AI Superpowers: China, Silicon Valley, and the New World Order

by Kai-Fu Lee

it was morphing into an alternate internet universe,

It was a place where many users accessed the internet only through cheap smartphones, where smartphones played the role of credit cards, and where population-dense cities created a rich labo...

“the Amazon of China” or “the Facebook of China” no longer made sense when describing apps like WeChat—the dominant social app in China, but one that evolved into a “digital Swiss Army knife” capable of letting people pay at the grocery store, order a hot meal, and book a doctor’s visit.

willingness to get one’s hands dirty in the real world separates Chinese technology companies from their Silicon Valley peers. American startups like to stick to what they know: building clean digital platforms that facilitate information exchanges. Those platforms can be used by vendors who do the legwork, but the tech companies tend to stay distant and aloof from these logistical details.

Chinese companies don’t have this kind of luxury. Surrounded by competitors ready to reverse-engineer their digital products, they must use their scale, spending, and efficiency at the grunt work as a differentiating factor. They burn cash like crazy and rely on armies of low-wage delivery workers to make their business models work.

By immersing themselves in the messy details of food delivery, car repairs, shared bikes, and purchases at the corner store, these companies are turning China into the Saudi Arabia of data: a country that suddenly finds itself sitting atop stockpiles of the key resource that powers this technological era. China has already vaulted far ahead of the United States as the world’s largest producer of digital data, a gap that is widening by the day.

the invention of deep learning means that we are moving from the age of expertise to the age of data. Training successful deep-learning algorithms requires computing power, technical talent, and lots of data. But of those three, it is the volume of data that will be the most important going forward. That’s because once technical talent reaches a certain threshold, it begins to show diminishing returns. Beyond that point, data makes all the difference. Algorithms tuned by an average engineer can outperform those built by the world’s leading experts if the average engineer has access to far more data.

But China’s data advantage extends from quantity into quality. The country’s massive number of internet users—greater than the United States and all of Europe combined—gives it the quantity of data, but it’s then what those users do online that gives it the quality. The nature of China’s alternate universe of apps means that the data collected will also be far more useful in building AI-driven companies. Silicon Valley juggernauts are amassing data from your activity on their platforms, but that data concentrates heavily in your online behavior, such as searches made, photos uploaded, YouTube videos watched, and posts “liked.” Chinese companies are instead gathering data from the real world: the what, when, and where of physical purchases, meals, makeovers, and transport...

Computers were still too expensive for most Chinese people, and by 2010 only around one-third of China’s population had access to the internet. So when cheap smartphones hit the market, waves of ordinary citizens leapfrogged over personal computers entirely and went online for the first time via their phones.

At Sinovation, our first round of investment went into incubating nine companies, several of which were eventually acquired or controlled by Baidu, Alibaba, and Tencent. Those three Chinese internet juggernauts (collectively known by the abbreviation “BAT”)

Hardly anyone noticed when the world’s most powerful app waltzed onto the world stage. The January 2011 launch of WeChat, Tencent’s new social messaging app,

The app lets you send photos and short voice recordings along with typing out messages. The latter was a major benefit given how cumbersome inputting Chinese characters on a phone was at the time.

In just over a year it had hit 100 million registered users, and by its two-year anniversary in January 2013, that number was 300 million. Along the way it had added voice and video calls and conference calls, functions that seem obvious today but that WeChat’s global competitor WhatsApp waited until 2016 to incorporate.

It soon pioneered an innovative “app-within-an-app” model that changed the way media outlets and advertisers used social platforms.

In the span of two years, WeChat went from a no-name app to a powerhouse of messaging, media, marketing, and gaming.

Over the ensuing five years, Tencent painstakingly built WeChat into the world’s first super-app. It became a “remote control for life” that dominated not just users’ digital worlds but allowed them to pay at restaurants, hail taxis, unlock shared bikes, manage investments, book doctors’ appointments, and have those doctors’ prescriptions delivered to your door.

Tencent’s innovation was so simple—and such pure fun for users—that it masked the magnitude of the power grab. WeChat gave its users the ability to send out digital red envelopes containing real money to WeChat friends near and far. Once users linked their bank accounts to WeChat, they could send out envelopes worth a set amount of money to one person or into a group chat and let their friends race to see who could “open” it first and get the money. That money then lived inside users’ WeChat Wallet, a new subdivision of the app. The money could be used to make purchases, transferred to other friends, or added to their own bank account if they linked it with WeChat. It was a seamless translation to digital of an age-old Chinese tradition, one that added a gaming element to the process.

Jack Ma was less amused. He called the move by Tencent a “Pearl Harbor attack” on Alibaba’s dominance in digital commerce. Alibaba’s Alipay had pioneered digital payments tailored for Chinese users back in 2004 and later adapted the product for smartphones. But overnight WeChat had taken all the momentum in new types of mobile payments, nudging millions of new users into linking their bank accounts to what was already the most powerful social app in China. Ma warned Alibaba employees that if they didn’t fight to hold their grip on mobile payments, it would spell the company’s end. Observers at the time thought this was just typical over-the-top rhetoric from Jack Ma, a charismatic entrepreneur with a genius for rallying his troops. But looking back four years later, it seems likely that Ma saw what was coming.

Smartphone users had more than doubled between 2009 and 2013, from 233 million to a whopping 500 million.

When Tencent’s flood of red envelopes lured millions of Chinese into linking their bank accounts to WeChat, it put in place the last crucial puzzle piece of a consumption revolution: the ability to pay for anything and everything with your phone.

building an alternate internet universe that reaches into every corner of the Chinese economy couldn’t be done without the country’s most important economic actor: the Chinese government.

on June 11, 2014, the Avenue of the Entrepreneurs opened to its new tenants.

Guo’s approach was about to go national.

On September 10, 2014, Premier Li Keqiang took the stage during the 2014 World Economic Forum’s “Summer Davos” in the coastal Chinese city of Tianjin. There he spoke of the crucial role technological innovation played in generating growth and modernizing the Chinese economy.

China’s mass innovation campaign did that by directly subsidizing Chinese technology entrepreneurs and shifting the cultural zeitgeist. It gave innovators the money and space they needed to work their magic,

Nine months after Li’s speech, China’s State Council—roughly equivalent to the U.S. president’s cabinet—issued a major directive on advancing mass entrepreneurship and innovation. It called for the creation of thousands of technology incubators, entrepreneurship zones, and government-backed “guiding funds” to attract greater private venture capital.

Following the issuance of the State Council directive, cities around China rapidly copied Guo Hong’s vision and rolled out their own versions of the Avenue of the Entrepreneurs. They used tax discounts and rent rebates to attract startups. They created one-stop-shop government offices where entrepreneurs could quickly register their companies. The flood of subsidies created 6,600 new startup incubators around the nation, more than quadrupling the overall total. Suddenly, it was easier than ever for startups to get quality space, and they could do so at discount rates that left more money for building their businesses.

For three of the four years leading up to 2014, total Chinese VC funding held steady at around $3 billion. In 2014, that immediately quadrupled to $12 billion, and then doubled again to $26 billion in 2015. Now it seemed like any smart and experienced young person with a novel idea and some technical chops could throw together a business plan and find funding

American policy analysts and investors looked askance at this heavy-handed government intervention in what are supposed to be free and efficient markets. Private-sector players make better bets when it comes to investing, they said, and government-funded innovation zones or incubators will be inefficient, a waste of taxpayer money. In the minds of many Silicon Valley power players, the best thing that the federal government can do is leave them alone. But what these critics miss is that this process can be both highly inefficient and extraordinarily effective. When the long-term upside is so monumental, overpaying in the short term can be the right thing to do. The Chinese government wanted to engineer a fundamental shift in the Chinese economy, from manufacturing-led growth to innovation-led growth, and it wanted to do that in a hurry.

That process of pure force was often locally inefficient—incubators that went unoccupied and innovation avenues that never paid off—but on a national scale, the impact was tremendous.

Throwing even more fuel on this fire was Alibaba’s record-breaking 2014 debut on the New York Stock Exchange.

Alibaba had claimed the title of the largest IPO in history, and Jack Ma was crowned the richest man in China.

Ma had become a national hero, but a very relatable one. Blessed with a goofy charisma, he seems like the boy next door. He didn’t attend an elite university and never learned how to code.

Ma’s ascent to rock-star status gave a new meaning to “mass entrepreneurship”—in other words, this was something that anyone from the Chinese masses had a shot at.

Analysts dubbed the explosion of real-world internet services that blossomed across Chinese cities the “O2O Revolution,” short for “online-to-offline.” The terminology can be confusing but the concept is simple: turn online actions into offline services. E-commerce websites like Alibaba and Amazon had long done this for the purchase of durable physical goods. The O2O revolution was about bringing that same e-commerce convenience to the purchase of real-world services, things that can’t be put in a cardboard box and shipped across country, like hot food, a ride to the bar, or a new haircut.

Uber may have given an early glimpse of O2O, but it was Chinese companies that would take the core strengths of that model and apply it to transforming dozens of other industries.

From there the O2O models became even more creative. Some hair stylists and manicurists gave up their storefronts entirely, exclusively booking through apps and making house calls. People who were feeling ill could hire others to wait in the famously long lines outside hospitals. Lazy pet owners could use an app to hail someone who would come right over and clean out a cat’s litter box or wash their dog.

After a couple of years of explosive growth and gladiatorial competition, the manic production of new O2O models cooled off. Many overnight O2O unicorns died once the subsidy-fueled growth ended. But the innovators and gladiators who survived—like Wang Xing’s Meituan Dianping—multiplied their already billion-dollar valuations by fundamentally reshaping urban China’s service sector. By late 2017, Meituan Dianping was valued at $30 billion, and Didi Chuxing hit a valuation of $57.6 billion, surpassing that of Uber itself.

WeChat had the power to nudge hundreds of millions of Chinese into O2O purchases and to pick winners among the competing startups. WeChat Wallet linked up with top O2O startups so that WeChat users could hail a taxi, order a meal, book a hotel, manage a phone bill, and buy a flight to the United States, all without ever leaving the app. (Not coincidentally, most of the startups WeChat picked to feature in its Wallet were also the recipients of Tencent investments.)

WeChat has taken on the functionality of Facebook, iMessage, Uber, Expedia, eVite, Instagram, Skype, PayPal, Grubhub, Amazon, LimeBike, WebMD, and many more. It isn’t a perfect substitute for any one of those apps, but it can perform most of the core functions of each, with frictionless mobile payments already built in.

THE LIGHT TOUCH VERSUS HEAVYWEIGHTS

To Chinese startups, the deeper they get into the nitty-gritty—and often very expensive—details, the harder it will be for a copycat competitor to mimic the business model and undercut them on price.

Other examples of O2O companies in China going heavy abound. After driving Uber out of the Chinese ride-hailing market, Didi has begun buying up gas stations and auto repair shops to service its fleet, making great margins because of its understanding of its drivers and their trust in the Didi brand. While Airbnb largely remains a lightweight platform for listing your home, the company’s Chinese rival, Tujia, manages a large chunk of rental properties itself. For Chinese hosts, Tujia offers to take care of much of the grunt work: cleaning the apartment after each visit, stocking it with supplies, and installing smart locks.

That willingness to go heavy—to spend the money, manage the workforce, do the legwork, and build economies of scale—has reshaped the relationship between the digital and real-world economies.

By enrolling the vendors, processing the orders, delivering the food, and taking in the payments, China’s O2O champions began amassing a wealth of real-world data on the consumption patterns and personal habits of their users.

During 2015 and 2016, Tencent and Alipay gradually introduced the ability to pay at shops by simply scanning a QR code—basically a square bar code for phones—within the app. It’s a scan-or-get-scanned world.

Funds are instantly transferred from one bank account to the other—no fees and no need to fumble with wallets. It marked a stark departure from the credit-card model in the developed world.

Adoption of mobile payments happened at lightning speed. The two companies began experimenting with payment-by-scan in 2014 and deployed at scale in 2015. By the end of 2016, it was hard to find a shop in a major city that did not accept mobile payments.

By the end of 2017, 65 percent of China’s over 753 million smartphone users had enabled mobile payments.

hapless