Eastern promise: Russian tech startups in the land of dragons

26 апреля 2018 г.

Long before he became one of the world’s richest men, Jack Ma applied for a job at KFC when it opened in China. Out of 24 applicants, all were accepted – except Ma, the business magnate himself has said. Now a popular Chinese joke has it that decades later on a rainy day, the founder of the Alibaba Group ecommerce giant sent some employees out to get KFC for lunch. When they came back without the takeaway and Ma asked where it was, the employees realised their mistake. “We thought you meant us to buy KFC the company! So we did,” goes the joke. (Alibaba’s investment arm is a part owner of KFC in China).

Bo Ji of Cheung Kong Graduate School of Business Europe presents China's opportunities to Skolkovo startups. Photo: Sk.ru.

The potential of the Chinese market for innovative businesses is far from just a joke for ambitious hi-tech startups, including Skolkovo residents, for many of whom China is a dream market. The incentives are too numerous to list, and not only in terms of launching ready products on the market: China also offers a wealth of opportunities for earlier-stage startups in terms of investment, incubators and accelerators.

“China is full of wealthy, risk-taking investors,” says Bo Ji, chief representative and assistant dean of Cheung Kong Graduate School of Business (CKGSB) Europe, whose alumni include Ma himself.

“There’s so much money in China that people don’t know where to invest. In the past, it would have been in real estate, but they have built more than they could possibly need,” Ji told a seminar at the Skolkovo Technopark last week devoted to helping Russian tech companies enter China (a video of which can be seen here).

With over 4,000 coworking spaces, over 3,000 incubators, 400 accelerators and 15,000 venture funds, it’s perhaps no surprise that China has produced over 50 unicorns (or dragons, as companies valued at over $1 billion are known in China).

Jack Ma, a teacher-turned-billionaire tycoon who embodies China's potential, speaking at Skolkovo in 2017. Photo: Sk.ru.

For startups at a later stage of development, the Chinese markets offer unbound potential. It’s the world’s largest fintech user: “People there don’t use cash now,” asserts Ji. Its ecommerce sector is very strong due to its excellent delivery services: many companies have their own courier services, and the record delivery time between a customer placing their order online in China and receiving the item is 6-7 minutes, according to Ji.

Other rapidly growing areas are healthcare, logistics, education and AI, including driverless vehicles.

“China is emerging as the world’s largest market for autonomous vehicles and mobile services, and will be worth more than the U.S. by 2030,” says Ji, citing a race between the mighty trio of Alibaba and internet and AI giants Baidu and Tencent, known collectively as BAT.

In 2016, in response to keen interest among Skolkovo startups in the Chinese market, the Skolkovo Foundation opened a representative office in Beijing. And the interest is mutual, says Evgeny Kosolapov, the Skolkovo Foundation’s representative in China.

“China is a country with surplus capital: they have a lot of money and are always hungry for technology. So there is a lot of interest in our companies and in hi-tech companies in general,” he told Sk.ru.

“The Chinese are interested in any of our startups whose inventions are based on hardcore science: maths, algorithms, neural networks, chemistry, physics, pharma – anything with a scientific component. Those based on business models aren’t interesting for them; business models are transferrable and they can do that themselves.”

Common mistakes

There are of course many high-profile examples of foreign companies entering the Chinese market only to retreat in defeat several years later. Ji identified several reasons that companies fail in China.

Firstly, they fail to localise: they don’t adapt their model for the market, he said, citing the example of U.S. retailer Walmart, whose model of fixed prices was, he said, at odds with Chinese consumers’ interest in temporary offers.

Secondly, they may fail to compete with a local brand, such as eBay’s defeat at the hands of Alibaba, which Ji put down to eBay’s reliance on credit cards, which he said are not common in China, while Alibaba’s Taobao worked with local banks to make buying items online accessible to more people. “Don’t underestimate local brands,” said Ji.

Thirdly, foreign companies may pick the wrong local partner to work with – or ignore the right one – and finally, according to Ji, they “fail to play nicely with the government.” He cited the example of Google, which accused the Chinese government of censorship and cyberattacks, and promptly shut down its Chinese search engine.

“It’s the government’s way or the highway,” says Ji. “You can’t negotiate with the government.”

Evgeny Kosolapov, the Skolkovo Foundation's representative in China. Photo: Sk.ru.

As Skolkovo’s representative in China, Kosolapov’s task is to advise the foundation’s startups and help them to avoid these pitfalls. He can advise them on the best entry point to the Chinese market for their particular product, given the country’s size.

“In China, different regions specialise in different things," Kosolapov told Sk.ru. “I can advise companies where to go based on their product. If it’s hardware, for example, then that’s for [China’s hi-tech and industrial powerhouse] Shenzhen. If it’s software: Beijing, and if it’s biomed: Shanghai.”

“Copying technology is human nature. Everybody does it. If your project has no one wanting to copy it, you have a much bigger problem: that means your product is not attractive enough" - Bo Ji.

Kosolapov can also secure introductions for Skolkovo startups to potential partners, customers and investors. He coordinates the foundation's participation in major Chinese trade shows, such as Mobile World Congress in Shanghai, in which 22 Skolkovo companies took part last year.

For foreign startups seeking to take advantage of China’s opportunities, CKGSB, the business school where Ji works, offers a programme called China Start aimed at helping companies to enter the market and find potential networks of partners, customers, and funding. During a one-week visit to Beijing, Shanghai and Shenzhen, startups can pitch their products to hundreds of investors and visit major Chinese companies.

Success stories

Skolkovo startups in general have successful experience on the Chinese market. Before opening the Beijing office, Skolkovo polled its startups and found that less than 10 percent of residents had experience of working in China, but of those that did, 80 percent of them had had a positive experience, said Kosolapov.

Since he took over the China office in autumn 2016, more than 100 Skolkovo startups have reached out to Kosolapov, and 10-15 of them have opened offices or signed contracts in China, he said, adding that the office mostly helps companies to raise Chinese investment rather than necessarily opening businesses there.

Sixty percent of the world's unicorns - or dragons, as they are known in China - are Chinese, according to Bo Ji.

One Skolkovo resident that has seen great success in China is CDNvideo, which helps its client companies to deliver fast, reliable and secure internet and video content via a network of servers located across the globe. The company sold a controlling stake to the Chinese company Wangsu Science & Technology last year. Differences between China and Russia can be a good thing in terms of business, says CDNvideo CEO Yaroslav Gorodetsky.

“We complement each other, because all of our strengths as Russians are the Chinese’s weak points, and vice versa,” he told the seminar.

There are language, cultural and regulatory barriers to overcome, he said, but the cultural barriers “you just have to accept and deal with.”

Contrary to some stereotypes, the Chinese make decisions quickly, said Gorodetsky. If it seems slow, that means they don’t want to do it.

The Chinese are hardworking, and something of a “geek culture” prevails there, he noted approvingly, explaining that IT companies tend to be headed by engineers rather than managers. Russian engineering is highly respected in China due to Soviet and Russian achievements in space, he added.

For fellow Skolkovo resident TION, which makes air purification systems, China was an obvious market because of the air pollution there. Part of TION’s production facilities was already located in Shenzhen when the company decided to enter the market, Andrei Samodin, head of communications at TION, told the seminar.

Yaroslav Gorodetsky, CEO of CDNvideo. Photo: Sk.ru.

“You have to win over people’s trust and this takes time,” said Samodin. In TION’s case, the time invested has more than paid off. The company now has about 50 dealers there and an office of 15 people in China, and the country accounts for 10 percent of TION’s sales. The company sees potential for that figure to grow, since the market there is still growing, said Samodin, adding that TION now makes special equipment specifically for the Chinese market, and is also investing in marketing there.

Copycat fears

Despite the success stories, some foreign companies are wary of China, primarily because of concerns over copyright infringement. Ji had some blunt advice for Skolkovo startups on this issue.

“Copying technology is human nature. Everybody does it,” he said.

“I always say that if your project has no one wanting to copy it, you have a much bigger problem: that means your product is not attractive enough,” he said.

At the same time, Ji said that IP protection is improving in China, and infringements are now limited to small companies.

“And consider that your marketing: through word of mouth, they’re building up the market for you,” he said.

Avoiding the Chinese market or trade shows there is no guarantee of immunity to IP theft, Kosolapov points out.

“Exhibiting at any international shows leaves a product open to being copied,” he said.

“The only solution is to run fast. It’s bad if you only have a version 1.0 and don’t already have version 2.0 in your head, and better still, plans for 3.0,” said Kosolapov.

“The best strategy is to sell the first version to the Chinese, or better still, raise investment there to make 2.0 and 3.0 better. Because if you just have a product that doesn’t evolve, whether you’re in Moscow or Novosibirsk, people will find it and copy it.”