Startups to China
Trends and opportunities
Achieving innovation-led development is a guiding principle to China’s 13th Five-Year-Plan (2016-2020). In May 2016, China released guidelines that specifed targets including becoming an ‘innovative nation’ by 2020, an ‘international leader of innovation’ by 2030, and ‘a world powerhouse of science and technology’ by 2049.
Overall expenditure on research and development (R&D) has grown from just 0.9 per cent of gross domestic product (GDP) in 2000, to 2.1 per cent in 2014. China is on track to reach its 2020 target of 2.5 per cent for R&D expenditure as a percentage of GDP, although Beijing, Shanghai and Jiangsu Province in China’s east have already surpassed this target. The 13th Five-Year-Plan Guidelines set a national average target of 2.8 per cent by 2030.
China boasts some 2,300 makerspaces and 2,500 incubators and accelerators. This includes over 460 in Shanghai (over 200 of which are publicly funded), all seeking to attract and support China’s new wave of young entrepreneurs, hoping to be the next Alibaba, Baidu or Tencent. This pool of talent is huge: 3.9 million students graduated from Chinese universities in 2014, 40 per cent of whom were in science and engineering disciplines.
In the last few years, China has witnessed unprecedented growth across the innovation ecosystem for startups including the establishment of platforms for seed funding, angel investors, venture capitalists and private equity funds, corporate, science-park and private sector-run incubators, accelerators, and co-working spaces and government programs, to connect banks and professional service providers to startups. One crucial benefit of this endeavour has been the acceptance of startups as a valued source of innovation and productivity by regulators, the public and other corporations seeking new ways of competing in a global marketplace.
Innovation Landscape in China
Innovation and entrepreneurial clusters have developed quickly in recent years in first tier cities such as Beijing, Shenzhen, and Shanghai. But there is also significant activity in second tier cities including East China’s Hangzhou and Chengdu in the west.
Shanghai is positioned as a centre for technology, innovation and entrepreneurship. Shanghai’s well-established innovation ecosystem includes extensive venture capital networks, a sophisticated financial services industry and a global legal and business advisory support system. Australian startups can tap into the city’s entrepreneur, industry and capital networks to accelerate their business development.
Expenditure on R&D in Shanghai topped US$13 billion in 2014, or some 3.6 per cent of GDP. Shanghai is the regional headquarters for 525 multinational corporations and houses a quarter of the R&D centres set up by multinationals in China. This global setting has attracted a strong community of Chinese and international technology companies and startups.
Beijing is home to Zhongguancun, China’s ‘silicon valley’, with leading universities, research centres and home-grown tech giants Baidu, Lenovo and Xiaomi, now the world’s fifth largest manufacturer of smartphones. Beijing is arguably the most mature city in China’s burgeoning ‘innovation’ landscape, with expenditure on research and development accounting for 6 per cent of GDP, the highest in China. But with maturity comes competition, and many now argue Beijing’s investors are no longer willing to take the risks of the past few years on early stage tech investments.
Shenzhen is developing its own innovation community, centred around the enormous hardware and electronic ecosystems that dominate districts of the city. There are 183 incubators, maker spaces and service platforms funded by the Shenzhen Science, Technology and Innovation Commission. Together this network offers pilot, short-run and mass-scale manufacturing opportunities for just about any product conceived.
China’s increasing centrality to the global economy alongside the growth of the middle class present opportunities for Australian entrepreneurs aiming for global scale and impact. Due to the government’s pro-entrepreneurship endeavours, China is now drawing attention from around the globe and almost all major startup events and contests now have operations in China. Chinese investors are actively looking for technology investment opportunities and strategic alliances with international companies both within, and outside, China.
China is a highly penetrated market in terms of internet usage, mobile subscription and mobile-based services, which gives startups access to a huge and educated user base willing and able to purchase, pay for, and share information via mobile devices.
Sectors of opportunity include fintech, education-tech, e-commerce, fashion and consumer products, services and health, advertising, software, entertainment and sport-tech.
Internet-related industries have been dominated by China’s major tech companies Baidu, Alibaba and Tencent (often referred to collectively as ‘BAT’). Emerging internet companies include Didi (which acquired Uber China), Meituan-Dianping (similar to Groupon and Yelp), Qihoo 360 (cyber-security), and Xiaomi (smart devices). Competition is fierce and these emerging companies are already giants, dominating not just domestic but also global markets. Xiaomi, for example, is the world’s fifth largest manufacturer of smartphones, after just six years in business. China’s highly mobile, increasingly wealthy middle-class are insatiable consumers of new products and services that offer convenience and can satisfy increasingly sophisticated and unique user preferences.
China has local regulations that restrict access to sensitive sectors (such as cloud computing), a high degree of content censorship, and controls that can either limit foreign participation, or may require local partnering or product localisation to comply. Unlike some markets, in China the Android platform is highly fragmented (over 100 active versions) and the most popular revenue drivers for these markets are mobile games. Chinese user behaviour, payment systems such as Alipay and WeChat Wallet, and language requirements also need to be considered.
The Australian Government is establishing ‘landing pads’ in global innovation hubs including Berlin, San Francisco, Shanghai, Tel Aviv and Singapore, to provide a platform for market-ready startups to explore global opportunities.
The Landing Pad in Shanghai, one of the five global hubs established by Austrade, is located at co-working space Xnode and aims to assist Australian-founded startups in connecting with the local community of startups, investors, service providers, regulators, and potential customers; to enable Australian startups access to a broader network including leading innovation hubs such as Shenzhen and Beijing.
Links and industry contacts
Government, business and trade
Austrade’s Landing Pads
China Torch Centre
Startup Gateway Program by Shanghai Technology Innovation Centre (Chinese only)
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