In April, the US announced a 7-year ban on ZTE. This China’s leading communication player was found to have violated a ban on shipping US technology to Iran. The sanctions will bar ZTE from purchasing essential US components. 

President Xi, summarizing lessons learned from the ZTE case, stressed the concept of “core technology” (in Chinese), referring to fundamental research and high-tech innovations that play a vital role in keeping China strong and independent.

“The US ban on ZTE is a wake-up call for China. China should be more focused on developing core technology, otherwise, we would further lose our voice [in technology],” said Ruan Zongze, vice-director of the China Institute of International Studies. He went on to say: “We have the talent and have resources to do it.”

Big powers will have to deal with persistent obstacles such as research, talent, and ecosystem building. Flexible startup businesses, on the other hand, may demonstrate greater potential amid steadily increasing market needs and the growing IoT field.

Inconvenient truths for big powers

To transfer core technology from thoughts to products, China has to face great challenges.

Money, however, is the last obstacle. China spent $279 billion on research in 2017, a 14% year-on-year increase. The huge volume made up 2.1% of China’s GDP. On 26 April, 2018, China’s state-backed semiconductor fund was “near to closing a $18.98 billion investment round for a second fund”, the first round of which raised $22 billion.

However, other areas don’t look that good. The overall research and talent environment is still weak. In 2015, there were 1,113 researchers per million people in China, 4,231 in the US, 6,899 in South Korea and 8,255 in Israel, according to UNESCO Institute for Statistics.

“There are Chinese companies such as Phytium and ShenWei that are into high-performance chips. The products are currently at the pre-mass production stage. Their chips do have a way to go to catch up with Intel’s best chips. To fill the gap between world leaders and our players, years of experience is one thing, and the leaders’ own manufacturing plants for key chip components such as wafers is another thing,” Guo Xiongfei, Design Director at Jinglue Semiconductor told us.

China’s desire to build up chip production can to some extent mix technology needs with nationalism. It’s rare, though, to see a state’s will absent from core technology and other strategic country-backed innovation plans.

“In terms of core technology, we can neither rely on foreign sources nor imports. The problem can only be solved by strengthening innovation power, and pursuing the spirit of scientists’ who created ‘atomic bomb, H-bomb, and satellites (in Chinese: 两弹一星) as well as China’s manned space project (in Chinese: 载人航天),” Ni Guangnan, member of the Chinese Academy of Engineering Science, said in a recent interview (in Chinese).

The state will have to inject massive funding and other resources to core technology field particularly chips. But, there are too many types of chips and it’s not quite clear where the priorities are.

Research, talent, and ecosystem building cannot succeed overnight. Setting proper expectation for or quantify the progress in the near future will also be impossible.

Wu Jinglian, China’s economic reform expert and former adviser to high-level leaders including Deng Xiaoping, said at a conference in April 2018 (in Chinese): “China should ask whether our disputes [with the Trump government] can accelerate the implementation of opening up policies. A phenomenon rising from the internet apparently implies a danger by giving in to nationalism. It’s leveraging administrative power to back industries involved. An example is a slogan called ‘developing the chip industry at any cost’.”

This can also be dangerous for players who hope to be just another lucky kid: not all will win. There is no standard or predictable measurement of material investment and non-material investment such as R&D, time, human capital or even global non-technology disputes.

Space for startups

Beyond all this, interestingly, few are talking about  the role for startups. In core technology fields, startups and emerging independent groups are already acting. Emerging players are gradually building up their power to transform a larger ecosystem.

One example is moves in instruction set architecture (ISA), the crucial interface that serves between hardware and software. ISA also defines how to program a computer. Many developers believe that RISC-V, the fifth open source RISC generation created at Univerity of California, Berkeley, will be another global standard.

Dr. Song Wei is a deputy researcher at the Institute of Information Engineering, China Academy of Science. He co-founded CNRV, RISC-V’s non-official community in China. “CNRV is a community where developers communicate and contribute,” he told TechNode. “What we are observing is that startups, small companies, and individual developers are very proactive while big companies are mainly observers.”

Guo is also the community manager for CNRV and an individual member of the official RISC-V Foundation—the first open and collaborative RISC-V community of software and hardware. The Foundation host over 70 members, including Google, NVIDIA, Qualcomm, Samsung, and C-Sky—the chip company recently acquired by Alibaba.

“RISC-V is very promising and it can theoretically do everything as long as you dare to think, everything CPU-relevant. But this needs patience and support to see more tangible results,” Guo explained. “Our people love big things. When you create, people expect you to make something among the best around the world overnight. Innovation is not defined by the rank of your creation. Our ecosystem demonstrates very low tolerance level to those who are encountering hardships. We need to accept failure and learn from rich experience to progress.”

Building the core technology

Startups and individuals can be faster than heavy hitters who are often slow to shift strategies. However, desire for quick money, huge opportunity costs, and repeated experiments hide many pioneering small players from public eyes.  Among the 151 unicorns in China, few, if any, create core technology.

“For some emerging highly-professional innovation projects, it’s common to have very small internal circles. It’s also a sad reality that in China sometimes their voices carry little weight,” Guo added.

But the ZTE case is gradually changing this situation in China.

“In the past years, China’s private equities and venture capitals valued business models. Now we are seeing both governmental and private institutions patiently moving toward core technology. ZTE’s case will further educate the Chinese risk-investment community which very often eye fast money,” Hu Linping, Director at Zhengxuan Investment and a former Huawei veteran, told us.

Investors’ increasing patience will mean a lot to Chinese startups. More importantly, an huge existing market and vibrant startup ecosystem are natural advantages for Chinese startups. Chips and core technology cannot thrive on their own. Developers’ tools, devices, algorithms, and applications all have to be there to function a complete IoT system.

According to Accenture, by taking additional actions to “absorb IoT technologies and increase IoT investment”, China can increase the cumulated GDP by $18 trillion by 2030. We are already seeing startups leveraging China’s massive social needs to empower practice of IoT ecosystem building.

“We purchase our chips from a Chinese chip-maker. The chips’ original use was far from our current use in medical sector. And the power of the chips can satisfactorily meet our needs,” Ma Jiliang told TechNode. Ma is a “Forbes 30 Under 30 in China” award-winner and CEO of Extant Future, a Chinese company that launched a wearable medical device called Modoo. Ma’s team developed their own passive monitoring technology which allows the device to continuously monitor fetal movement and heart rate.

“A chip to us is a tool. Global specialization means highly-efficient opportunities, and hence startups don’t have to be that concerned about self-made chips when it comes to serving mass social needs,” he said.

“A populous China holding massive consumer needs is a paradise for startups. The ecosystem includes startups with diverse potentials – this can be the best time in history for us,” Ma added. “We need communities like Y Combinators and WeWork that truly understand the ecosystem and resource allocation. Local communities can empower us too.”

Chinese local communities are thinking alike. Hosting innovative players will improve the communities’ mini ecosystem and establish collective identity power. Some are building close partnerships with state-backed institutions for members to maximize resource channels and reduce any unnecessary policy costs.

“We formed a strategic partnership with Ministry of Science and Technology of P.R.C’s Technology Resource Sharing Center for Engineering Technology Research,” Josh Zhang, Chief Strategy Officer at Ucommune, one of China’s biggest co-working spaces and community-based incubators, told us. “This will allow our members to use national-level big data. It’s also the first time that national-level big data has been opened for public sharing. We aim to bridge the gaps between members and research institutions to transform research into products for business.”

“More than 30% percent of our members are high-tech startups. We are also seeing rising numbers of patent-holders joining us,” Josh added.

While China’s heavy hitters will have to balance technological pursuits and politics, startups have more free space. The startup ecosystem will provide more options for emerging powers to decide for which part of the huge Chinese market they hope to play. Should there be innovations that hold potentials to grow into global solutions, there is high chance they will be from the startup ecosystem.