On 20 July 2017 I presented at a forum in Sydney called China Money, Chinas Markets run by InnovationAus. Here is my speech.
The topic for my presentation this morning can be broken down to these areas:
· ‘Why choose China’ and specifically why over other more traditional international markets; and
· ‘what are the innovation opportunities in China’ and finally,
· ‘how can we link our business and investment communities for mutual benefit?’
Firstly I declare I am not a ‘China expert” per se. My bona fides for presenting observations on this topic today are three fold:
· Firstly experience and knowledge of multiple international markets and in particular how they are intersecting with China - such as Africa and Latin America.
· Secondly as a tech entrepreneur taking my company to IPO in 1999 I also sold into a nascent China market with HarvestRoad Ltd in 2000 perhaps developed the first mandarin language version of an Australian software web portal product for the then Beijing.com; and
· With Michael Clifton and his China team at Austrade I helped construct and lead delegates on the Innovation stream of the AWIC 2016 business mission - and some of the people that participated in that mission are also here today.
Part 1. Why Choose China?
So in essence why should you choose China over any other global innovation destination?
Having had the ability to compare many international markets I would posit that the reason that anyone should look seriously at the China market - if you have the capability and capacity - is simply because it is like no other, it is acting like no other, and it has forces applying to it, and driving it forward, that is like no other. Therefore we should not consider it along the same principles as other more traditional global innovation centers.
The Harvard Business Review refers to China as a ‘parallel digital economy’[1] and I use the description ‘economic tsunami ‘.
So let me put this into some perspective and then relate to how it affects innovation and commercialization of capability between our economies:
· Firstly we all know that the size, capability, desire and will of the Chinese Government and its industrious people to influence it economic development is without peer in its speed and comprehensiveness.
· But China historically had some timing good fortune in terms of Government policy looking outwards just as global technology evolved – for example the GSM mobile networks in the 1990’s where China quickly became the worlds largest mobile user , followed by broadband and smart phone driven mobile internet, ecommerce and social media in the early 2000’s , and now as we move into the information age; big data, artificial intelligence, robotics and network and service personalization through social media.
· That is - just as the world became flat, global and digital according to Thomas Freidman, China began looking outwards at the new opportunity to compete globally it was given. Referring to India but equally applicable to China and the lens by which we need to view it he said:
“By 'flat' I did not mean that the world is getting equal. I said that more people in more places can now compete, connect and collaborate with equal power and equal tools than ever before.” [2]
· Also the concurrent centralized control of Internet activity – both in terms of restricting foreign participants and usurping privacy rights allowed for the emergence of major local social media and ecommerce player behemoths.
· Plus the demands of increasingly dense, rapid growth urbanization on its population provided – and continues to provide - a multiplier effect for the creation and delivery of new types of digital and ecommerce services and solutions to Chinese consumers.
· And China’s aging population combined with the increasing costs of labour compared to less developed markets, now requires a workforce strategy based on higher productivity utilizing innovation and finding new markets. Plus of course it requires a new level of aged care services and technology capability for its elderly citizens!
· The concurrent rise of a digital currency in the form of BitCoin – of which China is today the largest user - and distributed secure ledger technology aka Blockchain which it is aggressively pursuing - combined with forthcoming cash economy international standards with which China is heavily engaged, creates the ability to generate new types of trading and personal use banking and financial services underpinned by hundreds of millions of domestic clients.
· Another indication of innovation take up is reflected in its focus on patent registration. In volume alone – which does not not necessarily reflect quality or value - the number of invention patent applications received by China in 2015 broke the one million barrier compared to 587,802 is the US.[3]
So lets express the clear disparity of China relative to other markets you may be considering:
· China will achieve a ‘smart phone’ penetration of 740m by 2021[4] - no other single market has that critical mass of users.
· China has had no significant tradition of personal credit cards usage amongst the general population so ecommerce players have had fewer legacy consumer issues or hurdles to overcome in deploying their services and actually may have given them an advantage in the types of new, and unique, services they can offer in comparison to other markets.
· Chinese citizens are prepared to accept less privacy, and the boundaries between work and social or personal use, for greater functionality, and thus an application like WeChat has evolved into essentially a fully integrated mobile operating system – for an entire social and work lifestyle! There is no comparison in the west to WeChat and perhaps all systems in the west may need to consider some form of merging or evolution in order to match this capability going forward.
· China’s online sales market eclipsed the US about two years ago, and is was expected to reach $1.24 trillion in 2016. Compare that to Australia’s total retail sector value of $300bn. This would amount to almost half the world’s digital retail sales, according to a forecast by research firm eMarketer and China will have the largest percentage of internet shoppers in the world.[5] You can see why Australia Post is interested in China opportunities and why they appointed Christina Holgate as their new CEO.
• Alipay and WeChat account for 90 per cent of all mobile payments and Alibaba has an active consumer base of more than 420 million across China. [6]
Finally I would like to make one point about China’s role and current strength in global trade.
China was the world’s largest exporter of goods in 2014, accounting for more than 12 per cent of total exports.
Turning to trade in commercial services, the United States was by far the world’s largest trader in 2014, with total trade worth US$1,140 billion. China was in second spot with US$604 billion of trade.[7]
The important point to understand is that whilst Chinese industry has managed to dominate the manufacture and export of merchant goods it is still growing in terms of developing its services economy and this is a significant gap in their capability I am sure they will want to fill. The Australia China Free Trade Agreement interestingly for the first time makes provision for Australia companies to establish services capabilities in the China market and even examples like the acquisition of John Holland by CCCC[8] for its engineering project management experience are examples of that.
Part 2. Where are the Business Opportunities?
So in my personal view likely opportunities from Australia that match these Chinese trends and drivers could be:
· Pretty well any technology, products or capability that support China’s requirement for energy, water and food security. We saw three examples from UNSW this morning.
· Those products and services associated with health and well being and build on Australia’s reputation for policy, governance and regulation - especially food products, food safety, complementarity medicines and aged care services.
· Financial and banking services – especially ecommerce, digital currency and distributed secure ledger technology and the cash economy but also in wealth management – capturing the large part of the population described as the ‘unbanked’.
· Environmental services or technologies relating to air pollution, urban water, river systems or soil degradation management.
· Infrastructure and project management services and technology in design, building, construction, ports and rail.
· Products associated with increasing discretionary ‘aspirational’ consumerism – such as wine and beauty products, sports technology or fashion.
· Education and training – K to 12, HE and VET and corporate training especially in the fast growing aged care and aviation sectors[9] .
The great advantage for Australian innovators is most of what I have described is clearly outlined in the 13th Chinese Plan[10] priorities.
So my take out from this is what Australian capability has as its great strengths, China is wanting!
Part 3. How do we take this forward?
China is clearly not a ‘walk up’ market.
It requires partnerships and the best partnership is one where not only the local partner succeeds but where that success comes from the Australian partner also succeeding. For example I could think of joint efforts to prevent food fraud or substitution are ones that benefit all parties - the supplier, the wholesaler, the distributor and most importantly the customer.
When I was leading the Innovation stream of the Australia Week in China business mission across Shenzen, Beijing and Shanghai the delegation noted( and please feel free to add your own observations):
· That a sophisticated incubator and accelerator ecosystem exists – across all Chinas provinces creating its own mini regional competition.
· Some are working on the principal of ‘failing fast’ and folding talent back into new technologies and opportunities - so skills are not lost - just reassigned and the speed of innovation is maintained.
· The size of private funds being generated for innovation commercialization is in terms of billions – someone here may have an up to date figure of how that compares to US VC funds.
· Many players we met were already experienced from their time in the US system both as researchers and as investors.
· There are a lot of very successful, sophisticated young entrepreneurs – two of whom we met had studied at Australian universities here in Sydney!
· Chinese investors are not only looking at their own unique market opportunity but they are looking outwards and are not afraid to do so.
So we need to create better linkages – how should we do this?
1. Firstly meet and engage with everyone in this room. This is a common interest group that already exists!
2. We need to encourage the linking of sector focused incubators and accelerators and other great initiatives. Some have already done so like : Stone and Chalk in financial services and Innohub in education and Andrea Miles and the China Australia Millenial Project are all great examples. We just need many more. And on the China side as another example in Shenzen a local hardware accelerator has a 40% international start up participation – including a company from Melbourne that we met.
3. We need to link angel and VC communities – ideally in a partnering arrangement and for example Sapien Ventures based here is Sydney now has links and partnerships in Silicon Valley and Shanghai. The Chinese VC’s said that they had not traditionally looked at Australia for opportunities but are more willing to do so. Producing enough projects may be our only issue!
4. Corporate players like Telstra and CBA are establishing their own tech and innovation hubs in Asia, which is to be applauded, but how can we as a wider community get more leverage from their investment?
5. Pay attention to the activities of, and introduce yourself to, key corporate China players as they ramp up their presence and increasing interest in the Australian market and its products and services.
6. We can also utilize Australian government capability – Austrade’s landing pad in Shanghai – or even Singapore - and Federal and State Government led business missions and representatives across China are an outstanding way to familiarize yourself with the market and they are increasingly focused on sectors of emerging interest – like aged care, financial services or smart cities.
7. More recently Austrade conducted an investment missions from China to Australia.
8. University alumni have an important role to play also. Many of the Special Investor Visas awarded have involved parents of international students who became aware of the opportunities identified by their children. The SIV programme also has a requirement for a percentage of any investment made include supporting venture capital.
9. CSIRO and other University research collaborations are looking to finding ways to link research and technology ecosystems for mutual benefit and UNSW’s Torch Precinct is a first class example of this.
10. Innovators can also use an industry association with which they are associated to leverage off the back of those associations increasing interest and focus on China markets including encouraging the focus of groups like Standards Australia to influence International Standards direction for the benefit of Australia’s prosperity.
11. Finally we need very specific investment and innovation China forums and we need these on a regular basis to continually reinforce not just interest, but the capability we have between our two markets. This forum is a great contribution to that education process.
Closing
In closing I would like to reinforce that China has reached a point where it is perfectly poised to launch into the information age and become a major – if not the major - participant in the global digital economy. The ‘times’ in terms of technology development creating a ‘flat, digital world’ have been its friend and it is operating as a parallel digital market of hundreds of millions.
What China can now do, how it is doing it and the innovation force it brings with it is impressive in terms of its ambition and disruptive capability. For all these reasons I believe Australian capability and interests need to look at and choose China for what it distinctly offers.
Australia has some significant areas of expertise that are of interest to China’s go forward objectives and plans for its economy and society and we have a very credible reputation, brand and capability to offer.
As such we should look to deliver a technology or service that is trusted, unique, valued and not easily replicatable.
Combining this with the right Chinese partner will count among the key attributes for success.
I have described many ways in which we are already connecting – we just need to keep building and promote both progress and success.
Thank you.
NB: In the panel session we also referred to 2.0m Chinese living in Australia with Chinese heritage. This is not true of other markets like the US or Japan - not even close.
End
[1] https://hbr.org/2017/07/60-countries-digital-competitiveness-indexed
[2] https://www.brainyquote.com/quotes/quotes/t/thomasfrie416670.html
[3] http://www.tprinternational.com/china-vs-us-patent-trends-giants-stack/
[4] https://www.statista.com/statistics/467160/forecast-of-smartphone-users-in-china/
[6]http://www.theaustralian.com.au/business/stripe-deal-opens-door-to-china-for-eretailers/news-story/98aff43f975cc8115b3bb7c08739f092
[7]https://www.austrade.gov.au/News/Economics-at-Austrade/the-worlds-leading-trading-nations
[8]http://www.smh.com.au/business/leighton-sells-john-holland-in-115b-deal-20141211-125k7r.html
[9]http://www.theaustralian.com.au/business/aviation/austrade-china-mission-targets-flighttraining-demand/news-story/872851ebdbd55589a7fcfe0bf9ead323
[10]http://www.kwm.com/en/au/knowledge/insights/china-13th-5-year-plan-key-points-summary-new-normal-innovation-20160414
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