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Q&A with Tan Yinglan

Wednesday, November 16th, 2011
tan yinglan

Tan Yinglan was educated at Harvard, Stanford and Carnegie Mellon. He is a Kauffman Fellow at the Center of Venture Education, and serves on the boards of innovative growth ventures and venture capital funds in Asia. Yinglan was the first director of 3i Venturelab China, a joint-venture between private equity firm 3i and INSEAD. He is an Assistant Professor at Nanyang Business School and is also a member of the World Economic Forum’s Global Agenda Council on Fostering Entrepreneurship. He gave this exclusive interview to Victor Fic, our special correspondent for politics and economics.

Why did you go to China as a business expert to start with?

In 1999, I was air dropped into China for a joint venture linking a private eq- uity firm called 3i and INSEAD, the inter- national graduate research school. The hi-tech parks in Beijing’s Zhongguanzun in Shanghai’s Zhangjiang Science Park were my turf where my daily agenda had me meeting with major entrepreneurs. It was the start of Chinese consumer de- mand, and I saw hungry Chinese entre- preneurs capitalize on it.

You met Jack Ma. Could you recall some of his insights for us?

Jack Ma is now famous as the founder and CEO of Alibaba, the Internet portal for buying and selling goods in China. Ma explained to me in 2007, “We had no money... technology [or] plan. Every dollar we used very carefully.”

Why do you deem that a pivotal year?

The year 2006 was when China’s combined venture capital (VC) investment hit US$1.78 billion, and it took the world’s number two spot after the United States. The latter’s venture capital investment was at US$25.6 billion. But VC investment in China soon leaped close to 2.5 times to US$4.4 billion in 2010, while America’s fell to US$21.8 billion.

What is the proof that Chinese founders are zooming and changing the world?

Start with 1999. They have led over 46 Chinese firms to IPOs on NASDAQ, an unheard-of total of start-ups, created a growing group of billion-dollar players and high-tech companies such as Ctrip, Kongzhong and Baidu. Now the locus of global high-technology is migrating across the Pacific.

Is much written about innovation in China?

Many Asian governments deem it a pressing issue, but there is little quality literature about company strategies, their experiences and skills, experimentation, risk management, and lessons for others. A lot of people say China is just about low cost manufacturing and cheap reproductions. I disagree. The Chinese do innovate. They just innovate differently.

You say that Chinnovation leaders combine several of eight cardinal skills starting with revenue focus. What is that?

Compared to Western rivals, they carefully focus on revenues. Facebook is the biggest American social networking service with 500 million users versus 630 million for China’s QQ. The former just recently became profitable. QQ boasts a US$1.23 billion profit. In China, the investment strategy is very different, because VCs opt for later-stage deals and invest in later rounds with less risk and a smaller upside.

They are also rapid, as you observe.

Nick Yang co-founded KongZhong Corporation in March 2002 and listed it on NASDAQ (Nasdaq: KONG) in mid-2005. One leader jumped when Michael Jackson died and won the rights to construct Neverland in China.

And they are driven by customers... how?

What the customer declares as a requirement goes. Chinese innovators are very localized and aware of customer needs. They know the greater value resides in new consumer-based products. They exploit China’s cost advantage in niche markets to boost their process flexibility and honor their customer’s needs at low prices.

One, Facebook in America quickly begets 20 copycats in China, but innovation is not low-value replication. Zany Zeng of Xiaonei, China’s Facebook, lamented the “me-too” reflex. When Facebook altered its homepage, so did Xiaonei -- blindly. Chinese entrepreneurs mimic Western business models. But copiers usually fail if they do not subsequently innovate. We also see companies like e-Hi innovate by remixing business models from various companies i.e. Carey, Hertz and Zipcar.

Also, how do restrictions inspire innovation?

When Facebook was forbidden in China, it caused half-a-dozen clones. Farm workers must wash both potatoes and clothes. So, Haier produced a popular dual-use machine.

What does remix times three mean?

Breakthroughs often hail from combining ideas. QQ’s easy user interface melds Cyworld-like avatars, ICQ instant messaging, and Hangame. Rural China suffers from rodents, so Haier remixed existing features for a refrigerator with metal plates and bite-proof wiring.

How does China have tangible and intangible raw materials?

One example is human capital. Between 2004 and 2009, China was the world leader in high-expectation entrepreneurship -- i.e. creating over 19 million jobs. Of the working age people, over 4 percent are in such entrepreneurship, versus 1.5 percent in the US. But Chinese graduates know theory without experience.

I refer to China’s venture capital and purchasing power as financial capital. In 2009, there were over 420 venture investments in China for a total of US$ 2.70 billion. Combined retail sales of consumer items will hit US$ 2.2 trillion in 2010.

Why do some entrepreneurs strive for a Western look?

Chinese equate Western products with social status and quality. So the casualwear clothier Metersbonwe uses Western models. A McKinsey survey concluded 90 percent of Chinese think it is a foreign company!

What advice can you offer multinationals?

Promote your flagship brands but remix them for Chinese consumers’ tastes. Alibaba combined elements from Amazon, eBay, and Rakuten. Specifically, it targeted its rivals’ weak spots by understanding local requirements. For example, regarding eBay, Alibaba launched Taobao. First, this allowed users to list for free compared to eBay’s model that required them to pay to list their items. Second, Alibaba advertised on TV, while eBay advertised on the web.

What is the role of the Chinese state here?

Commerce Minister Chen Deming said that China will improve its innovation and government procurement policies to boost innovation. Beijing has also smartly thought long-term. It has four national multi-billion-dollar, 25-year horizon, game-changing investments: two in the transport sector, one in life sciences, and one in automotive manufacturing. The financial commitment and long-term planning tests the country’s public–private capability.

So you are optimistic about the future in this area?

One reason is that we see signals of internally-driven growth. China now has about 500 million Internet surfers with 700 million more to appear by 2015. The Internet opportunities in emerging Asia might reach about US$80 billion by then. Note the complex, growing tie-ups. Shenzhen-based Yosion’s Apple Peel 520 will make any iPod Touch into a cell phone. China has comparative advantage in battery technology, so we see its batteries merged with U.S.-system electronics.

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