Building Chinas Silicon Valley

In by Simone

Ellis Rahhal and Andrew Schorr sit across from each other in the minimalist office of their tech start-up, all clean lines and white linoleum floors. A pair of toothbrushes hint at many a late night hunched over their computers. Outside the window, the sun is slowly setting behind jagged mountains. The scene is classic Silicon Valley. But Rahhal and Schorr aren’t in California. They’re in suburban Beijing.
The two Americans are co-founders of Mobile Native, a mobile information firm providing a Beijing city guide for foreigners using its database of 5,000 points of interest, a free SMS service, and its website. Rahhal, a software engineer with more than 10 years of experience, and Schorr, who has been involved in a number of previous business ventures, met in 2006 on a long-distance run on the outskirts of Beijing. “On the bus ride back into town we talked about how cool it would be to be able track our run through the hills . . . and started thinking about how to provide location-based services over mobile phones,” Rahhal explains. “At the time Beijing had virtually no English listings, events, or maps on the web, let alone on mobile phones, so we decided to take up the task ourselves.”
Mobile Native’s office is located in Zhongguancun, in Beijing’s Haidian District, home to some of China’s most prestigious universities, including Tsinghua and Peking University. It is also home to a vibrant community of tech entrepreneurs, investors, and experienced professionals, with Microsoft and Google among the big names to set up shop in the area. Many observers have been quick to label Zhongguancun China’s very own Silicon Valley. But while its entrepreneurial atmosphere and sophisticated support networks merit comparison with its Californian counterpart, the area still has a long way to go before it can truly develop into a hub to challenge the world’s most important IT community.

Zhongguancun owes much of its growth to government policy. In 1988, the Chinese government designated the northwestern Beijing suburb China’s first national-level, high-tech industrial development zone. In a bid to attract tech firms to the area, it provided generous tax breaks and incentives for both start-ups and established firms alike.

The policies have certainly benefited start-ups such as Mobile Native. Whereas most businesses in China pay a 25% business tax rate, Mobile Native will be taxed at just 7.5% annually for the next three years, and at 15% after that.
In addition, the government created a number of high-tech incubators. These provide clusters of free office space for start-ups for a year, with heavily subsidized rents in year two. These initial years are make-or-break time for most start-ups. It is in the early stages that assets (such as software, web pages, databases, etc) are developed and business models emerge − but the extensive legwork necessary to develop these can be costly. Incentives such as those on offer in Zhongguancun are, therefore, a major boon.

The most successful of these incubators is the Tsinghua Science Park, located at the southeast corner of Tsinghua University. The park not only provides office space for startups, but also houses such established firms as Google, Sun Microsystems, Microsoft, (搜狐), and Deutsche Bank. The pooling of resources, with start-ups, multinationals, and university research facilities in close proximity to each other, has helped to create an eco-system capable of producing technological innovations.
However, despite all these favorable government policies, according to Jacob Hsu, CEO of Chinese software outsourcing firm Symbio Group (信必优), it was not until multinational technology giants arrived that the area really began to take off. “I mark the beginning of Beijing’s IT industry, and indirectly China’s IT industry, to when IBM and Microsoft set-up their R&D centers in [Zhongguancun] back in the mid-to-late 1990s,” he said.

Today, just about every major technology company in the world has offices in the area. Microsoft, for example, founded Microsoft Research Asia there in 1998, and now has additional research centers in Shanghai and Shenzhen. In the last 10 years, its Chinese research and development arms have published more than 1,500 papers for top international journals and conferences, and have developed many new components of Microsoft’s signature Windows operating system. Now, after 10 years of steady growth, the US tech giant is spending USD 280 million to build a new R&D facility in Haidian. The campus will have room for 5,000 employees and, when it is finished in 2010, will be Microsoft’s largest research center outside of the US.

Zhongguancun’s location in the heart of the city’s university district has also benefited both technology firms, and, many believe, the Chinese higher education system as well.
The large number of fresh graduates each year means that highly trained, and cheap, software engineers can be found on just about every street corner. As Philana Lo of Ethos Technologies (宇思信德科技), a software service provider headquartered in Beijing, puts it, “I think there’s a nice relationship between universities and industry.  My guess is that many overseas companies get a feel for China by the type of students that graduate from the universities, so coming to visit the schools is a good way to get one’s feet wet.”

Part-time work and internships abound, giving the next generation of engineers the chance to meet with current programmers. Students can mingle with pros at high-tech conferences, mixing technological and business concerns, giving both potential managers and software engineers chances to see how the other half works.
This is in some ways a conscious response to criticisms that Chinese students are too focused on theory and take many years to learn to adopt the pragmatic approach required for commercial research and development.
Overhauling the education system is a long-term project and China needs to develop domestic intellectual capital as quickly as possible. One way to speed up the process is to physically locate commercial research and development centers near universities, so there can be a short feedback loop between business managers’ needs and university curriculums.

One of the competitive advantages of being in China is the ability to work closely with the universities,” says Hsu. “I have found that most universities are enthusiastic partners when it comes to working together on developing the skill base of their students.” Symbio has established software institutes at three Chinese universities, and its experience shows how closely industry and universities can work together. “We have developed our own customized curriculum, taught by our own professors and teaching staff in conjunction with the university staff, and with our own diploma and testing/grading standards,” he adds. “In return, we guarantee to hire a certain percentage of the graduates that make it through our program.”

Of course, such endeavors require a great deal of financing. The traditional method of raising finance in China
knowing somebody in a Chinese bank is still effective for many tech start-ups. But once again the eco system effect has proved a major plus. The large number of start-ups, multinationals and investors in the area has spawned numerous networking events, the most high-profile of which is CHINICT, an annual three-day conference on high-tech issues. The main focus of the event is to spotlight up-and-coming technology companies in China, and to connect them with venture capital firms, which can provide them with the funds to grow.

CHINICT is now in its third year and serves as an example of the nexus between governmental, investment, and technological organizations that is occasioned by the high-tech economy. The event is sponsored by a who’s who of international stock exchanges, corporations, and governmental trade organizations. Stock exchanges such as Nasdaq, NYSE, Euronext, and the London Stock Exchange; IT giants like Microsoft, Intel, and Cisco; and governmental organizations like the European Commission and Paris Developpement are all actively involved, showing the enormous global level of interest in China’s tech sector.
In spite of such impressive finance networking opportunities, however, fundraising is still an inexact science, according to Mobile Native’s Schorr. “I don’t think anyone can really claim to understand China’s IT investment market,” he says.

The groups which have pushed the development of the area have also shown limited desire to directly invest in individual start-ups. Chris Evdemon, managing partner at Eastern Bell Venture Capital, believes incubators should become more directly involved financially with start-ups. “Incubators should go beyond real estate and offer real assistance to their hosted start-ups,” he says.
However, Schorr admits that part of the difficulty in finding funding is down to the start-ups themselves. “Most IT start-ups here have a difficult time finding and defining a viable business model and that, more than anything, is what holds back investment,” he said.

In its second year of expansion, Mobile Native is reaching that critical point for most startups. Background work is finished and assets are in place; the dance with investors and potential partners has begun.
The start-up has benefited enormously from being surrounded by other industry players in China’s high-tech hub. Schorr and Rahhal regularly attend networking events such as Mobile Mondays, a monthly gathering focusing on mobile technologies, consisting of presentations, a Q&A session, dinner, and, of course, plenty of time for schmoozing and business-card swapping.
Events such as these are particularly important for start-ups like Mobile Native which are foreign-run, and therefore don’t have as deep an understanding of the local market or a ready-made network of Chinese contacts. “As a couple of foreigners who were not too familiar with doing business in the Chinese mobile industry, we were very lucky to have been introduced to Mobile Mondays,” says Rahhal. “Considering the limited size of the foreign population in Beijing and the presence of Beijing and China’s main players at Mobile Mondays, we, as a small startup, have extraordinary access to decision makers in the industry.”

And thanks to these kinds of opportunities, business is beginning to gain traction. The company has recently clinched a number of deal, notably with the Beijinger, the city’s largest English-language listings magazine, to provide restaurant mapping services on the magazine’s website.

Despite the success of start-ups such as Mobile Native and the thriving atmosphere in Zhongguancun, however, experts caution that the area still has a way to go before it can truly begin to match Silicon Valley.
Benjamin Joffe, CEO of Plus8star consulting and the founder of Mobile Mondays, is quick to point out Zhongguancun’s deficiencies. “The support system around technologists is weak: business skills are rarely found within an engineering team, and neither are legal or accounting experts,” he says. “A company is not just tech and money, and to turn technology into a product and a market requires skills that are still missing in the ecosystem.”
In addition, while the area has benefited from the readily available pool of talent provided by its numerous universities, Symbio’s Hsu believes a big difference between Zhongguancun and Silicon Valley is that the highly talented individuals that enabled the Californian tech hub to rise to prominence in the 1980s and 90s are thin on the ground in Beijing.

“In the US, you can find five rock-star developers, and build some really awesome technology,” he says. “But if you need to find 20, 30, or 50 developers, it’s not only expensive, it’s also difficult to hire that many developers in a short period of time. China is just the opposite. I can hire 500 programmers in two weeks, but it is really difficult to find five rock-star developers.” He adds that China’s small number of truly talented developers and managers are “probably all CEOs of their own companies in the current market environment.”

As China moves to recreate Silicon Valley’s decades of growth in the course of a few years, there are still open questions about whether conditions are in place for it to succeed, and how easily the abundant technical talent in Haidian can be adapted to the requirements of business.
Haidian remains at the opposite end of the city from the central business district. A new subway line opened last month, linking the two districts and highlighting how central both are to Beijing’s economic future, and how much money the government is willing to put into facilitating their interaction.
Only time will tell, however, if business and technology concerns can coalesce sufficiently to produce the kind of technological innovation China needs to compete as it moves towards a knowledge-based economy.

[Published on China International Business Magazine]