China – The Sleeper Awakens (Part 1 of 5)

I just spent a few weeks in Japan and China on a book tour for the Japanese Japan bookcoverand China bookcoverChinese versions of the Startup Owners Manual.  In these series of 5 posts, I thought I’d share what I learned in China.  My post about Japan will follow. All the usual caveats apply. I was only in China for a week so this a cursory view. Thanks to Kai-Fu Lee of Innovation Works, David Lin of Microsoft Accelerator, Frank Hawke of the Stanford Center in Beijing, and my publisher China Machine Press.

Summary: I’ve lived in Silicon Valley for 35 years, I’ve taught in entrepreneurial clusters in New York, Boston, Helsinki, Santiago Chile, St. Petersburg, Moscow, Prague, and Tokyo, but the visit to the heart of the Beijing startup world Zhongguancun has truly blown me away.

Each of these clusters has wondered how to become the next Silicon Valley.  Beijing is already there.

———-

What a long strange trip China has been through. After the creation of the Peoples Republic of China in 1949, all industry was nationalized, agriculture was collectivized, and the private sector was eliminated. All companies were owned by the state, all planning was centralized, and the state determined the allocation of resources. This was the China I grew up with – the one where private enterprise was a crime and marketing wasn’t a profession.

To say China has transformed itself is perhaps the biggest understatement one can make. China has embraced state capitalism in a way Wall Street can only dream about.

Startups, Venture Capital and the Communist Party: how did this happen in China?
The best analogy to describe the relationship of science and technology and the Chinese startup scene is to understand its parallels with the United States during the Cold War with the Soviet Union.  During World War II, the U.S. mobilized scientists in a way no other country had. For 45 years – post World War II until the fall of the Soviet Union – the U.S. viewed science and technology as a strategic asset. We made major investments in it, understanding that establishing basic and applied science leadership was necessary for us to build advanced weapons systems to defend our country and deter and if necessary, wage and win a war with the Soviet Union.

These investments took the form of building national research organizations, several for basic science (NSF, NIH) and others for applied weapons research (DOD, DARPA, DOE, etc.) Research universities also became an integral part of the military ecosystem as the federal government pumped billions into supporting science.

Startups, entrepreneurship and commercial applications are happy byproducts of those military investments. For example, as the semiconductor business started, the largest customers for Fairchild’s and Texas Instruments new integrated circuits were the Apollo Guidance Computer and the guidance system for the Minuteman II ICBM.

China is following the same path...
Over the last three decades, to achieve strategic parity with the United States and to construct a modern military, the Chinese have made massive investments in building their science and technology infrastructure. China has gone from a land-based army to one that can support its territorial claims to the South China Sea and Taiwan with anti-access/area-denial weapons. This evolution required a transition, moving from a reliance on the numerical superiority of its land army toward a force boasting sophisticated aircraft and naval platforms, precision- strike weapons, and modern C4SIR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) capabilities. Its Second Artillery Corps not only controls China’s ICBMs, but also its short range missiles pointed at Taiwan, Vietnam, Philippines, and U.S. bases in Guam and Okinawa. And its new terminally guided ICBMs have put U.S. aircraft carriers in harms way in any regional confrontation. Its air force and navy have gone from a self-defense force to one that can project regional power effectively to the first island chain and beyond.

DongFeng 21C (CSS-5 Mod-3)

China’s military modernization depends heavily on investments in China’s science and technology infrastructure, reform of its defense industry, and overt and covert procurement of advanced technology and weapons from abroad.

Building China’s Science and Technology infrastructure
Science and startups have come a long way since the 1980’s when the Chinese government owned everything and controlled it through a central planning system.  But before startups could happen, China’s basic science, technology and finance infrastructure and ecosystem needed to be built.  Here’s how a national policy for science and technology emerged.

Beginning in the 1982, China started a series of science and technology programs in five areas: support of basic research, high technology R&D, technology innovation and commercialization, construction of scientific research infrastructure, and development of human resources in science and technology.

The majority of the science and technology programs are driven by MOST (Ministry of Science and Technology) and NSFC (National Natural Science Foundation). As we’ll see later, the MOF (Ministry of Finance) also has had a hand in funding new ventures.

MOST logoThe diagram below from OECD’s Report on China’s Innovation Policy puts the ministries involved in science in context. (Note that it does not show the military technology ministries.)

MOST in China

  • Basic research: National Natural Science Foundation (equivalent to the U.S. National Science Foundation,) ~$1.75 billion budget. The 973 program (National Basic Research Program) part of the Ministry of Science and Technology.
  • High technology R&D: 863 Program (State High Technology R&D Program) headed by ex leaders of Chinese strategic weapons programs, and the National Key Technology R&D Program.
  • Technology innovation and commercialization: National New Product Program, the Spark program for rural innovation, and probably the most important one for startups in China , the Torch Program
  • Science research infrastructure:  National Key Laboratories Program, and the MOST program for the construction of research facilities, R&D databases, and a scientific research network
  • Development of human resources in science and technology: Programs for attracting returnees or overseas Chinese talent: from the Ministry of Education – the Seed Funds for Returned Overseas Scholars, Chunhui Program, and the Cheung Kong Scholar Program. From the Ministry of Personnel – the Hundred Talents Program. From the National Science Foundation – the National Distinguished Young Scholars Program.

Part two the next post, describes China’s Torch Program, the largest government-run entrepreneurial program in the world.

Lessons Learned

  • China is working to build basic and applied science and technology leadership
  • Like the U.S. and the Soviet Union in the Cold War they are using science and technology to build advanced weapons systems
  • Technology startups are a side effect from these investments

Listen to the post here: or download the podcast here

24 Responses

  1. As always – Insightful and I am appreciative of you taking the time to share. I have just been asked about potentially lecturing in Hong Kong and this helps get a better picture of the landscape.

  2. Really interesting insight. Thanks Steve. Of your three final bullet points, ‘advanced weapons systems’ is what stands out. The suggestion is that this was and is their main intent. Is that what you mean?

    • yes.

      • Hi, Professor Blank, I’m a Chinese, as for as i know,the purpose of 863 program may be just like you said “they are using science and technology to build advanced weapons systems”.but It’s a long time ago, nowadays , the main focus of science and tech is to develop our economy and realize our modernization, such as the spark program u ‘ve mentioned

  3. China is getting ahead of the curve with newer and better technology…

  4. So, Steve, please give us your perspective on the differences between China and the US today with respect to entrepreneurial climate and landscape. Are we (USA) competing effectively with them or in decline?

  5. I have taught technology evaluation and commercialization in China for seven years and have seen first hand their desire to move quickly in this area. I have used Steve Blank’s ideas in my teaching and have promoted the books. Glad to see they are available now in Chinese. The Chinese are hungry for this kind of information. I have visited technology parks all over the country and was a consultant to Zhongguancun a few years ago. Amazing transition and Steve is right on in his analysis of the country.

  6. Your title hits the nail in the head – Sleeper Awake. China is a sleeping giant, with the sheer size of resources and human resources available. With her unique culture, she is slowly making progress on all fronts, including innovation, which requires freedom to create. It is a state of mind that young chinese folks need to arrive. Easier said than done, but the country is making tremendous progress in extraordinary speed. Steve, thanks for your summary and I look forward to reading more on your post-trip thoughts!

  7. I’ve been following Steve for more than 4 years, reading his books, attending his Stanford lectures, and practicing his methodology. I bought his “Four Steps to Epiphany”, Chinese edition, for everyone in my team in China. They were all excited to learn and practice the methodology. It not only helped us execute with more confidence, but transformed how we work. Thank you, Steve!
    It’s great to see the Owner’s Manual in Chinese. I just found them on amazon.cn. I’ll buy some copies for the team again!

  8. Impressive, but do you really think that they are innovative?

    My impression always was that because of the confucian background and the strongly hierarchical structures the ccp and the state have – thinking out of the box and questioning the status quo is not really supported.

    Further, the American way of risk taking, venturing and also the openess of the US society towards this, reinforces the creation of new industries.

    I am a German, in Germany we do have an open society, world class infrastructure, centuries of education culture, a lot of engineering knowledge but the society as such and the law as well is not really supporting entrepreneurs.

    Succesful Entrepreneurs in Germany are seen as crooks, and unsuccessful entrepreneurs as losers. But a management career in a big corporation is seen as the real way of live.

    I guess that China will have similar problems, they do take risks but in another way, the Chinese I met was extremly interested in short term bets and mostly was hard bargainers.

    China is not America.

    I think the role of cultural, social and legal frameworks for successful entrepreneur environments is not well understood.

    Silicon Valley will have the crown for a long time

    • Hi I´m Mexican, I was a student in China in the early 80´s I´m now an executive in a Chinese oil company and Honorary President of the Mexican Chamber of Commerce in China. I´m very impressed with your analysis. It actually brought lots of memories back since my school in Beijing was right next to Zhongguancun. I would be very honoured to keep in touch and would like read your book. Andres
      shangmex@gmail.com

  9. Hi Steve, Gean Chu here! Great insight and write-up about China. Time for you to come and visit us in Singapore and National University of Singapore (NUS)! I will host you for sure if you visit Singapore and find out more about our entrepreneurial ecosystem and etc. Cheers.

  10. Interesting content as very few get the opportunity to visit China the way you have. I look forward to the next 4 parts…

  11. [...] China – The Sleeper Awakens (Part 1 of 5). [...]

  12. Intresting post. I think that today it is very easy that environments change. Today is China we dont know who is next. I look forward to the next 4 parts

  13. [...] The first post described how China built a science and technology infrastructure to support advanced weapons systems development. The previous post described how the Torch program built China’s innovation clusters. This post is about the rise of Chinese venture capital and how it helped build the countries entrepreneurial ecosystem. [...]

  14. Steve: You are wise enough to recognize the difficulties of achieving success, but you have obviously been inspired by the enthusiasm of the young people you worked with. They are China’s hope, but whether or not they will be able to make a difference is uncertain.

    China’s new government is a breath of fresh wind, but it’s too early to tell whether they will be able to shift China from ‘authoritarian capitalism’ to a more liberal form. Everyone in the country would want to except those profiting under the current system.

    Realists such as Ruchir Sharma are willing to speak truth to power, and have so gained respect.

  15. [...] China – The Sleeper Awakens (Part 1 of 5).  How China built a science and technology infrastructure [...]

  16. I look forward to the next 4 parts.I think the role of cultural, social and legal frameworks for successful entrepreneur environments is not well understood.

  17. […] The first post described how China built a science and technology infrastructure to support advanced weapons systems development. The previous post described how the Torch program built China’s innovation clusters. This post is about the rise of Chinese venture capital and how it helped build the countries entrepreneurial ecosystem. […]

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