Apart perhaps from 'profit' it is hard to think of any other words that appeal to the imagination of entrepreneurs more than 'Silicon Valley' and 'China'. Unsurprisingly, then, the Tech Connection: China & Silicon Valley panel hosted in San Francisco in early June by Startup Basecamp, a co-living and co-working space, was full to capacity. Surprisingly, though, it was mostly Chinese entrepreneurs, not Westerners, in attendance. “If you look at the audience, you can see that there is a lot of appetite to increase activity here,” Guillaume de Dorlodot, the founder and CEO of Startup Basecamp told fDi.
Data from greenfield investment monitor fDi Markets shows that this Chinese appetite goes beyond sending representatives to panels such as that organised by Startup Basecamp. The past two years have marked record levels of Chinese outbound investment into software and IT, with 2014 recording 30 greenfield projects, followed by 27 in 2015.
The consumer electronics sector is enjoying a similarly prosperous period when it comes to Chinese outbound investment. The first five months of 2016 brought exactly the same number of investments as the whole of 2015, with 13 new ventures announced, and the 2010 record of 19 investments looks set to be broken.
Not there yet
But while the Chinese appetite for outbound tech projects appears to be growing, the country is not the leading investor in this sector, according to data from fDi Markets. While the 30 projects in software and IT announced in 2014 might be a record for China, the country still lagged behind not only by tech powerhouses such as the US, the UK and Germany, but also Switzerland, India and Australia, which recorded 73, 60 and 56 projects, respectively.
“The Chinese market is large enough to feed the hunger of local companies, so we have not seen activity that matches their potential yet. But I believe we will see more and more of Chinese overseas activity,” says Arman Zand, director of business development at tech co-working accelerator Rocket Space, who recently moved back to Silicon Valley after spending seven years developing a Chinese-American joint venture in Shanghai.
James Lockett, vice-president and head of trade facilitation and market access at Huawei, a Shenzen-based telecoms giant and one of the first Chinese tech firms to build a multinational footprint, also believes that in the years to come there will be a growing number of Chinese companies expanding abroad, partly as a result of waning economic prospects at home.
“There are a number of Chinese tech companies such as Huawei, Tencent, Alibaba and Baidu. Few yet have expanded overseas, primarily because of language issues and the fact that the Chinese market is so large that they can enjoy a big business without selling much outside China,” says Mr Lockett. “With the recent slowdown of growth in China, there could be more opportunities to grow outside China for those willing to adapt.”
Alibaba and the followers
Among the companies that have already been expanding overseas in the software and IT sector, the one clear leader is Alibaba, a Hanghzou-based e-commerce firm valued at an estimated $60bn. Between 2014 and 2016 (to May) the company launched 15 greenfield projects, with almost half of them located in the US.
Apart from Alibaba, the most active companies, albeit with a much lower level of investment, were Avazu, a Shanghai-based digital marketing firm, and Kingsoft, a Beijing-based software firm. Both have launched four overseas projects since 2014. Avazu has allocated the majority of its investments in developed economies such as Germany, the UK and the US. Kingsoft has been betting on emerging markets such as Brazil and Indonesia.
Within the consumer electronics sector, the leading investor has been Hisense, a Qingdao-headquartered white goods producer. Since 2014 it has launched eight projects, predominantly in emerging markets (the Czech Republic, Mexico and South Africa), ahead of Haier Group, another Qingdao-based company, which launched six projects, and Cogobuy Group, a Shenzen computer and telecoms hardware firm, which launched four projects. As with Hisense, Haier and Cogobuy expanded mainly into developing economies, with the former investing in India, Pakistan and the Philippines and the latter in Israel and Singapore.
According to Mr Zand, rather than following Alibaba and Avazu into developed markets, Chinese companies are more likely to join Kingsoft, Hisense, Haier and Cogobuy in emerging markets, where purchasing power might be lower but demand for Chinese expertise is high, particularly in the software and IT field.
“Chinese tech companies might not be able to compete with companies in developed markets when it comes to quality, but they have plenty of experience in delivering to high-volume markets,” says Mr Zand. Such experience will come in handy in populous markets such as Africa, which according to Mr Zand is the next frontier for Chinese tech investments.
Xiao Wang, CEO of Innospring Silicon Valley, an entity linking Chinese companies with international partners, says that South America, the Middle East and south-east Asia should be added to that mix. Yet, according to Ms Wang, the mainstay of the Chinese international presence, especially when it comes to job creation, will come not from software and IT, but tech manufacturing. “I think this is the most underestimated and undervalued sector,” she says. “And this is where a lot of Chinese international activity will come from, because it is becoming simply too expensive now to produce in China.”
Just the start
To date, software and IT job-creation still exceeds hardware when it comes to job creation, with an estimated 2854 jobs created in this sector since 2014, as compared with an estimated 1016 created by consumer electronics firms, according to data from fDi Markets. Yet, in both cases, China made it to top 10 worldwide. And there is more to come, as judged not only by expert forecasts but also recent moves of companies such as LeEco.
Founded only six years ago, the company has been dubbed by some as a 'Chinese Netflix' and is already valued at $3.2bn. In April, it opened its North American headquarters in Silicon Valley's San Jose. The initial headcount of the company's US operations is estimated at 250, but it is expected to more than double that number by the end of the year.
“We are a relatively new brand in the US, but we do business all around the world, and our presence here in Silicon Valley puts an exclamation point on our visionary plans,” Shawn Williams, chief administrative office of LeEco US, commented on the day of the company's San Jose opening. With standing-only space at the Startup Basecamp's panel, it is easy to predict that there will be more of these exclamation marks in years to come.