How Silicon Valley can Out-Innovate China
Michael Mortiz from Sequoia sent a memo that was meant to shake Silicon Valley to its core, but has gotten a lot of feedback: here, here, and here. While I do not argue with his observations, but his advice to Silicon Valley seems amiss. To sum up his advice: China is working faster and cheaper, and will hit breakthroughs and innovations faster than you. Therefore, stop talking about #meToo and #youToo should GBTW (GetBackToWork).
In order to out-innovate a country that is 3x your size, and tech talent that is about 40% cheaper than what is available, it will take more than working harder, but working smarter and understanding what you are up against.
The Dark Side of Frugality in China
The frugality is a result of so many people being poor. My parents who immigrated over to from China via Taiwan were so frugal in the US because they were pulling themselves out of poverty. China as a whole is moving itself out of poverty and their way of doing that is by controlling their burn and increasing their income. But what the observation lacks, is often the spartan furniture is of poor quality. Also, regarding the extra clothes and re-use of tea bags could be because the heat is state controlled. In Beijing, they cannot turn on the heat until a certain date determined by the government. Twice when we were living there, it was snowed before the heat was not allowed to be turned on.
Modern China has been formed by this saying:
It does not matter the white cat or the black cat, as long as it catches the mouse. — Deng Xiaoping
有办法 （you ban fa), which translates to “there is a way” is a common phrase in Mainland China. On the one hand this saying displays an amount of determination and grit that if held by 1.2 billion people should scare anyone. The darker side is despite whatever regulations come their way, they find a way to achieve their goal.
This can account for the growing “disposability” mindset. There is a whole generation that is growing up on Taobao (their online store equivalent to Amazon), rock bottom prices but poor quality. If something breaks or does not work, it was so cheap; another one can be bought. This mentality can become problematic when building substantial businesses that need to be long lasting. Furthermore with over 1.2 billion reported people in China, the “disposable”mindset does extend towards the labor force. Churn can be high and replacing employees are common.
This “achieve at all costs” mentality is similar to what has taken down titans such as Uber and Harvey Weinstein here in the US and is something that China needs to be able to remedy. While their “all costs” have been different, “frugality at all costs” can cost the Chinese companies more in the long run. The melanin scare in baby formula and plastic inside of rice are examples of “frugality at all costs”. Repercussions are already seen by the discount that many Chinese companies receive because of their accounting practices and low quality.
Manufacturing Mindset
The most recenty way many Chinese were able to gain wealth was through manufacturing. Right around the same time of privatization of land and the wealth of coal, many of the current Chinese class made their money via manufacturing and factories. Within a manufacturing mindset the amount of time you are at the office equals more productivity. This may be true if you are factory but most (Western) studies [1]will claim after a certain time limit, creative and heavy analytic work is no longer productive. Nor can you incentivize like a manufacturer [2].
In 2015, when we were selling our games to a Chinese company, my HR team leader (born and raised in China) brought up an interesting story about the acquiring company’s CEO. The CEO out of all things to worry about was upset over a linke worker who had a time and attendance problem on the weekend. Her conclusion was that this company still had a manufacturing mindset to where instead of managing employees to have creative output, the CEO still viewed the world in man-hours as a proxy of productivity.
Also the relentless of work, and lack of family time over the luxuries of life are afforded to first world countries who have already climbed out of poverty. And, the complaints about weekend work — well there are complaints, it is
that the author just does not have a great grasp of knowledge of Chinese or spoken to Chinese employees, or in the right WeChat groups. There have been cases where I’ve heard employees at MNC (Multi National Companies) who love coming in the weekend, but it was because that MNC provided free food, high speed Internet, and a VPN with access to the outside world. At home it was too difficult for them to get this type of internet access.
So, you want a revolution?
What may be so relentless about this generation of entreprenuers is not only have they been fueled by the success of Alibaba, TenCent and Baidu, but they are the first generation who has not seen a revolution or as much poverty as the founders of BAT (Baidu, Alibaba and TenCent).
Jack Ma was born during a time where the Cultural Revolution (1966–1975), where most of society stopped. [3] Teachers were being accused of not being loyal to the Communist Party, kids were turning in their parents, and neightbors were turning each other in. My cousin was born the same year as Jack Ma and he remembers the Labor Camps for teachers and other intellectuals. Through this adversity there raised a set of founders like Jack Ma were able to rise. My Chinese teacher told me that for so long these types of students did not have books since school was shut down and they became the fiercest and determined to make up for what they lost.
For women who grew up during Jack Ma’s generation and the decade thereafter, all have quoted Chairman Mao stating: “Women hold up half the sky” has helped witht he equality of men and women. China had gone through a great starvation in the Great Leap Forward and could not afford that women not be part of this revolution.
However, this current generation of entreprenuers have those types of people as their parents. And — they have no siblings. This one-child policy places a lot of pressure, moreso, on the woman who is still seen as the general caretaker when it comes to childcare. Single Chinese women I speak with talk about their fear of getting married will stop their careers — even with grandparents on standby. One woman who came from the more rural part of China and in Beijing working at a tech company told me she did not want to get married because she was expected to take care of her own parents and then her husband’s parents, and if a baby was born she was expected to take care of the baby as well. We also had a local Chinese employee who quit her job with us, so she could take care of her mother-in-law. If parents are being cared for, it is expected that the children take care of them, not some outsourced nanny.
While there are nannies to care for the top executives children, the middle managers are not afforded this luxury. Also, this generation if they come to Beijing from the countryside, has seen sex-selective abortions as well as forced abortions. As reported by a family member, this was happening to women even through the 1980s in Tier 1 cities like Guangdong, China.
With both countries racing to out-innovate and out-compete one another, wouldn’t you want everyone, man or woman, young or old , who is qualified to help you win?
China is STILL the Middle Kingdom
When you visit China, it is very clear you have stepped into a foreign kingdom blocked off by the Great Firewall. The apps that once worked elsewhere (Facebook, Twitter, and Youtube) do not work inside of China. The RMB that is needed to transact is only useful in China, and not outside of China borders.
During my stay in China from 2015–2016, the conversation that I would encounter with Westerners during this time would be:
In the last 300 years what has been an innovation that has had worldwide impact to have come out of Asia, and more specifically China?
The greatest inventions that have had world-wide impact in the last 300 years were first invented in the West: airplanes, bikes, television, cameras, computers, internet, etc… . The last great innovations that have come out of China has been paper and gunpowder, and someone from the outside had to go and get it and bring it to the rest of the world.
For example, China has long banned gaming consoles. As a result the birth of microtransactions (ability to play and then pay a la carte for items in a game) has created billions upon billions of dollars in the gaming industry and has rocked traditional gaming console revenue to its core around the world. This new business model has expanded and somewhat cannibalized the video game economy [4]. Zynga was able to take popular farmer sim games like Harvest Moon and adapt them to the West as Farmville, ushering an entirely new business model.
Steps to Out-Innovate China
Now that we can understand some of the reasons how China has come to be, the best way for Silicon Valley to out-innovate is to work faster and smarter. How can Silicon Valley do it?
Change your mindset about China. Connie Chan wrote an excellent piece in 2016 that still applies today about how we need to change our mindset about China. We are now competing against the world and it is fierce. Only the paranoid survive, and they need to be taken seriously as a competitor. It is hard to argue countries with a low work ethic increase their GDP. The opposite is not true; however, a high work ethic does not automatically yield a growing GDP — due to corruption, infrastructure, full development etc…This proves the point that hard work alone will not out-compete any country.
Go to China and learn. The old saying goes: “It is good to keep your friends close, but your enemies closer.” If Silicon Valley changed their view of China, they would be learning, and not just looking at them from sources of capital or unsavvy investors.
One could argue that the West is much better at mass marketing , commercializing and branding. Even the last large inventions, it took someone from outside of China, to go there and bring it to the west, much like the invention of paper, which was only brought to the West (Germany) one millenia after it was invented. Their paper : “Once they had learned to make paper, they became more interested in also learning about Chinese printing” which led to the Gutenberg press. [5]Use technology as leverage. In many ways the population can be a crutch for them. For example, C-Trip, the largest travel site grew by having people hand out flyers. This is using the power of people rather than technology. But in the US the density of people are so low and the tech talent is rising that Silicon Valley should be thinking how to off-load tech as much as possible.
Use quality as leverage. Currently, this has been something China has not been great at. Moving fast and breaking things makes sense in the experimental phase, but building a competitive moat at some point will include quality. If bringing something into China, we have noticed brands in consumer packaged goods have done really well: Nike, McDonalds, Coca-Cola, and Apple. The tide is slowly changing (e.g. Lenovo), but for now I believe the West still is winning out.
Enable affordable (childcare) services in the US. In the US, about half of the workplace population is being left out and that is due to exorbitant childcare services where many couples find it untenable for both parents to work, and oftentimes it is the women that are left out. Also China has a much more generous paid maternity policy, and they only allow one-child! [6]
Have a win at XX costs attitude. Instead of having a win at all costs attitude, have a win at XX costs attitude. Where, XX costs defines your moral and values on what you and how you would like to win. This will ensure you build a company that lasts.
And finally…
Keep your burn as low as possible, grow as fast as possible, and work your a$$e$ off.