It's no secret that China is paving the path from emerging economy to a nation driven by technical innovation. Research from the McKinsey Global Institute (MGI) has concluded that to reach consensus growth forecasts—5.5 to 6.5 percent a year—during the next decade, China must generate 2-3 percent of its annual GDP growth through innovation.
China's developing economy provides an untapped landscape for corporate innovators who are looking to explore new technical front-runners. To better understand trends in China, let's look at two innovation focal points.
Shenzhen: Drone Development Hub
Shenzhen's location just north of Hong Kong made it a prime candidate to become China's first special economic zone in 1980. As a result of sustained investment from both state and private enterprise, the city and surrounding region has become China's high-tech powerhouse. The region's GDP is higher than that of Portugal, the Republic of Ireland, and Vietnam, thanks to its low-cost manufacturing and good transport links.
Recently, Shenzhen has become the country's — and the world's — drone capital. It has a 70 percent market share of the global consumer drone market with more than 300 companies dedicated to the unmanned aerial vehicle business alone, including DJI, the world's largest drone-maker. These companies are generating $3 billion in sales annually, according to Yang Jincai, director of Shenzhen UAV Industry Association.
This high concentration is the result of the Shenzhen government announcing three years ago it had singled out drones as one of its key industries in its Development Plan of Aerospace Industry of Shenzhen 2013-2020.
The consumer drone market in China alone is expected to be worth $31 billion within the next decade. This has led to a slew of venture capital pouring into Shenzen. DJI, the world's largest drone-maker is backed by Accel Partners and Kleiner Perkins Caufield & Byers. Other startups have benefited, too, including Flypro Aerospace Technology, which specializes in drones for sports; Yuneec International, which caters to the professional film and photography brackets; and Ehang, which develops drones with VR capabilities.
While civilian drones are driving interest and investment, their use in transportation is likely to be the most disruptive impact of the 300 drone companies calling Shenzhen home.
Ehang is currently working with Maryland-based Lung Biotechnology to create a special drone capable of transporting human organs.
Chinese retailer JD.com has begun using drones from Shenzhen to transport goods between distribution centers in the Jiangsu province, helping to reduce the number of trucks on the region's roads. Meanwhile, MMC is building drones capable of spraying fertilizer on crops, analyzing plant health, and creating prescriptions for improving yield — all without the need for a human pilot. With the company's newest hydrogen battery capable of keeping a drone airborne for hours at a time, heavy tractors and agricultural machinery could soon become a thing of the past.
Hangzhou: E-Commerce Hub
Nicknamed “China's Silicon Valley," Hangzhou was designated as an economic and technological development zone in 1993 to encourage the establishment of manufacturing and food processing industries.
While that was considered a success, it also became the focal point for e-commerce in China. Located between Shanghai in the north and Ningbo in the south, it benefits from swathes of investor money in the former and a huge container port in the latter.
The Alibaba Group, the world's largest B2B portal, calls the city home, and there are more than 470,000 online business entities in the region, including JD.com and logistics company SF Express, according to Hangzhou newspaper Today Morning Express.
Driving Hangzhou's e-commerce growth, according to consulting firm McKinsey, is the evolution of China's middle class from passive consumers to sophisticated and seasoned shoppers. This transition has seen a growing group of people willing to pay a premium for quality both in terms of the product and customer service.
The proportion of people in what the consultancy calls “upper middle class" is expected to account for 54 percent of urban households by 2022 – up from 14 percent currently.
One of the e-commerce platforms catering to this newly affluent market is yMatou, which allows Chinese citizens to buy luxury items from other countries easily. yMatou, operates 12 warehouses worldwide and has built its own logistics company to handle the volume it imports into the mainland.
According to official estimates, there are more than 5,000 businesses specializing in cross-border e-commerce. Beijing-based internet consultancy Analysys International estimated these businesses imported $71 billion worth of goods in 2014. Purchases through these companies were worth $37 billion in 2015, according to the Hangzhou-based China E-CommerceResearch Centre (CECRC). This means that mainlanders are spending more than $100 billion a year on foreign goods online, which is roughly the same as Amazon registered in sales globally last year.
Another e-commerce star is Huimin, which connects brand merchants directly with convenience store vendors, cutting out the 4-6 middlemen that increase prices by 3-5 percent according to Marbridge Consulting. This month the company raised a $200 million Series B round, allowing it to expand to more than 40 cities and some 400,000 vendors.
Food delivery companies like Ele.me allow customers to order food from restaurants that don't typically deliver. It has so far raised $2.34 billion.
Cheyipai.com meanwhile is a full-scale used car platform covering C2B, B2B, and B2C segments of the industry. It operates in more than 50 cities nationwide and has developed value-add services, such as extended warranty and leasing programs, independent of sellers.
Meituan, which began life as a Groupon clone, now allows local businesses to broadcast deals to nearby shoppers. It's on course to generate $18 billion in revenue this year. When Meituan first started out, it was competing against some 3,000 competitors dotted across the country, says American venture capitalist Kai-Fu Lee. E-commerce evolves quickly in China, thanks to the cut-throat competition every company faces.
Last year, investments into e-commerce platforms jumped 78 percent according to IT Orange, a Chinese market research firm. With the market still relatively small, expect innovation to continue apace in years to come.
Interested in learning more about emerging entrepreneurial economies in China, Silicon Valley, the United Kingdom, and beyond? Get in touch with RocketSpace's corporate innovation services team. We're opening new offices in London and Beijing as part of our effort to weave together a global innovation ecosystem. We'd love to hear your corporate innovation team's perspectives and questions.
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