China surging ahead as digital powerhouse

China has firmly established itself as a global leader in consumer-oriented digital technologies. It is the world's largest e-commerce market, accounting for more than 40 per cent of global transactions, and ranks among the top three countries for venture capital investment in autonomous vehicles, 3D printing, robotics, drones and artificial intelligence (AI).

One in three of the world's unicorns - start-ups valued at more than US$1 billion (S$1.35 billion) - is Chinese.

Powering China's impressive progress in the digital economy are Internet giants like Alibaba, Baidu and Tencent, which are commercialising their services on a massive scale, and bringing new business models to the world. Together, these three companies have 500 million to 900 million active monthly users in their respective sectors.

Now, these Internet firms are using their positions to invest in China's digital ecosystem - and in the emerging cadre of tenacious entrepreneurs that increasingly define it. Alibaba, Baidu and Tencent together fund 30 per cent of China's top start-ups, such as Didi Chuxing (US$50 billion), Meituan-Dianping (US$30 billion) and JD.com (US$56 billion).

With the world's largest domestic market and plentiful venture capital, China's old "copycat" entrepreneurs have transformed themselves into innovation powerhouses. They fought like gladiators in the world's most competitive market, learnt to develop sophisticated business models (such as Taobao's "freemium" model), and built impregnable moats to protect their businesses (for example, Meituan-Dianping created an end-to-end food app, including delivery).

As a result, the valuation of Chinese innovators is many times higher than that of their Western counterparts. Moreover, China leads the world in some sectors, from livestreaming (one example is Musical.ly, a lip-syncing and video-sharing app) to bicycle sharing (Mobike and Ofo exceed 50 million rides daily in China, and are now expanding abroad).

Most important, China is at the frontier of mobile payments, with more than 600 million Chinese mobile users able to conduct peer-to-peer transactions with nearly no fees. China's mobile-payment infrastructure - which already handles far more transactions than the third-party mobile-payment market in the United States - will become a platform for many more innovations.

As Chinese firms become increasingly technically capable, the country's market advantage is turning into a data advantage - critical to support the development of AI. The Chinese firm Face++ recently raised US$460 million, the largest amount ever for an AI company. DJI (a US$14 billion consumer drone company), iFlyTek (a US$14 billion voice recognition company), and Hikvision (a US$50 billion video-surveillance company) are the world's most valuable firms in their respective domains.

Another important developing trend in China is "online merging with offline" (OMO) - a trend that, along with AI, Sinovation Ventures is betting on. The physical world becomes digitised, with companies detecting a person's location, movements and identity, and then transmitting the data so that it can help shape online experiences.

For example, OMO stores will be equipped with sensors that can identify customers and discern their likely behaviour as seamlessly as e-commerce websites do now. Similarly, OMO language learning will combine native teachers lecturing remotely, local assistants keeping the atmosphere fun, autonomous software correcting pronunciation, and autonomous hardware grading homework and tests. With China in a position to rebuild its offline infrastructure, it can secure a leading position in OMO.

China's government has grand plans for the country's future as a digital world power. The State Council-led Mass Entrepreneurship and Innovation Programme has resulted in more than 8,000 incubators and accelerators. The government's Guiding Fund programme has provided a total of US$27.4 billion to venture capital and private equity investors. The authorities are now mobilising resources to invest US$180 billion in building China's 5G mobile network over the next seven years, and are supporting the development of quantum technology.

The State Council has also issued guidelines for developing AI technologies, with the goal of making China a global AI innovation centre by 2030.

Such aspirations will inevitably disrupt the labour market, from routine white-collar jobs such as telemarketing to non-routine ones such as driving or even radiology. Recent MGI research found that in a rapid-automation scenario, some 82 million to 102 million Chinese workers would need to switch jobs.

Retraining the displaced will be a major challenge for China's government, as will preventing the major digital players from securing innovation-stifling monopolies. But the government's readiness to embrace the emerging digital age, pursuing supportive policies and avoiding excessive regulation, has already placed the country at a significant advantage.

PROJECT SYNDICATE

•Kai-Fu Lee is a co-founder and chief executive of Sinovation Ventures, a venture capital firm. Jonathan Woetzel is a director of the McKinsey Global Institute.

A version of this article appeared in the print edition of The Straits Times on December 19, 2017, with the headline 'China surging ahead as digital powerhouse'. Print Edition | Subscribe