China puts faith in start-up boom
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The Chinese government has prioritised supporting entrepreneurship as it grapples with flagging growth and seeks to reboot the country’s economy. It wants to move away from heavy industry towards a more service sector-led model driven by consumption.
Chinese Premier Li Keqiang has urged local governments to implement policies encouraging “mass entrepreneurship and innovation” and to promote the growth of start-up companies. The state has set aside more than Rmb2.1tn ($320bn) to invest supporting emerging entrepreneurs in the technology sector, according to Zero2IPO, the China-based consultancy.
China has not been without entrepreneurial success stories. Alibaba, which became the world’s largest stock market flotation when it raised $25bn in its 2014 initial public offering on the New York Stock Exchange, was started in founder Jack Ma’s apartment. However, the ability to launch fast-growing companies has generally been limited to a few well-connected individuals while state-owned enterprises still dominate large sections of the economy.
That could be about to change. “There has been a shift in attitude,” says Sun Yu, head of network research at FT Confidential Research, a unit at the Financial Times. “The government wants to encourage everybody to set up a business, not just a handful of people.”
Over the past year, the State Council has introduced new measures to promote innovation and entrepreneurship, cutting red tape, offering tax rebates to start-ups and making it easier to register new companies.
Jinan city municipal authorities gave industrial robotics company Robot Phoenix Rmb2m ($300,000) to help develop its business after the company was launched in 2012. The money did not have to be repaid.
“Every half-year we had an examination to see how the business was progressing before we could receive the next tranche of money,” says Zhang Sai, chief executive of Robot Phoenix. “We have a good relationship with the government and that has helped us become more successful.”
Robot Phoenix, which manufactures robots to pick and place products during manufacturing and packaging, has subsequently received two rounds of private equity investment and now employs 73 staff. Mr Zhang says the company hopes to launch an IPO in about five years’ time.
The majority of the venture capital investment in China focuses on internet start-ups, followed by telecoms and software companies. However, the development of next-generation robotics used in high-tech manufacturing has become a target area for authorities, particularly as labour costs in the country rise. China unveiled a plan in April this year to triple its annual production of industrial robots by 2020.
Beijing-based robotic arm manufacturer Heng Zheng Robotics has received tax breaks and office space from the local government and now employs about 40 people. “The incentives we received have really helped us grow,” says Yuguang Yuan, chief operating officer at Heng Zheng Robotics.
Almost 3,000 start-up incubators, providing fledgling companies with services such as management training and office space, were operating across China by the end of last year, according to Zero2IPO.
Last year, the aggregate value of venture capital deals in China was $37.8bn, according to London-based consultancy Preqin. This year that figure could be even higher. The aggregate deal value up to May 16 this year had already reached $22.3bn.
However, not everyone in the Chinese venture capital industry is convinced by the state’s efforts to assist domestic start-ups. “The government wants to create a more entrepreneurial society but they are trying to short-circuit the processes needed to get there,” says Gary Rieschel, founder of Qiming Venture Partners, a China-based venture capital firm. “It cannot be achieved by simply pumping money into the system.
“Picking winners in venture capital is hard and what is happening in China is that businesses are being chosen based on local government connections. Who is making the decisions about where the investments get made? You cannot make rational capital allocation decisions when the government is involved with where the money comes from,” Mr Rieschel adds.
Last year, 4.4m companies were registered in China, a rise of 21.6 per cent on 2014, according to Zero2IPO. But as the number of people starting their own businesses rises, competition in key sectors is heating up. “Four years ago there were only a handful of competitors in our field of robotics,” says Mr Zhang. “But now there could be as many as 100. Many of our competitors seem to come from nowhere.”
In such a cut-throat marketplace the effective implementation of the rule of law, particularly with regard to intellectual property, is paramount. However, this has long been an area of concern under China’s state-run legal system. “China is doing more to protect intellectual protection and create better law enforcement,” says Mr Sun. “But at the same time protectionism and cronyism remain widespread.”
US tech giant Apple recently lost an attempt to protect its own intellectual property in China, when a Beijing court ruled in May that it could not prevent a Chinese company using the iPhone brand name on various leather accessories sold in China.
“The protection of intellectual property is something we worry about,” says Mr Zhang. “The only way to deal with it as a company is to keep growing. If someone copies you then you need to design a product that is better and more competitive. It’s a tough market out there.”
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