This article was written by John Kinzer and Lilly Huang
The world's second largest economy is at a crossroads, presenting both new opportunities and challenges for innovation-minded businesses and investors.
Currency and stock market jolts aside, the Chinese innovation sector is coming into its own, and increasingly looking west to do business with U.S. companies. The days when business mostly flowed one way to China are long over.
Just as U.S. companies have headed east in search of new markets, Chinese enterprises and investors are coming west to look for new markets and startup investments to bolster their technology know-how.
Sizing up the opportunities, Hans Tung, managing partner of GGV Capital, says the old China driven by large state-owned enterprises focused on manufacturing is slowing, giving way to a new China where the Internet reigns and startups abound.
"With the shift to mobile, we are seeing a convergence of Chinese and U.S. business opportunities and it's definitely going both ways. We are in very interesting times, because there is so much more possibility. People are going to be amazed," Tung predicted.
Consider these recent developments. China's Alibaba, fresh from its mega-IPO, and Lending Club, the world's largest online credit marketplace connecting borrowers and investors, earlier this year announced a creative partnership: under an exclusive arrangement, U.S. small businesses can access loans through Lending Club to buy goods through the Chinese e-commerce giant. Silicon Valley Bank introduced the two partners.
Chinese robotics company Ninebot, which is backed by smartphone maker Xiaomi, surprised many observers in April when it acquired Segway, the electronic transporter created by Dean Kamen, in a bid to establish itself as leader in smart devices. Silicon Valley Bank provided financing for the deal. Xiaomi and other Chinese Internet giants are on startup investment and acquisition sprees. "Chinese capital coming this way is at a very early stage and providing exciting new opportunities," agreed George Koo, a Committee 100 member and veteran China investment advisor.
While opportunities abound, tackling new markets is always difficult. No matter which direction you are heading, political, economic and cultural dynamics often are unpredictable. We advise taking the long view and a big dose of patience and commitment. Also, seek out those who have gone before who can share valuable experience.
Trends we are watching
As part of China's goal to "internationalize" its currency, the government is encouraging freer flow of capital. Regulators are slowly easing limits on foreign investments by local businesses and individuals. We see a new emerging pool of eager Chinese investors – companies, individuals and indigenous funds – looking to put their money in U.S. technology companies.
The trend is only poised to grow, predicted Ken Gullicksen, Chief Strategy Officer at Evernote, who led the company's expansion to China three years ago. "High-quality indigenous Chinese investment funds now have licenses to invest in the U.S., and they are looking for deals," he reported. Large private equity funds in Hong Kong and Singapore also are in the hunt for U.S. opportunities.
Bloomberg earlier this year reported that China's long-term outbound investment is catching up with the inbound variety, and quoted a researcher at the Chinese Academy of Governance who predicted that within a year, China will be "a net provider of investment funds to the world." How this summer's economic volatility and the yuan devaluation will impact the outbound flow will be interesting to watch.
U.S. companies are getting warmer welcomes these days as the Chinese government is taking steps to invigorate the economy. That includes implementing new policies to encourage innovation companies and startups, domestic and foreign. Earlier this year, the nation's premier extolled his government to "ignite the innovative drive of hundreds of millions of people."
The results so far: China is expanding its free-trade high-tech zones – more than 120 jurisdictions have been approved. In these zones, more relaxed rules are beginning to boost cross-border business. In one of the first big moves, Amazon opened operations in the Shanghai free-trade zone, with an agreement to give Chinese customers access to its global supply chain and help small and medium-sized Chinese enterprises export their products.
In another positive cross-border development, a small number of non-Chinese and joint-venture banks now can offer products and services in renminbi, the local Chinese currency, which should ease transactions. Among them is SPD Silicon Valley Bank, a 50/50 joint venture between SVB and Shanghai Pudong Development Bank that is headquartered in Shanghai. "In 2011, no one was going in to China," said Gullicksen, referring to the year that he headed to China for Evernote. "Now there is a resurgent wave." Gullicksen attributes his company's staying power in China to a laser-focus on being "local," but also to treating its Chinese operations as part of the overall company. It recruited local investors, hired local managers and did not consider China simply a satellite operation, he said.
As cross-border opportunities grow, U.S. companies are well-advised to recalibrate their business models if they want to succeed in China, said Marc van der Chijs, co-founder of Tudou.com – the YouTube-like Chinese video platform – and a managing partner at CrossPacific Capital Partners in Vancouver. Often, American companies tend to be short-sighted and pull out after the first or second year when revenues don't materialize. "You need time to build relationships," he said. "If you don't localize, you won't succeed."