China

What Trump Doesn't Understand About China's Entrepreneurial Culture

China doesn't want to be the world's technology manufacturer; it wants to displace Silicon Valley as the world's technology innovator.
What Trump Doesn't Understand About China's Entrepreneurial Culture
Image credit: Kevin Frayer | Getty Images

President Trump has drawn a bullseye on Beijing, threatening to slap tariffs on U.S. imports and label China a currency manipulator, all in an effort to improve our trade imbalance and bring manufacturing jobs back to America. He may be targeting the right country but waging the wrong war.

China may be the world’s technology manufacturer, but Beijing has its sights set much higher than that. China aims to be the world’s technology innovator, as well.

No longer content to simply assemble high-tech products, China now wants to create them. It wants to imagine them, design them, make their building blocks and own their intellectual property. Even if Trump wins his trade war, the U.S. may very well lose something far more critical: its entrepreneurial leadership in technology.

Related: China Is a Problem, But Higher Tariffs Are Not the Solution

All tech-heavy products are made in four basic steps: Prototypes are developed. Software code is written. Production units are designed, components and subsystems are specified. Finally, the finished product is assembled and tested.

Most of today’s tech companies own the first three steps. That’s where the innovation, the entrepreneurial risk and the value is. While some design is outsourced, American companies still retain the intellectual property rights. They carry the startup and venture capital risk, and they own the brand of the finished product.

Until recently, Chinese companies were limited to the final step: assembly and test. Not any longer, and the change is happening at lightning speed. Over the past decade or so, China has incubated thousands of startups and launched dozens of government-backed venture capital firms with funds rivaling the size of those on Silicon Valley’s famed Sand Hill Road. Chinese companies are innovating in electric vehicles, drones, smart devices, fintech and ecommerce.

Related: How Your Small Business Can Sell in China Today

While more than half of the world’s unicorns -- venture-backed companies valued at $1 billion or more -- are American companies, nearly a quarter of them are now from China, including four of the top seven by valuation, according to research firm CB Insights.

Western nations may think they’re clean-tech pioneers, but more electric cars are actually made and sold by local companies in China than the rest of the world combined.

Last August, Uber gave up on the China ride-hailing market, selling its local unit to archrival Didi Chuxing, which is backed by China’s three internet giants: Alibaba, Tencent and Baidu.

Alibaba, whose 2014 IPO was the biggest in history, moves far more merchandise than Amazon.

Samsung and Apple may be the two biggest global smartphone makers, but rounding out the top five are Huawei, Oppo and Xiaomi, which together share almost 20 percent of the market. They’re all based in China.

Semiconductors have long been China’s Achilles heel, but a January report by the Obama administration highlighted a $160 billion program by Beijing to acquire advanced chip technology, subsidize domestic production and make China a global leader in semiconductors by 2030.

Most astonishing to those who spend time in the sprawling technology hubs of Beijing and Shenzhen is the attitude of the locals. China’s entrepreneurial culture is more aggressive and competitive than ours. Its people are hungrier and work harder than their western counterparts. Its startups scale much faster than ours do. China has a rapidly expanding, upwardly mobile middle class that’s hungry to consume a virtually unlimited supply of hot new products designed and made by local companies.

Don’t get me wrong. The Trump administration is right to be concerned with trade deficits, manufacturing jobs, currency manipulation and intellectual property theft. Those are big issues that we should deal with sooner rather than later, but make no mistake -- China’s intentions go way beyond its current role as the world’s biggest manufacturer and consumer of technology goods and services.

Beijing aims to own the core technology, the design, the chips, the hardware, the software and the brands of the final products. It wants the intellectual capital. It wants the value. It wants to displace Silicon Valley as the entrepreneurial capital of the world. In time, it just may succeed.

Related: Trump Won't Destroy Silicon Valley

As The Great One, Wayne Gretzky learned from his father, you want to skate to “where the puck is going, not to where it has been.” That’s exactly what China is doing. By focusing on where China’s been, instead of where it’s going, Donald Trump may win his trade war but end up losing something far more precious: America’s dominance in technology.

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