Will the Silicon Valley’s Supremacy Nearing End with China Dominance?
Investments in Chinese companies in the new economy are 18 times higher than five years ago; a factor that fuels the perception that China may overtake Silicon Valley as the world's new barn of the technology business.
China, alongside the United States, is the cradle of startups worth more than $1 billion. Currently, of the world’s top five unicorns, three are Chinese, and only two are American. Recently, a Beijing startup that allows people to buy coffee via smartphones has entered the so-called “land of the unicorns” by being valued at $1 billion seven months after its launch.
According to Dow Jones VentureSource, in addition to China’s 109 startups worth more than the 127 US companies valued at $1 billion – the Chinese giants are worth $557 billion versus $478 billion for the American companies. These companies have become faster money attractor than their competitors in the United States. Despite tensions with Americans, Chinese giants are attracting more money than their rivals in the United States – $71 billion to $70 billion this year alone, according to VentureSource data.
In addition, Sequoia Capital, one of the largest venture capital firms in Silicon Valley, may for the first time invest most of its latest global fund in China, people close to the fund said. The fund should invest up to 60% of its capital in Chinese startups, about $ 8 billion. The pace of China’s corporate investment is also staggering.
According to The Wall Street Journal (WSJ), the volume of investments is 18 times higher than five years ago, which has not been seen since the technology stocks bubble of 2000, which fuels the perception that China is ready to surpass Silicon Valley as a world technology center.
In September, Chinese investment firm Hillhouse Capital Group revealed that it has $ 10.6 billion under management, surpassing $ 9.3 billion by KKR & Co. It was days before, the giant Meituan Dianping, an online platform for collective purchases, which has lost at least $8.5 billion since 2015, opened the capital in Hong Kong with a market capitalization of about $53 billion.
The Giants of China
The Manbang Group, better known as Uber of trucks, also sought investors this year. The company was looking for about $300 million in financing but in April many expressed interests, which led Manbang to raise $2 billion and sign plans for a fleet of self-propelled trucks powered by electricity – which did its market value reaching the US $6 billion.
Despite success with investors, the majority of Manbang users are not paying. The company got about 200,000 senders billing about $250 a year in membership fees and is committed to balancing the value next year. Recently, Manbang started looking for another $ 1 billion in investment, valued at $ 10 billion.
Besides, there are companies like Didi Chuxing, which provides services in the area of technology and private transport, which has raised about $24 billion in the last six years to compete with its competitors. Even after a battle with Uber, which consumed a good part of the company’s cash for two years.
Today, Didi struggles with a local rival, including Meituan who expanded its business last year. In March, Meituan began offering short walks in Shanghai for less than a US cent, resulting in a wave of users who started using cars for distances that normally travel on foot. Stephen Zhu, Didi’s director of strategy, said that competition in China is fiercer than in Silicon Valley, and that companies take everything very seriously.
Didi recently entered the delivery market, a segment that represents Meituan’s main source of revenue and Ele.me, a company that Alibaba acquired in May. In April, Didi took over the streets of central China’s Wuxi city with delivery teams that offered monthly salaries, co-op drivers, and expressive bonuses to bring in more users. In contrast, to compete against Didi’s single 25-yuan coupon (the US $ 3.67), Meituan and Ele.me reacted with great discounts – a user even posted a social screen capture of an order via Meituan for fried chicken, orange juice and milk tea which cost 0.01 yuan.
The competition is so fierce that Song Yunyi, head of a restaurant in China, said Meituan’s marketing team warned him not to work with Didi. After he listed Didi as a partner, Yunyi claims that the Meituan application began to describe his store as closed.
The dispute ended after government agencies interfered in the fight and since then Didi has taken delivery of food services to at least three more cities and is investing in bicycle sharing and automated steering. Didi is also looking for more investments and plans to go public with a valuation of up to $80 billion, according to the Wall Street Journal, which heard sources familiar with the company’s plans.
Meanwhile, Meituan is promoting the sharing of bicycles and the delivery of groceries. Ele.me parent Alibaba is merging the company with an affiliate and raised $3 billion for the combined business, resulting in a $25 billion valuation. “At first, yes, you’re practically giving free meals to consumers,” Wang Lei, chief executive of Ele.me, told the WSJ. But at some point, spending “has become more logical,” he said without giving a prediction of when such logic will appear.
China’s technological boom
Many experts believe that the risks of China’s technological boom will be worth it. “Here the potential is enormous, and the growth of Chinese enterprises is much faster than outside of China,” said Richard Peng, former CEO of Tencent, whose fund, Genesis Capital has invested in the latest round of Manbang Group.
A Chinese referral is Alibaba, whose initial IPO in 2014 was the highest in history, leaving investors such as the American venture capital company GGV Capital happy. When GGV invested in Alibaba in 2003, the company was valued at about $180 million, said managing partner Hans Tung. Since then, the value of Alibaba has increased more than 2,000 times.
In addition to foreign investment, another way to foster the “land of unicorns” is the Chinese government itself. The advances of technology giants are a source of national pride, and today many leaders of the country are encouraging innovation.
The focus on the user is also a differential when we talk about Chinese startups. While US entrepreneurs are more focused on products and technology, Chinese companies are more aggressive and user-centered.
According to Connie Chan, Andreessen Horowitz’s senior partner, Western technology companies risk losing to Chinese companies in emerging markets if they do not understand how they operate.