Business & Economics

China: The sleeper awakens (part 1 of 5)

Steve Blank

I just spent a few weeks in Japan and China on a book tour for the  Japanese and Chinese versions of the Startup Owners Manual.

In this 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, and my publisher China Machine Press.

SumJapan bookcovermary: I’ve lived in Silicon Valley for 35 years, I’ve taught in entrepreneurial clusters in NeChina bookcoverw 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 thefirst 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 researchNational 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&D863 Program (State High Technology R&D Program) headed by ex leaders of Chinese strategic weapons programs, and theNational Key Technology R&D Program.
  • Technology innovation and commercializationNational 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
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Comments to "China: The sleeper awakens (part 1 of 5)":
    • Dennis Gorrebeeck

      Interesting analysis but scary at the same time. The United States has made China the superpower it is today and I sincerely believe that our government needs to crack down on the lopsided trading practices between our two countries. Also, China manipulates its currency at times so that they can appear to be more competitive then what they actually are. China is also buying insurance companies in the United States and other major businesses which traditionally were not for sale to foreign markets.

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    • David Kinyua

      Great Analysis! We in other developing countries look in awe at what China has done, as if it just happened. We often ignore the many basic steps that China has taken in the past to be where it is today. Even when Deng Xiaoping opened up China, he did not denounce Mao, or renounce his reign, blighted as it was, they built on many of those science projects, reformed and transformed them to fit with the new vision.

      If China does not get caught up in one of the new chaotic but nationally catastrophic color revolutions currently sweeping the Middle East and previously swept through the former communist block countries, it will built itself a country and a model to copy in the future.

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