The untold story of China`s Silicon Valley

When thinking about tech and entrepreneurship in the United States, we immediately think of Silicon Valley, a region in the southern part of the San Francisco Bay Area. China, in some way, also has its own Silicon Valley, an area that has developed into a global powerhouse in technological innovation, and that has been instrumental to China`s economic development.

The area is called Zhongguancun and is (primarily) located in the North-Western district of Haidian, Beijing. It is home to some of China`s largest technology enterprises, around 40% of China`s unicorn companies, startups valued over 1bn USD, and over 300 regional headquarters and R&D centers of multinational corporations, generating total revenues of over 800 billion USD per year.

Zhongguancun has seen a remarkable transformation from an area in the outskirts of Beijing to what it is today. Working in Zhongguancun for 1.5 years I want to tell the untold story of Zhongguancun, and look into the factors that contributed to Zhongguancun`s success, as well as its challenges going forward.

Zhongguancun`s Haidian Skyline in April 2020

Until 1978: Emergence as Beijing`s cultural and educational district

Before China`s reform and opening up under the leadership of Deng Xiaoping, Zhongguancun primarily served as the capital`s designated cultural and educational district. Already in the 1970s, the region boasted one of the highest concentrations of research universities and research centers in Asia. Besides, it is in proximity to Tsinghua University, China`s premier institution for engineering, and Peking University, China`s leading institution for humanities, as well as the Chinese Academy of Sciences, China`s most notable research institute. Since 2016, the Academy has even been ranked as the number one research institute in the world by Nature Research, one of the most important scientific magazine publishers globally, underlining its key position in China`s R&D ecosystem.

Establishment of first private sector enterprises (1978 to 1988)

With the process of China`s economic reforms, China`s Supreme Leader Deng Xiaoping declared the modernization of science and technology as one of the pillars of his Four Modernization policies to catch up with the West after decades of isolation. In that process, Chen Chunxian, Member of the Chinese Academy of Sciences, visited (the real) Silicon Valley and was inspired to establish a technology hub in Zhongguancun. Together with a group of researchers, he founded the first institution to provide market and business access to scientific and technological personnel. In that course, more and more private sector institutions emerged, including several international IT companies that are well known today. One such example is Lenovo, which became one of the largest technology companies in the world with revenues of over 51bn USD in 2019 after acquiring IBM`s personal computer business in 2005.

Simultaneously, Zhongguancun became famous for its electronics stores, and service-related businesses, similar to the markets that can today be found in Shenzhen and other areas of China. Thousands of stalls in prominent hardware markets such as Hailong Market, Guigu Market, Taipingyang Market, Dinghao Market, and Kemao Market, attracted students and people from all over the country.

By 1987, Zhongguancun generated revenues of 900 million RMB, boasting 148 science and technology enterprises, with more than 5,000 employees.

Zhongguancun in the 1980s1

Growth in national relevance (1988 – 1999)

After Zhongguancun`s initial successes, the central government declared Zhongguancun a High-Technology Industry Development Experimental Zone, covering an area of 100 square km, and implementing additional policies to accelerate the development of the region. Among the commercial successes during that time were the establishment of China Potevio, the first mobile phone production line in China in 1991, and Sohu, China`s first large-scale classification search engine (still operating today) in 1998. The late 1990s also saw the foundation of JD.com, one of the largest e-commerce companies in China, generating 576.888bn RMB (over 80bn USD) in revenue in 2019. JD`s origins can be traced back to a small retail shop its Founder Richard Liu operated in the Hailong Market in the 1990s.

By 1999, Zhongguancun counted 6,690 high-tech enterprises, with 243,000 employees, and total revenues of 104.9 billion RMB.

Richard Liu`s shop in Hailong Market2

Globalization, and the emergence of the internet industry (1999 – 2009)

Relatively unimpacted by the dot-com bubble in the Western world, Zhongguancun continued to develop rapidly in the 2000s. The region finally became connected to Beijing`s subway system in 2008, bringing Zhongguancun, much closer to other economically and politically essential areas in the city.

Zhongguancun gets connected to Beijing`s subway system3

After the State Council decided in 1999 to speed up the construction of Zhongguancun Science Park, it opened a liaison office in Silicon Valley in July 2002. As a result, a growing number of international companies established their research centers in Zhongguancun including Google, Intel, Oracle, IBM, Microsoft and Sony.

Total economic output continued to expand, and revenues exceeded one trillion RMB in 2008.

Zhongguancun becomes a zone of global influence

With the decision of the state council to approve the construction of the Zhongguancun National Demonstration Zone in 2009, the region experienced an additional boost for its development of a high-tech ecosystem. In the years that followed, some of today’s most renowned technology companies emerged.

Established in 2010, Xiaomi has seen a spectacular rise to stand shoulder-to-shoulder with the leading consumer electronics companies in the world, making it the youngest Fortune Global 500 company with a revenue of 205 billion RMB (around 29bn USD) in 2019. Notably, its cost-effective smartphones have been successful across the world, and especially in emerging economies including India.

In the 2010s, Zhongguancun saw the rise of some of the largest social media companies in the country. Bytedance, the most-valuable startup in the world valued around 100bn USD, holds TikTok and Toutiao, with hundreds of millions of daily active users. Kuaishou, a similar video-sharing app, counts over 200 million daily active users.

Established in 2012, Didi Chuxing became the leading ride-hailing company in China, and won a landmark battle against Uber China, taking over the company in June 2016. Over the years, the company acquired stakes in other leading companies in the industry, including Grab (Singapore), Lyft (US), Ola (India), Bolt (EU), and Careem (UAE).

Backed by the Chinese government’s ambition to become leader in the development of artificial intelligence (AI), some of the leading AI companies in China emerged in Zhongguancun in the mid-2010s, including software and algorithm-focused companies SenseTime (valued 6.75bn USD) and Megvii (valued 4bn USD) and the AI chip companies Horizon Robotics (valued 3bn USD) and Cambricon (valued 2.5 billion USD). Interestingly, even though SenseTime`s headquarters officially are based in Hong Kong and Shanghai, it is center of business and largest number of employees, around 800 people, are based in Zhongguancun. By 2019, 28 of China`s 50 AI unicorns were located in Beijing, making Zhongguancun one of the densest areas of AI development in the world.

What is ahead for Zhongguancun

Zhongguancun`s ability to attract top talent, scale some of the largest technology companies in the world, and convince leading multinational companies to establish their research centers in the region, has led some to call it “China`s Silicon Valley.” Although Shenzhen, a city in the South of China with over 23 million inhabitants is often also titled the Silicon Valley of China, its focus lies primarily on hardware innovation, whereas Zhongguancun represents China`s core region for internet, software and AI innovation.

The enormous growth of the region has had a massive impact on rental costs and housing. Today, Zhongguancun`s core region in the South of Haidian became one of the most costly areas to live as well as rent office space in Beijing, pushing out most of the electronics stores from the region. To accommodate the growth of its enterprises, Zhongguancun`s administration expanded the area`s footprint continuously and today operates seven technology parks, including Haidian Park, Fengtai Park, Chanpink Park, Electronic City (Chaoyang), Yizhuang Park, Desheng Park, and Jianxiang Park throughout the city. With the continuous growth of Zhongguancun`s companies, it can be expected that some of them will decide to relocate away from its center in Haidian, and to establish offices outside the city, following the recent examples of Didi, Lenovo, and Xiaomi. Besides, there are government attempts to lure companies outside the city. The unveiling of the IC Park in 2018, for example, convinced dozens of integrated circuit enterprises to move out of the city’s boundaries.

Map of Zhongguancun4

One can expect that Zhongguancun will experience a rise in its significance in the future, because of the unique interplay of several aspects:

1. Talent from top technology companies and research institutions: In 2018 Zhongguancun was home to half of China`s unicorns. In addition, over 40 universities are located in Haidian Park, including Tsinghua and Peking University, 200 research institutes, and national laboratories.
2. Significant governmental support: The government is continuously investing in infrastructure, and attracting of top talent from overseas (Zhongguancun operates 10 liaison offices outside China).
3. Access to vast amounts of capital: An active presence of top VC investors such as Zhenfund, Sequoia Capital China, Hillhouse Capital, GSR Ventures, and IDG Capital ensures that companies have the financial ability, and network to quickly scale.
4. Entrepreneurial and risk-taking culture: Employees are willing to take risks, and if an opportunity does not work out, they can find work at another company, very close to where they previously worked.
5. Work ethics: Employees are used to working on the weekends as well as more than twelve hours per day in Zhongguancun`s sprawling tech scene. In addition, employees are enormously flexible and resilient, allowing companies to start, cancel, and merge new initiatives incredibly fast, which is key to adapt to the quickly changing market conditions in the highly competitive and vast Chinese market.

Venture-capital deal value in China, $bn5

What remains open are the following aspects:

1. Internationalization: It remains seen if the internationalization of Chinese companies will continue, given calls for protectionist policies in several areas in the world and intensifying regulations on data privacy and technology transfer. For companies that are already international, that could mean severe short-term repercussions.
2. Semiconductor Development: To truly become a “Silicon” Valley, Zhongguancun has to prove that it can create relevant players in the global semiconductor industry, which remains a key challenge for the Chinese government. In 2018, China imported semiconductors worth 310 billion USD, and has declared higher degree self-sufficiency as a key priority. As the industry is capital intensive and requires a special set of skills, experience, and specialized equipment, this mission will however be more difficult to achieve than the development of the internet and software industries.
3. Bursting Unicorn Bubble: After a decade of rapid growth in venture capital deal volumes in China, creating 82 unicorn companies in Beijing, compared to northern California with a little over 100 companies, it will be seen whether these companies can deliver to their promises. According to Xu Yinghong, Chairman of Tsinghua Holding, one of the leading technology investment groups in the country, around 50% of unicorns could be at risk to go bankrupt.

Sources

1. Dong, X., Hu, Y., Yin, W., & Kuo, E. (2019). Zhongguancun Model: Driving the Dual Engines of Science & Technology and Capital.
2. JD.com. (2020, May 3). Corporate Website JD.com. Retrieved from https://corporate.jd.com/ourHistory
3. The Economist. (2020, January 9). Life is getting harder for foreign VCs in China. The Economist.
4. Tung, H. (2017, October 24). Why More Trains May Lead to More Unicorns in China.
5. Zhongguancun Science Park. (2020, May 3). Website Zhongguancun Science Park. Retrieved from https://www.chinadaily.com.cn/m/beijing/zhongguancun/2011-11/14/content_14089674.htm