AI Superpowers

by Kai-Fu Lee

  The precision copying extended even to the most elegant and cutting-edge hardware. When Steve Jobs launched the original iPhone, he had only a few months’ lead time before electronics markets throughout China were selling “mini-iPhones.” The fun-size replicas looked almost exactly like the real thing but were about half the size and fit squarely in the palm of your hand. They also completely lacked the ability to access the internet via the phone’s data plan, making them the dumbest “smartphone” on the market.

  American visitors to Beijing would clamor to get their hands on the mini-iPhones, thinking them a great joke gift for friends back home. To those steeped in the innovation mythology of Silicon Valley, the mini-iPhones were the perfect metaphor for Chinese technology during the copycat era: a shiny exterior that had been copied from America but a hollow shell that held nothing innovative or even functional. The prevailing American attitude was that people like Wang Xing could copy the look and feel of Facebook, but that the Chinese would never access the mysterious magic of innovation that drove a place like Silicon Valley.

  BUILDING BLOCKS AND STUMBLING BLOCKS

  Silicon Valley investors take as an article of faith that a pure innovation mentality is the foundation on which companies like Google, Facebook, Amazon, and Apple are built. It was an irrepressible impulse to “think different” that drove people like Steve Jobs, Mark Zuckerberg, and Jeff Bezos to create these companies that would change the world. In that school of thought, China’s knockoff clockmakers were headed down a dead-end road. A copycat mentality is a core stumbling block on the path to true innovation. By blindly imitating others—or so the theory goes—you stunt your own imagination and kill the chances of creating an original and innovative product.

  But I saw early copycats like Wang Xing’s Twitter knockoff not as stumbling blocks but as building blocks. That first act of copying didn’t turn into an anti-innovation mentality that its creator could never shake. It was a necessary steppingstone on the way to more original and locally tailored technology products.

  The engineering know-how and design sensibility needed to create a world-class technology product don’t just appear out of nowhere. In the United States, universities, companies, and engineers have been cultivating and passing down these skillsets for generations. Each generation has its breakout companies or products, but these innovations rest on a foundation of education, mentorship, internships, and inspiration.

  China had no such luxury. When Bill Gates founded Microsoft in 1975, China was still in the throes of the Cultural Revolution, a time of massive social upheaval and anti-intellectual fever. When Sergei Brin and Larry Page founded Google in 1998, just 0.2 percent of the Chinese population was connected to the internet, compared with 30 percent in the United States. Early Chinese tech entrepreneurs looking for mentors or model companies within their own country simply couldn’t find them. So instead they looked abroad and copied them as best they could.

  It was a crude process to be sure, and sometimes an embarrassing one. But it taught these copycats the basics of user interface design, website architecture, and back-end software development. As their clone-like products went live, these market-driven entrepreneurs were forced to grapple with user satisfaction and iterative product development. If they wanted to win the market, they had to beat not just their Silicon Valley inspiration but also droves of similar copycats. They learned what worked and what didn’t with Chinese users. They began to iterate, improve, and localize the product to better serve their customers.

  And those customers had unique habits and preferences, ways of using software that didn’t map neatly onto Silicon Valley’s global one-size-fits-all product model. Companies like Google and Facebook are often loath to allow local changes to their core products or business models. They tend to believe in building one thing and building it well. It’s an approach that helped them rapidly sweep the globe in the early days of the internet, when most countries lagged so far behind in technology that they couldn’t offer any localized alternatives. But as technical know-how has diffused around the globe, it is becoming harder to force people of all countries and cultures into a cookie-cutter mold that was often built in America for Americans.

  As a result, when Chinese copycats went head-to-head with their Silicon Valley forefathers, they took that American unwillingness to adapt and weaponized it. Every divergence between Chinese user preferences and a global product became an opening that local competitors could attack. They began tailoring their products and business models to local needs, and driving a wedge between Chinese internet users and Silicon Valley.

  “FREE IS NOT A BUSINESS MODEL”

  Jack Ma made an art of these kinds of attacks in the early days of the Chinese e-commerce company Alibaba. Ma founded his company in 1999, and for the first couple of years of operation his main competitors were other local Chinese companies. But in 2002, eBay entered the Chinese market. At that time, eBay was the biggest e-commerce company in the world and a darling of both Silicon Valley and Wall Street. Alibaba’s online marketplace was derided as another Chinese copycat with no right to be in the same room as the big dogs of Silicon Valley. And so Ma launched a five-year guerrilla war against eBay, turning the foreign company’s size against it and relentlessly punishing the invader for failing to adapt to local conditions.

  When eBay entered the Chinese market in 2002, they did so by buying the leading Chinese online auction site—not Alibaba but an eBay impersonator called EachNet. The marriage created the ultimate power couple: the top global e-commerce site and China’s number one knockoff. eBay proceeded to strip away the Chinese company’s user interface, rebuilding the site in eBay’s global product image. Company leadership brought in international managers for the new China operations, who directed all traffic through eBay’s servers back in the United States. But the new user interface didn’t match Chinese web-surfing habits, the new leadership didn’t understand Chinese domestic markets, and the trans-Pacific routing of traffic slowed page-loading times. At one point an earthquake under the Pacific Ocean severed key cables and knocked the site offline for a few days.

  Meanwhile, Alibaba founder Jack Ma was busy copying eBay’s core functions and adapting the business model to Chinese realities. He began by creating an auction-style platform, Taobao, to directly compete with eBay’s core business. From there, Ma’s team continually tweaked Taobao’s functions and tacked on features to meet unique Chinese needs. His strongest localization plays were in payment and revenue models. To overcome a deficit of user trust in online purchases, Ma created Alipay, a payment tool that would hold money from purchases in escrow until the buyer confirmed the receipt of goods. Taobao also added instant messaging functions to allow buyers and sellers to communicate on the platform in real time. These business innovations helped Taobao claw away market share from eBay, whose global product mentality and deep centralization of decision-making power in Silicon Valley made it slow to react and add features.

  But Ma’s greatest weapon was his deployment of a “freemium” revenue model, the practice of keeping basic functions free while charging for premium services. At the time, eBay charged sellers a fee just to list their products, another fee when the products were sold, and a final fee if eBay-owned PayPal was used for payment. Conventional wisdom held that auction sites or e-commerce marketplace sites needed to do this in order to guarantee steady revenue streams.

  But as competition with eBay heated up, Ma developed a new approach: he pledged to make all listings and transactions on Taobao free for the next three years, a promise he soon extended indefinitely. It was an ingenious PR move and a savvy business play. In the short term, it won goodwill from Chinese sellers still leery of internet transactions. Allowing them to list for free helped Ma build a thriving marketplace in a low-trust society. It took years to get there, but in the long term, that marketplace grew so large that in order to get their products noticed, power sellers had to pay Ma for advertisements and higher search rankings.
Brands would end up paying even larger premiums to list on Taobao’s more high-end sister site, Tmall.

  eBay bungled its response. In a condescending press release, the company lectured Ma, claiming “free is not a business model.” As a Nasdaq-listed public company, eBay was under pressure to show ever-rising revenues and profits. American public companies tend to treat international markets as cash cows, sources of bonus revenue to which they are entitled by virtue of winning at home. Silicon Valley’s richest e-commerce company wasn’t about to make an exception to its global model to match the wild pronouncements of a pesky Chinese copycat.

  That kind of shortsighted stubbornness sealed eBay’s fate in China. Taobao rapidly peeled away users and sellers from the American juggernaut. With eBay’s market share in freefall, eBay CEO Meg Whitman briefly relocated to China to try and salvage the operations there. When that didn’t work, she invited Ma to Silicon Valley to try and broker a deal. But Ma smelled blood in the water, and he wanted total victory. Within a year, eBay fully retreated from the Chinese market.

  THE YELLOW PAGES VERSUS THE BAZAAR

  I witnessed this same disconnect between global products and local users while leading Google China. As an extension of perhaps the world’s most prestigious internet company, we should have had a major brand advantage. But that linkage back to headquarters in Silicon Valley turned into a big stumbling block when it came to adapting products to wider Chinese audiences. When I launched Google China in 2005, our main competitor was the Chinese search engine Baidu. The website was the creation of Robin Li, a Chinese-born expert in search engines who had experience working in Silicon Valley. Baidu’s core functions and minimalist design mimicked Google, but Li relentlessly optimized the site for the search habits of Chinese users.

  Those divergent habits were starkest in the ways users interacted with a page of search results. Within focus groups, we were able to track a user’s eye movements and clicks across a given page of search results. We used that data to create heat maps of activity on the page: green highlights showed where the user had glanced, yellow highlights where they had stared intently, and red dots marked each of their clicks. Comparing heat maps generated by American and Chinese users makes for a striking contrast.

  The American users’ maps show a tight clustering of green and yellow in the upper left corner where the top search results appeared, with a couple of red dots for clicks on the top two results. American users remain on the page for around ten seconds before navigating away. In contrast, Chinese users’ heat maps look like a hot mess. The upper left corner has the greatest cluster of glances and clicks, but the rest of the page is blanketed in smudges of green and specks of red. Chinese users spent between thirty and sixty seconds on the search page, their eyes darting around almost all the results as they clicked promiscuously.

  Eye-tracking maps revealed a deeper truth about the way both sets of users approached search. Americans treated search engines like the Yellow Pages, a tool for simply finding a specific piece of information. Chinese users treated search engines like a shopping mall, a place to check out a variety of goods, try each one on, and eventually pick a few things to buy. For tens of millions of Chinese new to the internet, this was their first exposure to such a variety of information, and they wanted to sample it all.

  That strikingly fundamental difference in user attitudes should have led to a number of product modifications for Chinese users. On Google’s global search platform, when users clicked on a search result’s link, it would navigate them away from the search results page. That meant we were forcing Chinese “shoppers” to pick one item for purchase and then, in effect, kicking them out of the mall. Baidu, by contrast, opened a new browser window for the user for each link clicked. That let users try on various search results without having to “leave the mall.”

  Given clear evidence of different user needs, I recommended Google make an exception and copy the Baidu model of opening different windows for each click. But the company had a lengthy review process for any changes to core products because those changes “forked” the code and made it more difficult to maintain. Google and other Silicon Valley companies tried hard to avoid that, believing that the elegant products coming out of the Silicon Valley headquarters should be good enough for users around the globe. I fought for months to get this change made and eventually prevailed, but in the meantime Baidu had won over more users with its China-centric product offering.

  Battles like this were repeated continuously over my four years with Google. In fairness to Google, headquarters gave us more latitude than most Silicon Valley companies give to their China branches, and we used that leverage to develop many locally optimized features, which won back substantial market share Google had lost in previous years. But headquarters’ resistance to forking made each new feature an uphill battle, one that slowed us up and wore us down. Tired of fighting with their own company, many employees left out of frustration.

  WHY SILICON VALLEY GIANTS FAIL IN CHINA

  As a succession of American juggernauts—eBay, Google, Uber, Airbnb, LinkedIn, Amazon—tried and failed to win the Chinese market, Western analysts were quick to chalk up their failures to Chinese government controls. They assumed that the only reason Chinese companies survived was due to government protectionism that hobbled their American opponents.

  In my years of experience working for those American companies and now investing in their Chinese competitors, I’ve found Silicon Valley’s approach to China to be a far more important reason for their failure. American companies treat China like just any other market to check off their global list. They don’t invest the resources, have the patience, or give their Chinese teams the flexibility needed to compete with China’s world-class entrepreneurs. They see the primary job in China as marketing their existing products to Chinese users. In reality, they need to put in real work tailoring their products for Chinese users or building new products from the ground up to meet market demands. Resistance to localization slows down product iteration and makes local teams feel like cogs in a clunky machine.

  Silicon Valley companies also lose out on top talent. With so much opportunity now for growth within Chinese startups, the most ambitious young people join or start local companies. They know that if they join the Chinese team of an American company, that company’s management will forever see them as “local hires,” workers whose utility is limited to their country of birth. They’ll never be given a chance to climb the hierarchy at the Silicon Valley headquarters, instead bumping up against the ceiling of a “country manager” for China. The most ambitious young people—the ones who want to make a global impact—chafe at those restrictions, choosing to start their own companies or to climb the ranks at one of China’s tech juggernauts. Foreign firms are often left with mild-mannered managers or career salespeople helicoptered in from other countries, people who are more concerned with protecting their salary and stock options than with truly fighting to win the Chinese market. Put those relatively cautious managers up against gladiatorial entrepreneurs who cut their teeth in China’s competitive coliseum, and it’s always the gladiators who will emerge victorious.

  While foreign analysts continued to harp on the question of why American companies couldn’t win in China, Chinese companies were busy building better products. Weibo, a micro-blogging platform initially inspired by Twitter, was far faster to expand multimedia functionality and is now worth more than the American company. Didi, the ride-hailing company that duked it out with Uber, dramatically expanded its product offerings and gives more rides each day in China than Uber does across the entire world. Toutiao, a Chinese news platform often likened to BuzzFeed, uses advanced machine-learning algorithms to tailor its content for each user, boosting its valuation many multiples above the American website. Dismissing these companies as copycats relying on government protection in order to succeed blinds analysts to world-class innovation that is happening elsewhere.

  But the maturation of Ch
ina’s entrepreneurial ecosystem was about far more than competition with American giants. After companies like Alibaba, Baidu, and Tencent had proven how lucrative China’s internet markets could be, new waves of venture capital and talent began to pour into the industry. Markets were heating up, and the number of Chinese startups was growing exponentially. These startups may have taken inspiration from across the ocean, but their real competitors were other domestic companies, and the clashes were taking on all the intensity of a sibling rivalry.

  Battles with Silicon Valley may have created some of China’s homegrown internet Goliaths, but it was cutthroat Chinese domestic competition that forged a generation of gladiator entrepreneurs.

  ALL IS FAIR IN STARTUPS AND WAR

  Zhou Hongyi is the kind of guy who likes to pose for pictures with heavy artillery. His 12 million social media followers are regularly treated to pictures of Zhou posing next to cannons or impaling cell phones with a high-powered bow and arrow. For years, one wall of his office was adorned entirely with the shot-up sheets of paper used for handgun target practice. When his PR team submits a stock photo to media outlets, it’s sometimes a picture of Zhou dressed in army fatigues, smoke rising in the background and a machine gun leaning by his side.

  He is also the fiery founder of some of China’s most successful early internet companies. Zhou’s first startup sold to Yahoo!, which picked Zhou to head up China operations. Clashing endlessly with the Silicon Valley leadership, Zhou is rumored to have once thrown a chair out an office window during a shouting match. When I led Google China, I would invite Zhou to speak to our leadership team about the unique characteristics of the Chinese market. He took the opportunity to berate the American executives, telling them they were naive and knew nothing about what it took to compete in China. They would, he said, be better off just handing over control to a battle-hardened warrior like him. He later founded China’s leading web security software, Qihoo 360 (pronounced “chee-who”), and launched a browser whose logo was an exact copy of Internet Explorer’s but done in green.