahead of teams from Facebook, Google or Microsoft.
Artificial Intelligence is the new strategy
Artificial Intelligence and Deep Learning have become so critical to China that in July of 2017, they released a State Council Notice called "The Next Generation Artificial Intelligence Development Plan" (PDF). The plan is worth reading due to its prescient nature on several aspects.
"The plan includes of laws, regulations, and ethical norms on AI, as well as mechanisms for safety and supervision. The plan seeks to mitigate likely negative externalities, such as job losses, associated with AI, while fully leveraging the opportunities."
The government recognizes, though, that local talent is still hard to come by. To offset this, they're deploying a dual strategy. On the one hand, they're investing heavily on AI-based startups, both locally (SensaTime Group's 410 million dollars in July 2017, Megvii's Face++ 460 million dollars in October) and outside the mainland. While the US is investing in the field, the hunger for more money is patent. China is investing in companies that the US money is neglecting.
“We were told by the secretary of the Air Force, ‘Your tech is awesome, we should put it everywhere,’” he said. “No one followed up.” […] American military officials have “figured out a very good way to give $10 billion to Raytheon,” he said. “But to give a start-up $1 million to develop a proof of concept? That’s still very, very hard.”
On the other hand, China is trying to make it easier for foreign talent to come and work with them. To accomplish this, the big three of China, Baidu, Alibaba and Tencent (BAT) have been opening AI, and Deep Learning focused research centers on the West Coast.
Baidu already has two research centers in Sunnyvale, CA. Tencent has been operating a data center out of Silicon Valley and a new AI Research center in Seattle, WA. Alibaba recently announced they're opening seven new research labs worldwide, one of them in the Seattle area and another in San Mateo, CA. Uber Rival Didi Chuxing, is also another of the big Chinese startups that opened shop in Mountain View in March 2017.
Strategic ramifications
Underestimating China is easy. For many years it's been the land of the cheap mediocre copycats. Chinese culture is foreign to most Westerners. It's plagued with idiosyncrasies that cultured western institutions have defined as inferior or wrong. The fact that few outside of China speaks or read Chinese doesn't help. We disregard and downplay that that's different or unknown to us.
But the truth is, it's becoming increasingly hard to ignore the fact that China is on the verge of becoming the world's technological leader.
While Chinese universities still have a low rate of international participation, that will change fast. It's a matter of time before foreign students start flocking China, looking for the next Stanford.
Meanwhile, more and more companies are turning to China for funding and customers. The US and Europe are lagging behind in technological adoption. Robotics, AI-based systems, automated education, Quantum computing or smart mobility are all happening in China, not in the US. The market is in China, the funding is in China, and the regulation is in China.
The US is becoming progressively more hostile to startups. More and more entrepreneurs are fleeing America. Some are finding in China, the perfect market for their cutting-edge technology.
It's hard to see how the Trump administration can correct the innovation decline. Much worse is the situation in Europe where there seem to be no strategic plans around key technologies like AI and Deep Learning. The difference in research, investment and execution capacity between China and Europe is staggering.
Organizations worldwide should keep a close eye on Asia, both China's big four (BATJ, Baidu, Alibaba, Tencent, and JD) and conglomerates like Japan's Softbank.
China will, most probably, dictate the rules of the next technological revolution. Organizations need to invest in understanding the new landscape before they get obliterated in the crossfire.
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