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Q&A: Shaun Rein, China expert, on why the nation has traded copying for innovation

McClatchy-Tribune Information Services

December 8, 2014


For years, American firms far and wide have bemoaned Chinese copycats.

But these days, the water-cooler chatter in Silicon Valley has turned to the meteoric rise of Alibaba, which in September sparked the world’s largest IPO. With millions of users and merchants, the Chinese firm handles more transactions than Amazon and eBay combined.

Shaun Rein, managing director of China Market Research Group, says the company’s success betrays a larger story: Chinese companies are focusing less on replicating what worked in the West and finding ways to innovate in their own right. He documents the shift in his new book, "The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia," which was published in October.

Shaun Rein, who founded The China Market Research Group, is author of "The End of Cheap China: Economic and Cultural Trends that will Disrupt the World." (Shaun Rein)

Rein was in New York when we talked with him about why Chinese companies are taking a new approach, how the shift will reverberate in Silicon Valley and what American tech giants need to do to gain traction in China. The conversation has been edited for length and clarity.

Q: Talk to me about the changes that are afoot in the Chinese economy.

A: It would be a mistake for Silicon Valley companies and American companies in general to underestimate the rise of innovation in China. It’s true that over the past 30 years, China had mostly been a copycat nation. A lot of people have said it’s because the Chinese culturally can’t innovate or the government stifles innovation. Those were factors, but it was really concerns about intellectual property protection and a lack of funding for research and development that stopped innovation. And there was so much low-hanging fruit — either manufacturing something for export or copying something from the West — that you didn’t need to focus on innovation in order to get wealthy.

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Now that the economy has changed and it’s getting harder to make money in China, a lot of companies are being forced to innovate just to survive. And what we’ve seen in the past six months is that some of the early innovators, like Tencent or Alibaba, have made a ton of money. That’s created a wholesale change among VCs and entrepreneurs. They’re now saying, "We can make more money by being innovative than by copying."

Q: What role have venture capitalists played in the shift?

A: Ten years ago, the VCs didn’t know how to operate in China. They were scared of the country. They would say, "Let’s invest in the Google of China or the Groupon of China." They wanted to minimize risk and basically recreate what worked in the U.S. and back Chinese entrepreneurs who spoke English well. Now, in just the past two years, Chinese entrepreneurs have become VCs for the first time, and they’re looking to invest in innovation.

Q: Will Chinese entrepreneurs’ new approach help or hurt companies in the valley?

A: There’s a threat in the mobile space because some Chinese companies are light years ahead of what a lot of the players in Silicon Valley are doing. Many of the dominant players in Silicon Valley were made for a PC environment. When they shifted to mobile, they had to transport the experience, and the result wasn’t always great. In China, companies like WeChat (a messaging app) were built with the mobile interface from the very beginning because many Chinese have never accessed the Internet through a PC. You’ll find a security guard who makes $100 a month, and he’s accessing the Internet all day from his mobile device.

However, there are also great opportunities for Silicon Valley companies. Some Chinese tech companies that originally were copycats are cash-rich and looking to buy innovation by investing in and acquiring Silicon Valley and Canadian startups. And the valuation they’ll pay is often higher than an IPO.

Q: China is clearly a priority to the valley, with both Facebook CEO Mark Zuckerberg and Apple CEO Tim Cook traveling to the country in recent weeks. What do they need to do to succeed there?

A: Looking at Apple, I think they’re in a lot of trouble in China. They have been very slow getting product into the market and developing the right sales channels. And they haven’t customized their products at all. That worked before. It’s not going to work with Chinese electronics companies Xiaomi and Huawei coming up. Tim Cook understands there is an issue, and he has been coming to China a lot more. They’re definitely improving, but when you sell a product that’s double the price of Xiaomi’s, then why would anybody buy you?

Q: Cook and Alibaba CEO Jack Ma have both said publicly that they’d like to team up on mobile payments. What’s the likelihood they’ll come together?

A: I think a partnership would be great, and of course they’re going to say nice things about each other, but it would benefit Apple far more than it would benefit Alibaba. Alibaba would play coy.

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Shaun Rein

Age: 37.

Birth place: Concord, New Hampshire

Position: Founder and managing director of China Market Research Group

Previous jobs: Chief of research and head of IT investment at Inter-Asia Venture Management; managing director and head of China, Taiwan and South Korea for WebCT, an educational technology company acquired by Blackboard

Education: B.A. in East Asian studies and economics from McGill University; M.A. from Harvard University in regional studies, East Asia, with a focus on the Chinese economy

Residence: Lives in Shanghai with his wife and 7-year-old son, Tom

Five things about Shaun Rein

1. He was in a body cast for a year after a sports injury, then used a cane or a wheelchair for five years. Now, he runs 10 kilometers several times a week.

2. When he was 9 or 10 years old, he started his first business: buying and selling baseball cards.

3. He travels extensively. If you ever see him on TV in the same suit and tie for three weeks, that probably means he’s staying in Thailand or Bali.

4. He wrote a book, "Shaun Rein’s Guide to Getting into Harvard," that was published in China in 2003.

5. Over the past year and a half, he’s given speeches on every continent except for Antarctica and South America.