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

by Kai-Fu Lee

online-to-offline services

They turned Chinese cities into the first cashless environments since the days of the barter economy.

intelligent bike-sharing applications that created the world’s largest inte...

Adding fuel to this fire was an unprecedented wave of government support for innovation. Guo’s mission to build the Avenue of the Entrepreneurs was just the first trickle of what in 2014 turned into a tidal wave of official policies pushing technology entrepreneurship. Under the banner of “Mass Innovation and Mass Entrepreneurship,” Chinese mayors flooded their ...

laying the groundwork for Chinese leadership in the age of AI implementation. 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 thres...

Algorithms tuned by an average engineer can outperform those built by the world’s leading experts if the average engi...

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 ...

Silicon Valley juggernauts are amassing data from your activity on their platforms, but that data concentrates ...

Chinese companies are instead gathering data from the real world: the what, when, and where of physical purchases, mea...

China’s physically grounded technology ecosystem gives these algorithms many more eyes into the...

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.

January 2011 launch of WeChat, Tencent’s new social messaging app,

Tencent aimed to disrupt its own product with a better one built just for mobile.

it had added voice and video calls and conference calls,

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

the official accounts offered much of the functionality of a standalone app without the hassle of actually building one. These accounts quickly became so dominant in the social media space that many media and consumer companies simply stopped building their own apps, choosing instead to live entirely in WeChat’s world.

In the span of two years, WeChat went from a no-name app to a powerhouse of messaging, media, marketing, and gaming. But Tencent wanted even more. It already monopolized users’ digital lives, but it wanted to extend that functionality beyond the smartphone. 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.

Chinese New Year’s Eve, 2014—and the weapon drew inspiration from the occasion. Chinese tradition calls for the gifting of “red envelopes” during Chinese New Year, small and decorative red packets with cash inside.

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,

WeChat users loved the envelopes, sending out 16 million of the packets during Chinese New Year and in the process, linking 5 million new bank accounts to WeChat Wallet.

Over the coming years, Alibaba, Tencent, and thousands of Chinese startups would race to apply these tools to every nook and cranny of Chinese urban life, including food delivery, electricity bills, live-streaming celebrities, on-demand manicures, shared bikes, train tickets, movie tickets, and traffic tickets. China’s online and offline world would begin rubbing shoulders in a way not seen anywhere else in the world. They were refashioning China’s urban landscape and the world’s richest real-world datascape.

He and the local district government used a combination of cash subsidies and offers of space elsewhere to move out almost all the traditional businesses on the street. In 2013, construction crews took jackhammers and paving equipment to the now-empty street, and after a year of laying bricks and building sleek new exteriors, on June 11, 2014, the Avenue of the Entrepreneurs opened to its new tenants. Guo had used the tools at his disposal—cash, cement, and manual labor—to give a strong nudge toward indigenous innovation in the local startup. It was a landmark moment for Zhongguancun, but one that wasn’t destined to stay sequestered to this corner of Beijing. Indeed, Guo’s approach was about to go national.

It called for the creation of thousands of technology incubators, entrepreneurship zones, and government-backed “guiding funds” to attract greater private venture capital. The State Council’s plan promoted preferential tax policies and the streamlining of government permits for starting a business.

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.

“guiding funds,” a mechanism that uses government money to spur more venture investing. The funds do that by increasing the upside for private investors without removing the risk. The government uses money from the guiding fund to invest in private venture-capital funds in the same role as other private limited partners. If the startups that fund invested in (the “portfolio companies”) fail, all the partners lose their investment, including the government. But if the portfolio companies succeed—say, double in value within five years—then the fund’s manager caps the government’s upside from the fund at a predetermined percentage, perhaps 10 percent, and uses private money to buy the government’s shares out at that rate. That leaves the remaining 90 percent gain on the government’s investment to be distributed among private investors who have already seen their own investments double. Private investors are thus incentivized to follow the government’s lead, investing in funds and industries that the local government wants to foster.

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 to get his or her startup off the ground.

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.

With the mass innovation campaign, the Chinese government issued its first full-throated endorsement of internet entrepreneurship. Posters and banners sprung up around the country exhorting everyone to join the cause. Official media outlets ran countless stories touting the virtues of indigenous innovation and trumpeting the successes of homegrown startups. Universities raced to offer new courses around entrepreneurship, and bookstores filled up with biographies of tech luminaries and self-help books for startup founders.

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

“O2O Revolution,” short for “online-to-offline.”

Silicon Valley gave birth to one of the first transformational O2O models: ride-sharing. Uber used cell phones and personal cars to change how people got around cities in the United States and then around the world. Chinese companies like Didi Chuxing quickly copied the business model and adapted it to local conditions, with Didi eventually driving Uber out of China and now battling it in global markets.

The first O2O service other than ride-hailing to truly take off was food delivery. China’s internet juggernauts and a flood of startups like Wang Xing’s Meituan Dianping all made O2O food delivery plays, pouring subsidies and engineering resources into the market. Crowds at Chinese restaurants thinned out, and streets filled up with swarms of electric scooters trailing steam from the hot meals they carried on board. Payments could be made seamlessly through WeChat Wallet and Alipay. By the end of 2014, Chinese spending on O2O food delivery had grown by over 50 percent and topped 15 billion RMB. By 2016, China’s 20 million daily online food orders equaled ten times the total across the United States.

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. Chinese parents could hire van drivers to pick up their children from school, confirming their ID and arrival home through apps. Those who didn’t want to have children could use another app for around-the-clock condom delivery.

Installed on more than half of all smartphones in China and now linked to many users’ bank accounts, 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.

a remote control for our lives. It had become a super-app, a hub for diverse functions that are spread across dozens of different apps in other ecosystems. In effect, 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.

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. Going heavy gave these companies a data edge over their Silicon Valley peers, but it was mobile payments that would extend their reach even further into the real world and turn that data edge into a commanding lead.

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.

Larger businesses bought simple POS devices that can scan the QR code displayed on customers’ phones and charge them for the purchase. Owners of small shops could just print out a picture of a QR code that was linked to their WeChat Wallet. Customers then use the Alipay or WeChat apps to scan the code and enter the payment total, using a thumbprint for confirmation. Funds are instantly transferred from one bank account to the other—no fees and no need to fumble with wallets.

Alipay and WeChat even allow peer-to-peer transfers, meaning you can send money to family, friends, small-time merchants, or strangers. Frictionless and hooked into mobile, the apps soon turned into tools for “tipping” the creators of online articles and videos. Micro-payments of as little as fifteen cents flourished. The companies also decided not to charge commissions on the vast majority of transfers, meaning people accepted mobile payments for all transactions—none of the mandatory minimum purchases or fifty-cent fees charged by U.S. retailers on small purchases with credit cards.

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. Chinese people were paying for groceries, massages, movie tickets, beer, and bike repairs within just these two apps. By the end of 2017, 65 percent of China’s over 753 million smartphone users had enabled mobile payments.

It got to the point where beggars on the streets of Chinese cities began hanging pieces of paper around their necks with printouts of two QR codes, one for Alipay and one for WeChat.

The market research firm iResearch estimated in 2017 that Chinese mobile payment spending outnumbered that in the United States by a ratio of fifty to one. For 2017, total transactions on China’s mobile payment platforms reportedly surpassed $17 trillion—greater than China’s GDP—an astounding number made possible by the fact that these payments allow for peer-to-peer transfers and multiple mobile transactions for items and services throughout the chain of production.

Tencent offered subsidies to both the rider and the driver if they used WeChat Wallet to pay. The rider paid less and the driver received more, with Tencent making up the difference for both sides.

The promotion built up user habits and lured onto the platform taxi drivers, who are the key nodes in the urban consumer economy.

Data from mobile payments is currently generating the richest maps of consumer activity the world has ever known, far exceeding the data from traditional credit-card purchases or online activity captured by e-commerce players like Amazon or platforms like Google and Yelp.

in late 2015, bike-sharing startups Mobike and ofo started supplying tens of millions of internet-connected bicycles and distributing them around major Chinese cities. Mobike outfitted its bikes with QR codes and internet-connected smart locks around the bike’s back wheel. When riders use the Mobike app (or its mini-app in WeChat Wallet) to scan a bike’s QR code, the lock on the back wheel automatically slides open. Mobike users ride the bike anywhere they want and leave it there for the next rider to find. Costs of a ride are based on distance and time, but heavy subsidies mean they often come in at 15 cents or less.