Will China become an innovator?
Will China become an innovator?
China and the Civilization Research Tree
One of my favorite computer games growing up was Sid Meier’s Civilization. I mostly remember playing the original version on my 386DX clone PC and still have fond memories of conquering competing civilizations that are generations behind in tech, the normally peaceful Gandhi “going nuclear”, and the triumphant launch of your civilization’s colonists into space at the end game.
Besides learning the names of foreign cities both past and present, and remembering not to piss off Gandhi, one of the key takeaways from the game was the Research Tree, or the idea that developmental progress is built off a foundation of past enabling technologies or ideas.
For example, in Civilization, to develop or “unlock” Automobiles, you first needed to develop Combustion and Steel. To develop these two, you need Industrialization, which itself is based on Banking and the Railroad. And so on and so forth until you get back to basic building block innovations like the Alphabet and Pottery.
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Not only was the Research Tree idea a core gameplay concept for an entire generation of real-time and turn-based strategy games, it is also quite applicable to the real-world and to thinking about this question about Chinese innovation.
Another key takeaway from Civilization is that different civilizations do not need to follow the same exact path down the Research Trees. A civilization’s ability to unlock certain technologies is often dependent on its history and the natural resources with which it had been endowed. For example, civilizations without early access to coal reserves would have found it more difficult to unlock “Industrialization”.
These two takeaways from Civilization feature heavily in the way I thought about this question. But before we dive in, I just wanted to spend a few moments defining the term “innovation” and what it means to “innovate”.
While many people think about innovation as the advances that are happening at the “bleeding edge”, I define innovation as anything that “increases the productivity or efficiency of an economy” — i.e. things that help you advance along the Research Tree. This is not merely well-known inventions like the incandescent light bulb, the integrated circuit or the smartphone; it can also be something like the standardization of the container ship and how it dramatically lowered global shipping costs in the latter half of the 20th century.
Moreover, innovation is relative. As civilizations or economies are all at varying stages of development (i.e. some farther along the Research Tree than others), something that is considered new and novel in a poor country may have already been implemented many decades ago in a wealthy economy and is therefore not considered “innovative” in the traditional sense of the term.
This is why before we talk about China’s innovation potential, we must discuss American innovation.
I joined Investcorp’s Technology Investments Group (as it was known back then) as a young investment professional in early 2005. One of the first investments I worked on was a small growth equity investment we made in a company called SavaJe Technologies — pronounced “savage” and not “sah-vah-hey” as my high school-level Spanish-honed instincts led me to utter the first time I met with the management team.
We were intrigued by the idea that the mobile phone could eventually become more than just a voice communications device. Already, we were seeing Blackberry add e-mail functionality and Java-based proto-apps show up on Nokia handhelds. SavaJe’s approach was to leverage a large and growing Java ecosystem and existing Java application library by building a Java-based operating system in a mobile phone format — hence the name of the company (I’ll let you figure this one out; hint: why the capitalized “J”?).
I would expect very few of you to have ever heard this name because as you might have guessed, the investment was a complete and utter failure. SavaJe did manage to produce its first series of Java-based “feature phones” but the hardware was too expensive, distribution too hard, and the software too buggy to be commercially viable.
Less than a year after we made our investment, the company ran out of funding and essentially wound down. It was later acquired by Sun Microsystems — the company that had originally developed Java — presumably for its intellectual property. In 2010, Sun was acquired by Oracle. Two years later, Oracle would sue Google for adopting Java naming protocols for Android app developers. When the court documents were released publicly, I had a nice chuckle when an old friend whose name I once had trouble pronouncing flashed across a legacy news alert that I had forgotten to shut off.
But hey, at least I got to keep what is probably still today one of my favorite deal toys — an orange & white, fully functional (albeit somewhat buggy) Java-based Jasper S20 feature phone:
The other thing I got out of the experience was a front row seat to the smartphone revolution that was just beginning to unfold. Unbeknownst to us and the SavaJe team — who viewed Symbian as its primary competition — there were some really smart, determined teams out there working on the same idea. And unlike Symbian, these guys were re-thinking everything from the ground up.
On January 9th, 2007, Apple CEO Steve Jobs stood in front of an excited crowd at the Moscone Center in San Francisco and announced the iPhone. Leading up to the big reveal, he toyed with the crowd, discussing the introduction of three new Apple products — a wide-screen iPod, a mobile phone and an Internet communicator — before unveiling a single, combined device in its now-iconic glory.
Many people have heard this story that is straight out of the annals of canonical Apple lore. Fewer people know that many years earlier, the company had tried to produce a similar kind of device. In 1993, after six years of development and $100 million of development expenses, Apple unveiled the Apple Newton, an early “personal device assistant” that ran its own proprietary operating system and featured cutting-edge handwriting recognition.
But like our investment in SavaJe a dozen years later, it too was a failure.
Why did the iPhone succeed in such a spectacular, massive way while the Newton failed?
This brings us back to the Research Tree.
They say that timing is everything. This is certainly the case in the world of high technology, where the underlying currents flow fast, driven by the tireless march of Moore’s Law and its various cousins (i.e. Metcalfe, Reed, etc.).
Back in 1993, my aforementioned 386DX PC featured a 120-megabyte hard disk and 4 megabytes of memory and cost my dear parents close to $2,000 to purchase — $4,000 in today’s dollars, if you adjust for inflation. The screen was a 15 lb. color VGA monitor that could support resolutions as high as 640x480. Earlier that year, we had just purchased our first cordless phone to replace our landline POTS hardware.
The technology frontier of the early-to-mid-90s allowed Apple to develop a handheld device that featured:
A black and white screen with 336 x 240 native resolution
640 kilobytes of memory
4 megabytes of storage
9.6k baud internal modem
This device weighed around 1 pound and cost $700 ($1,400 in today’s dollars).
The problem is that the underlying enabling technologies had not yet developed to the point where the Apple Newton could perform the jobs it wanted to replace — your calendar and diary, your watch, your index cards, your Rolodex and perhaps even the PC game version of Civilization — at a satisfactory level, for the price that Apple had to charge to make any sort of profit.
In other words, before we could unlock commercially-viable smartphones we had to first unlock other enabling technologies. If we were to look at a simplified, Civ-esque Research Tree for Smartphones, it might look something like this:
In reality, it is a lot more complicated and certainly not as linear or direct cause-and effect as the Research Tree above might suggest.
Semiconductors as a category is more of a moving target (again, Moore’s Law) and that unlocks features on a rolling basis as you achieve new $/capacity milestones. For example, 640 kb of memory can’t really enable functionality that is superior to non-electronic alternatives, but perhaps an amount 200x that could. 4 MB of storage can’t really move the needle, but an amount 1,000 times could.
Similarly, modems that can transmit 9,600 bits per second in 1993 were too slow, but soon-to-debut 3G standards (200 kbps and up) in 2007 began to make downloading music bearable. Stylus pens are too much of a hassle but using your fingers turns out to be great if you can get the response times under a certain threshold.
And as you can see above, it is not just about pure technology milestones. Progress in non-technology related areas also matter. For instance, developing laws, regulations and processes around how to manage and license digital content like music enabled transacting at scale in ways that were not feasible before. Another contributing factor was the development of the consumer electronics supply chain in East Asia so that you could make these devices affordable and available in a timely manner for hundreds of millions of consumers.
It took several generations and multiple intermediate products — such as voice-only cellular phones and specialized devices like Blackberries and the iPod — before all the stars aligned, and all of the necessary technology and non-technology milestones were “unlocked” such that “Smartphones” were finally enabled.
On December 18th, 1978, the Third Plenary Session of the 11th Central Committee of the Communist Party of China commenced in Beijing. It was here that a diminutive man of Hakka ancestry from Sichuan became the paramount leader of the People’s Republic of China (note: not the man in the graphic above). This was to be a pivotal turning point in the modern Chinese Civilization’s economic and political history.
On its Research Tree, China had unlocked “Communism” in the first half of the 20th Century, culminating with “Most Wise Emperor Mao Tse Tung” leading the People’s Liberation Army into Beijing on October 1st, 1949. While Communism proved effective in finally bringing some semblance of political stability after a century of turmoil, it had proven less capable in fostering modern standards of economic prosperity.
As fans of Civilization would know, Communism helped civilizations on their defense metrics, but not on economic productivity. Back in the real world, the productivity gap was widening between planned economies and free market economies that were leveraging technology-centric innovations to push them to heretofore unseen levels of wealth and prosperity.
It was that diminutive Hakka man, Deng Xiaoping, who had long realized this but was unable to push forward the necessary reforms having been purged not once but twice over the previous two decades. But as he took over the reins of the country, the Chinese Civilization finally began to take steps to unlock “Capitalism”.
Capitalism was the key to unlocking innovation for China. It turns out that private asset ownership and the potential to generate profits and accumulate capital are incredibly motivating factors for our species. It pushes us to work hard, to strive and to be creative: Capitalism unlocked human potential in ways that Communism never could.
China’s early reforms were focused on its agriculture sector which had long been mismanaged by the Communist Party. Deng unwound the disastrous collectivization policies and promoted a “household responsibility system” which essentially allocated land to individual households. As had been demonstrated in other densely populated Asian countries like South Korea and Taiwan two decades earlier, quasi-private land ownership provided much more incentive for “farmer-entrepreneurs” to work hard — and that led to step-change gains in agricultural productivity that not only benefited themselves but society at large.
Similarly, reforms were implemented in the cities to improve industrial productivity. A dual-price system was introduced which was the first step towards introducing market-based pricing and allow market signals (vs. central planners) to determine production. Private businesses were allowed to operate for the first time since 1949 and the economy started opening itself up to foreign investment after being closed for nearly thirty years.
While these reforms seemed primitive, they were really the first steps in what was to be a very, very long journey — a journey that the Chinese Civilization is still on today. There have been a few stumbles along the way but for the most part, it has moved in a continuous forward direction.
I still remember one drizzly afternoon in Shanghai several years ago when I got a bit hungry and headed out from my hotel to grab a bite at a small dumpling shop at a nearby side street. It was a cozy, family-owned restaurant and because it was the lunch hour rush, there was a long queue to the cash register.
As I checked my wallet to make sure I had brought enough Renminbi, I noticed that everyone on line — young and old — had their smartphone out tuned to the same medium-blue color screened app. As I looked more closely, I realized this was the “cool new payments app” that everyone had been talking and this was the first time I was seeing it live. When I got to the cashier and started pulling out cash, she looked at me kind of funny, paused for a few seconds as she figured out how to handle it. Finally, she managed to pry open the cash register and rummage through a small pile of haphazardly strewn bills before collecting the appropriate amount of change.
After overcoming the initial embarrassment of it all, I started thinking about what I saw and thought to myself, “man this seems like it might be pretty big.” A short while later, I signed up to Alipay and essentially overnight stopped using cash in China.
The Chinese Civilization had just unlocked “Mobile Payments” on its Research Tree.
Mobile Payments itself was a direct result of Smartphones having been unlocked several years earlier by the American Civilization as described above. As I write about here, the rapid proliferation of smartphones and the lack of existing credit-card infrastructure allowed China to jump straight to a mobile-centric payments solution built around the latest software and hardware paradigms.
At first glance, Mobile Payments does not really offer significantly better features than the existing “Credit Card” milestone that had been unlocked decades earlier in the advanced economies of the world. The biggest direct benefit was rendering the invention of “Cash”, unlocked over a millennium earlier during the Song Dynasty, largely obsolete with lower friction costs, easier accounting etc.
But as you dig beneath the surface, the more robust, modern technology behind Mobile Payments has started to unlock some truly “bleeding edge” innovations. In other words, Mobile Payments unlocks next-generation advances on the Research Tree in ways that payments infrastructure based on Credit Cards cannot.
For example, the ability to make mobile, micro-payments led to the invention of dockless bike-sharing as well as other novel online-to-offline (O2O) business models. The rich transaction data generated from mobile payments (which captures many more data points than typical credit cards) is a treasure trove for AI/ML companies looking to mine the data for actionable insights. Each of these second-order innovations can lead to the unlocking of future third- and fourth-order milestones as well.
The Research Tree for Mobile Payments might look something like this:
At this point, I think it is very hard to argue that China is not already innovative. And if you use this definition of “innovation”, then China has been quite innovative for the past four decades after Deng Xiaoping kicked off its economic reform program. It’s just that up until recently, most of its innovations were of the “catching up” variety.
Now, with China starting to reach the “bleeding edge” technology frontier in areas like Internet, e-commerce and mobility-related infrastructure and applications, other civilizations are taking notice even as it remains far behind in other sub-segments (e.g. core industrial technology in areas like aviation and semiconductors).
My hope, perhaps optimistic, is that unlike some of the more “winner-take-all” victory paths in Civilization, the real-life game is won when the various civilizations come together and help each other advance up the Research Tree to the point where humans can live in harmony in a world of “distributed plenty”.
At the very least, it is a noble goal to strive for and look forward to.
This was originally published on Quora in December 2018.