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The Rise Of China’s Innovation Machine

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China has long been the factory floor that churns out popular gadgets for companies world-wide, but the country’s own technology products were rarely viewed as leading edge.

Now, that is beginning to change.

Increasingly, China’s own technology companies are challenging market leaders and setting trends in telecommunications, mobile devices and online services.

Keeping better-known global competitors at bay in their massive home market, they are hiring Silicon Valley executives and expanding overseas with aggressive marketing campaigns featuring international sports stars and celebrities.

Lenovo Group
BUSINESSES:
PCs and mobile devicesFOREIGN COUNTERPARTS:
PCs: Hewlett-Packard, Dell; Smartphones: Apple, Samsung

ANNUAL REVENUE, 2012:
$33.9 billion

KEY POINTS:
• Became world’s biggest PC maker in 2013
• Bought IBM’s PC business in 2005 for $1.25 billion
• Generates more than half of its revenue overseas

Chinese companies still face a perception problem among consumers in many parts of the world that their products aren’t as high-quality or reliable as others. Some foreign competitors have alleged that Beijing gives unfair advantages through subsidies, cheap financing and control over the currency market.

But, many executives at Chinese and Western companies contend, China’s technology sector is reaching a critical mass of expertise, talent and financial firepower that could realign the power structure of the global technology industry in the years ahead.

“Traditionally Chinese companies were fast followers, but we are starting to see true innovation,” said Colin Light, partner at PricewaterhouseCoopers.

The rise of China’s tech industry is fueled in part by its growing investment in research and development. According to a study released in December by U.S.-based Battelle Memorial Institute, R&D spending in China will likely reach $284 billion this year, up 22% from 2012. That compares with just 4% growth forecast in the U.S. to $465 billion for the same period. It forecasts China will surpass Europe in terms of R&D spending by 2018 and exceed the U.S. by 2022.

At Shenzhen-based Huawei Technologies Co., the world’s second-largest telecommunications-equipment supplier by revenue after Sweden’s Ericsson, annual R&D expenditures rose fourteenfold in a decade to $5.46 billion in 2013 from $389 million in 2003.

When Peter Zhou joined Huawei straight out of graduate school in 2000, the company’s Shanghai research center had a few hundred workers in a shared office. Every Wednesday night after work, Mr. Zhou and other young Chinese engineers gathered for study sessions, sometimes using university textbooks from the U.S.

“At that time, Huawei was not at the same level as Western companies,” Mr. Zhou, now an executive at Huawei’s wireless-equipment business, recalls.

“We were like students.”

But in the past decade, Huawei overtook Western rivals such as Nokia Corp. NOK1V.HE -0.51% and Alcatel-Lucent SA ALU.FR -1.10% in the telecom-gear market. Part of its success stemmed from Huawei engineers’ creative ways to upgrade wireless networks using software instead of a costly method of replacing all hardware components, according to Mr. Zhou.

Huawei now has an R&D center in Shanghai that employs more than 10,000 engineers, many of whom have computer-science degrees. As the mobile industry deploys faster fourth-generation networks, Huawei is already working on the technology for fifth-generation networks, which could be ready around 2020.

Huawei’s global expansion has met some skepticism. Last year, some European Union officials alleged that unfair subsidies from the Chinese government allowed Huawei to sell its gear at lower prices in Europe. Huawei denied those allegations.

In October, when Danish telecom carrier TDC TDC.KO -0.68% A/S announced a $700-million deal to replace its existing Ericsson equipment with Huawei’s gear, TDC Chief Executive Carsten Dilling said that he chose Huawei for its technical expertise, not its prices—adding that Huawei was “actually quite expensive.”

Glory Global Solutions Ltd., a U.K.-based global supplier of cash-handling machines used at banks, opened a research center in Shanghai in 2011. The center’s Chinese engineers are developing advanced sensor technology to identify various security features embedded in bank notes to detect counterfeit bills, combing software programming, hardware engineering and scientific methods like spectrometry.

Working on cutting-edge technology with Chinese engineers involves a risk of them leaving to set up local competitors, said its Chief Executive Paul Adams. Still, local engineers are bringing new ideas to Glory Global, he said.

China is also moving up the technological curve in sophisticated areas like mobile processor chips, where it used to be absent. U.S. competitors like Qualcomm Inc. QCOM +0.28% and Nvidia Corp. NVDA +0.31% are still far ahead, but China’s Fuzhou Rockchip Electronics Co. and Allwinner Technology Co. are increasing their presence in the fast-growing market for chips used in low-end smartphones and tablets. Last month, the Chinese government announced plans to spend almost $5 billion to create a fund to make investments in the country’s microchip industry.

In consumer products, few Chinese brands have succeeded in becoming household names globally. But personal-computer maker Lenovo Group Ltd. 0992.HK -2.68% , which last year overtook Hewlett-Packard Co. HPQ +2.50% as the world’s largest PC maker by units sold, is setting a new precedent with its aggressive global expansion in smartphones. In the third quarter of last year, Lenovo ranked third in smartphone sales globally after Samsung Electronics Co. 005930.SE -0.15% and Apple Inc., AAPL -0.56% according to research firm Gartner.

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Huawei spent $5.46 billion on research in 2013, up from $389 million in 2003. Above, a Huawei phone at CES. Associated Press

Lenovo, which bought International Business Machines Corp.’s IBM +0.54% PC business in 2005, released its first smartphone in China in 2010. At that time, its executives knew that the company lacked many of the resources necessary to compete globally in smartphones. Lenovo recruited many people from telecom and Internet industries to inject “new blood,” according to Chief Strategy Officer Zhou Qingtong.Around 2010, Lenovo also created a team of mobile-app developers. In mid-2013, it launched Qiezi, an app for both Apple’s iOS and Google Inc. GOOG +0.66% ‘s Android operating systems that enables two phones to instantly share photos and videos without an Internet connection. In four months after its debut, Qiezi gained more than 30 million users, according to Lenovo.

“We needed a game changer,” said J.D. Howard, a former Silicon Valley entrepreneur who joined Lenovo in early 2012 to head its overseas mobile device operations.

In 2012, Lenovo signed a three-year sponsorship deal with the U.S. National Football League that allowed it to use NFL trademarks in its marketing. Lenovo also hired National Basketball Association star Kobe Bryant for its smartphone ads in Asia and enlisted Hollywood actor Ashton Kutcher in its latest marketing ploy in the U.S.

Since 2012, Lenovo has launched smartphones in overseas markets such as Indonesia, India and Russia. In Indonesia, it now takes up more than 10% of the local smartphone market.

“Apple is of course a cool brand, but I think Lenovo is cool too,” said Amalia Pulungan, a nonprofit worker in Jakarta who bought a Lenovo smartphone in October.

In late December, Lenovo opened its new hub for research, development and production of smartphones and tablets in the central Chinese city of Wuhan, after it spent $800 million to build the 200,000 square-meter facility.

“We definitely want to be number one in smartphones, but it will be a long journey,” said Lenovo Chief Executive Yang Yuanqing during an interview.

While Chinese companies have made big gains in hardware, many of them face a challenge that has plagued other Asian technology companies: developing software and user interfaces that appeal to a global audience.

Tencent Holdings Ltd. TCEHY +0.20% , which owns the WeChat smartphone application, is bucking that trend. Launched in late 2010, WeChat dominates China’s mobile messaging market and the majority of the app’s 272 million monthly active users are in China. But last year, it spent $200 million on overseas ad campaigns to push WeChat into many markets including India, South Africa, Spain and Italy. Tencent says the app has more than 100 million downloads abroad.

WeChat was ahead of competitors in offering an easy-to-use feature for sending recorded voice messages and it is challenging the dominance of Silicon Valley’s WhatsApp, which has more than 300 million monthly active users globally.

Mikey Mashila, an 18-year-old fashion designer in Johannesburg, downloaded WeChat last summer, after seeing the app’s TV ad featuring Argentine soccer star Lionel Messi.

“Everyone knows Messi in South Africa,” said Mr. Mashila, who invited his friends to join WeChat and now uses the app as often as WhatsApp.

“In handsets or laptops, Chinese tech companies’ global expansion has been much more of a hardware story so far, and I think what’s fascinating about Tencent is that it’s becoming a software and services story,” said Michael Reynal, a portfolio manager at San Francisco-based RS Investments, which has about $27 billion in total assets under management.

Tencent’s share price nearly doubled last year and its market capitalization of $123 billion isn’t far from Facebook Inc. FB -0.71% ‘s $139 billion market value.

Tencent isn’t alone. A basket of Chinese tech stocks rose 42% over the past six months, according to Reorient Financial Markets. Over the same period, the S&P North American Technology Sector Index rose 18%.

Behind the overseas expansion of Lenovo, Huawei and Tencent, the domestic startup scene is also becoming more vibrant. In China, where smartphones are sole Internet tools for many consumers, the behavior of local mobile users has at times presaged trends in the U.S.

Several years ago, Chinese entrepreneur Tang Yan researched his idea of a location-based mobile dating app that would connect strangers in close geographic proximity, and was surprised to find few examples of such services among major U.S. apps. “I thought if the idea is right, then it would get hot in America first,” said Mr. Tang, who is now chief executive of Beijing Momo Technology.

Mr. Tang launched Momo, a dating app, in China in 2011 and now has more than 35 million monthly active users. The most similar app in the U.S., Tinder, launched in September 2012.

“More Chinese players are beginning to realize that to survive in the long run and have sustainable growth, they really have to innovate,” said Bernard Kwok, a Beijing-based senior vice president of U.S. software maker Symantec Corp. SYMC +0.70%.

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Entrepreneurship

Women on Top in Tech – Tara Velis, Growth Hacker and Digital Innovation Strategist

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(Women on Top in Tech is a series about Women Founders, CEOs, and Leaders in technology. It aims to amplify and bring to the fore diversity in leadership in technology.)

I am talking to Tara Velis, Growth Hacker and freelance Digital Innovation Strategist. Tara was selected and recognized by TheNextWeb.com as one of the 500 most talented young people in the Dutch digital scene during the 2017 TNW edition. Tara is known for her creative, entrepreneurial spirit, which she is using to her advantage in leading the change in SMEs and corporates around the globe.

What makes you do what you do?

I tend to see life as a big, complex puzzle. Because of my curious nature, I am in constant development, looking for new angles and new approaches to business problems. Innovation through technology is exploring ideas and pushing boundaries. The most radical technological advances have not come from linear improvements within one area of expertise. Instead, they arise from the combination of seemingly disparate inventions. This is, in fact, the core of innovation. I love going beyond conventional thinking practices. Mashing up different thoughts and components, connecting the dots, and transforming that into something useful to businesses.

How did you rise in the industry you are in?

I consistently chose to follow my curiosity, which has led me to where I am today. If you want to succeed in the digital industry, you need to have a growth mindset. Seen the fact that the industry is evolving in an astoundingly quick rate, it’s crucial to stay current with the trends and forces in order to spot business opportunities. I believe taking responsibility for your own learning and development is key to success.

Why did you take on the role of Digital Innovation Strategist?

The reason for this is twofold. On the one hand, I got frustrated with businesses operating in the exact same way they did a couple of decades ago. Right now we are in the midst of a technology revolution, and the latest possibilities and limitations of cutting-edge technologies are evolving every single day. This means that companies need to stay current and act lean if they want to survive. On a more personal level, I noticed that I felt the need to use my creativity and problem-solving skills to their maximum capacity. In transforming businesses at scale, I change the rules of the game. I love breaking out of traditional, old-fashioned patterns by nurturing innovative ideas. This involves design thinking, extensive collaboration and feedback, the implementation of various strategies and tactics, validated learning, and so on. I get a lot of energy from my work because it is aligned with my personal interests.

Do you have a mentor that you look up to in your industries?

Yes, I look up to Drew Boyd. He is a global leader in creativity and innovation. He taught me how to evaluate ideas in order to select the best ones to proceed with. This is crucial because otherwise,you run the risk of ideas creating the criteria for you because of various biases and unrelated factors. He also taught me a great deal on facilitation of creativity workshops.

How would you describe your leadership style?

I tend to have the characteristics of a transformational leader. People have told me that my enthusiasm and positive energy is motivating and even inspiring to them. Even though I take these comments as a huge compliment, I am not sure how I feel about referring to myself as a leader. To me, it still has a somewhat negative connotation. I guess I associate the concept with being a boss who’s throwing around commands. But if a leader means listening to others and igniting intrinsic motivation in people, then yes, I guess I’m a charismatic leader.

Do you consciously or unconsciously support diversity and why?

Yes, one hundred percent. I believe that creativity and innovation flourish when a highly diverse group of people bounces ideas off each other. Diversity in terms of function, gender,and culture is extremely valuable, especially in the ideation phase of a project, as it can help to see more possibilities and come up with better ideas.

Do you have any advice for others?

Yes, I have some pieces of advice I’d like to share.
First of all: Develop self-awareness. You can do so by actively seeking feedback from the people around you. This will help you understand how others see you, align your intentions with your actions, and eventually enhance your communication- and leadership skills.

Surround yourself with knowledgeable and inspiring people. They might be able to support you in reaching your goals, and help you grow both personally and professionally.

Ask “why?” a couple of times. This simple and powerful method is useful for getting to the core of a problem or challenge. Make sure to often remind yourself and your team of the outcome of this exercise to have a clear sense of direction and focus.

Data is your friend. Whether it’s extensive quantitative market research or a sufficient amount of in-depth consumer interviews (or both!), your data levels all arguments. However, always be aware of biases and limitations of research.

Say “Yes, and…” instead of “No”. Don’t be an idea killer. Forget about the feasibility and budget, at least in the ideation phase. Instead, encourage your team to generate ideas without restrictions. You can compromise certain aspects later.

Prioritization is key. There is just no way you can execute all your ideas, and, quite frankly, there is no point in trying to do so. Identify the high potential ideas and start executing those first.

Encourage rapid prototyping. Don’t wait too long to experiment, launch, and iterate your product or service. Fail fast and fail often. Adopt an Agile mindset.

If you’d like to get in touch with Tara Velis, please feel free to reach out to her on LinkedIn: https://www.linkedin.com/in/taravelis/

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Callum Connects

Marek Danyluk, CEO of Space Ventures

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Marek Danyluk has a talent for assessing the competencies of management teams for other businesses and pulling together exceptional teams for his own businesses!

What’s your story?
I am the CEO of a venture capital business, Space Ventures, which invests in seed and pre-series A businesses. I also own and run Space Executive, a recruitment business focused on senior to executive hires across sales, marketing, finance, legal and change.

My career started as a trainee underwriter in the Lloyds market but quickly moved into recruitment where I set-up my first business in 2002. The business grew to around 100 people. I moved to Asia in 2009 as a board member of a multinational recruitment business with the mandate to help them scale their Asian entities, which helped contribute to their sale this year, in 2017.

My main talent is assessing the competencies of management teams as well as building high performing recruitment boutiques and putting together exceptional management teams for my own businesses.

What excites you most about your industry?
Building the business is very much about attracting the best talent and being able to build a culture which people find invigorating and unique. It’s an exciting proposition to be able to define a culture in that regard and salespeople are a fun bunch, so when you get it right it’s tremendous.

From a VC point of view there is just so much happening. South East Asia is a melting pot of innovation so the ideas and quality of people you have exposure to, is truly phenomenal. The exposure in the VC has taken me away from a career in recruitment. Doing something completely different has given me a new level of focus.

What’s your connection to Asia?
Whilst I came here with work, both my boys were born in Singapore and to them this very much is home. That said, my father in law spent many years in the East so coming and settling here was met with a good degree of support and familiarity.


Favourite city in Asia for business and why?
Possibly Hong Kong. It’s the closest I’ve been to working in London. Whilst there are massive Asian influences people will work with you on the basis you are good at what you do and work hard. I find that approach very honest and straightforward.

What’s the best piece of advice you ever received?
“Always treat people well on the way up!”

Who inspires you?
I like reading about people who have excelled in business such as Jack Ma, James Kahn, Phil Knight, Sir Richard Branson, Elon Musk, all have great stories to tell and they are all inspirational. No-one has inspired me more than my parents and they are well aware as to why…

What have you just learnt recently that blew you away?
Pretty much any technology innovation blows me away.

If you had your time again, what would you do differently?
Whilst it is important not to have regrets I do continually wake up thinking I’m still doing my A’ Levels. So, I’d have probably tried a little harder in 6th form.

How do you unwind?
I like the odd glass of red wine and watching sport

Favourite Asian destination for relaxation? Why?
Japan skiing. I love skiing and Japanese food and it’s a time when I can really enjoy time with the wife and kids. I recently tried the Margaret River which was divine, although not technically Asia.

Everyone in business should read this book:
Barbarians at the Gate

Shameless plug for your business:
Space Executive is the fastest growing recruitment business in Singapore focused on the mid to senior market across legal, compliance, finance, sales and marketing and change and transformation. Multi-award winning with exceptional growth plans into Hong Kong and London this year, and the US, Japan and Europe by the end of 2022. We are building a truly global brand.

Space Ventures is interested in any businesses that require capital or management and financial guidance or any or all of the above. We have, to date, invested in on-line training, food and beverages, peer to peer lending platforms, credit scoring as well as other tech and fintech start-ups. We are always interested in hearing about potential deals.

How can people connect with you?
[email protected]

Twitter handle?
@Spaceexecutive

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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