The Family in China

European Straits #45

Nicolas Colin

Dear all,

I’m about to spend a week in Shanghai, China. The trip is part of my work as an affiliated professor at Sciences Po's School of Public Affairs , which has a partnership with Fudan University's School of International Relations & Public Affairs.

Most of my time in Shanghai will be dedicated to meetings and discussions with Fudan’s representatives and students, so as to strengthen the partnership and prepare work on issues of shared interest. But since it’s my first trip to Mainland China (I know Hong Kong, but not the rest of the country), I’ll also use the opportunity to try and learn more about the Chinese digital economy.

A question I and my partners have is what interests does The Family have in China? We’re a pan-European firm, so almost all of our portfolio is European startups (although we’ve made a few opportunistic investments in US companies, including Stripe).

But I can’t really fathom the idea that there’s nothing to draw from a country that is, after all, bound to dominate the global digital economy at some point. So here are a few ideas on why European players such as The Family should invest quite a lot in knowing more about China.

1. China has long been a follower in the global economy. It leveraged the proven catching-up playbook, using the state to protect its nascent tech industry from foreign competition while getting technological inspiration from more advanced countries. There are many lessons to be drawn from China’s success in nurturing global tech champions such as Tencent, Alibaba, Baidu, and Didi Chuxing. That’s especially true now that the European Union is reflecting on how to foster its domestic digital economy and even the UK is converting to the idea of industrial policy.

=> Key takeaway—China has succeeded in fostering its own entrepreneurial ecosystem. Not everything is replicable in the West, but it has a lot to teach us on tech-friendly policy.

2. China is now racing ahead, which makes it all the more important to know what’s happening there. Indeed the intelligence I’ve collected from astute observers suggests that the country has long since passed the frontier. It is now a pioneer not only in cutting-edge technology such as artificial intelligence but also new modes of production and consumption in fields such as retail banking, shopping, energy, and healthcare. Considering that, what strikes me is how difficult it is to access information related to what’s happening on the ground. Part of this is due to the fact that China is inward-looking, carefully preserving its domestic tech industry from too much outside attention. Another critical part is the language: I’m sure there’s the equivalent of Techcrunch, Wired, O’Reilly Media and The Information available out there—but it’s all in Mandarin, and learning Mandarin is hard for us Westerners!

=> Key takeaway—China’s digital economy is essentially unknown. That’s a problem since our business is nurturing an investment thesis with ostensibly up-to-date intelligence.

3. China is uniquely positioned to succeed in the age of ubiquitous computing and networks. While the government plays quite a large role in the Chinese economy, the playground that is the private sector is rendered more accessible for entrepreneurial ventures because of the absence of legacy infrastructures and regulations. A fast-growing digital economy also needs a large reserve army of labor to fill the new jobs brought about by tech companies. For the US, that reserve army in transitional periods has historically been populated with immigrants. In China, it’s clearly the massive rural influx that contributes to making a large and cheap workforce available in the technology-driven urban economy.

=> Key takeaway—China can serve as a precedent to make the favorable case for both immigration and legal frameworks that are more welcoming for technology.

4. Chinese tech ventures are extremely competitive due to their giant domestic market. When you operate a tech-driven business on such a market, network effects are present at such a large scale that you only need to monetize at the margin to generate profits. This explains why Chinese entrepreneurs excel at two things that make tech ventures successful: thrift and scaling up fast. The size of China’s domestic market would also suggest that Chinese tech companies are not that interested in expanding abroad—and that non-Chinese entrepreneurs will never be competitive on the Chinese market. However, the thriving of the local entrepreneurial ecosystem will also generate excess capital, and part of it will be allocated to funding ambitious startups elsewhere. This is already happening in Silicon Valley—as well as in Europe with the likes of Taxify, which is now massively funded by Didi Chuxing. Indeed we all need to be prepared to attract Chinese capital as it is deployed at a global scale.

=> Key takeaway—China’s success in technology will eventually lead to it deploying capital in Europe. It’s an opportunity that we at The Family must be prepared to seize.

Will China one day dominate the global digital economy? It’s one thing to best other countries when it comes to growing large tech companies. It’s another to succeed at making the digital economy more sustainable and more inclusive. The coming years will be interesting in that regard: will China double down on its success and become as exceptional as the US was in the 20th century—an example that we’ll all try to follow? There are many, many challenges to be tackled on that path. But as Donald Trump is running the US into the ground, China is definitely in the race to become the core of the new techno-economic paradigm. I’ll write more when I’m back!

In the meantime, here are a few other readings (or viewings) that I found interesting:

Warm regards (from London, UK),

Nicolas