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China’s Little Giants are the latest weapon in the US technology war

 


(Bloomberg)-In China today, Alibaba Group Holding Ltd. Giants like Tencent Holdings Ltd. and Tencent Holdings Ltd. are not endorsed, but small giants are on the rise.

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This is the designation of a new generation of startups selected under an ambitious government program aimed at fostering a technology industry that can compete with Silicon Valley. These often ambiguous companies show that they are doing something innovative and unique, targeting strategically important sectors such as robotics, quantum computing, and semiconductors.

Wu Gansha has earned the title of Little Giant in a self-driving startup as a result of a government review of technology. This allowed the Beijing company Uisee to further increase its credibility and economic benefits. Last year, it raised more than 1 billion yuan ($ 157 million), including funding from a state fund. It will also be a unicorn with a valuation of at least $ 1 billion.

Wu said it was an honor to wear a huge little label. The essence of the project is that a company must have expertise that no other company has.

The program has been around for over a decade, but it has gained new attention after Beijing has begun cracking down on big companies such as Alibaba and Tencent. The little giant label has become an important measure of government approval. This is a signal to investors and employees that the company is isolated from regulatory penalties. President Xi Jinping has given this program a personal blessing.

“This helps startups in many ways. It’s a grant. It’s a grant. It’s an honor. It’s a sign of approval,” said Lee Kai-Fu, founding managing director of venture company Sinovation.

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This program is key to the Communist Party’s ambitious strategy to relocate the country’s technology industry. For 20 years, China has largely followed the Silicon Valley model, allowing entrepreneurs to pursue ambition with little government oversight. This is Alibaba, an e-commerce pioneer, Tencent, a social media giant, and ByteDance Ltd, the creator of the hit TikTok short video app. It led to great success.

However, in a series of regulatory measures over the past year, Beijing has revealed that the technology industry needs to be reorganized to comply with government priorities. Alibaba and Tencent were soon forced to eliminate anti-competitive practices, but gaming companies had to limit minors to three hours of online play per week. In a broader sense, the government has shown that softer Internet services are not endorsed.

Instead, Beijing aims to shift resources to strategically important technologies such as chips and enterprise software. Since 2019, the Ministry of Industry and Information Technology has nominated 4,762 small giants, many of whom belong to the semiconductor, mechanical and pharmaceutical industries. This designation is usually accompanied by favorable incentives from the central government or state authorities, such as tax cuts, generous lending, and favorable recruitment policies.

The country is trying to promote more hardcore technology, said Yipin Ng, founding partner of Yunqi Partners, a venture fund investing in small giants. In that sense, this is more in line with what they are trying to push to make China more competitive.

Governments from the United States to Africa have established programs to support SMEs, but China’s efforts have diminished them in terms of scale, resources, and ambition. Since Mao, the country’s most powerful leader, Xi has launched a dozen programs that spend trillions of dollars in bulk to pursue economic strength, social stability and technological independence.

The US trade war has solidified the Communist Party’s determination to build a self-sufficient industry. The Donald Trump administration is Huawei Technologies Co. When blacklisting national champions such as and Semiconductor Manufacturing International Corp., the country’s vulnerabilities were revealed.

Read how Beijing’s crackdown unfolded over the year

The concept of a small giant dates back to at least 2005, when the local government of Hunan Province enacted policies to support small and medium-sized enterprises. The powerful MIIT of the central government has approved a Hunan province campaign that includes land subsidies and financial support as a model for developing the private sector. Local governments like Tianjin have launched their own initiatives.

The central government began to seriously promote the program in 2018, when there was a trade war. MIIT has announced plans to create about 600 little giants to develop core technologies. The procedure for winning the designation was designed to promote competition and identify the most promising companies.

Candidates apply in a 6-page form detailing their financial position, number of patents, and research findings. In the first round of selection, each state was able to nominate up to 12 companies. In the three high-tech hub countries of Beijing, Shenzhen and Shanghai, a total of only 17 candidates were assigned.

Guan Yaxin, Chief Operating Officer of Beijing-based ForwardX Robotics, has proven innovation and has 121 patents worldwide, including 25 in the United States, making the process relatively smooth. I said there is.

This government approval is very helpful when I grow my business. Clients understand that we are not just a random startup.

Since then, MIIT has expanded its program to thousands of companies, with about 1,000 small-priority giants at the top of the hierarchy. Members of this rare club, including Wus Uisee, receive funding directly from the central government. In January, the Treasury secured at least 10 billion yuan to fund SMEs until 2025, and the Lions directly funded research on priority startups. The goal is to create 10,000 little giants by 2025.

Barry Naughton, a professor and Chinese economics scholar at the University of California, San Diego, said it was very clear that this was a choice of companies that were highly dependent on China’s unique industrial policies and needs. They were partially chosen because they are good companies, but an equally important criterion is that they meet the urgent policy needs of the current government.

There is a considerable risk. The success of China’s technology industry over the last decade has come from giving entrepreneurs such as Alibaba Jack Ma and Byte Dances Zhang Yiming a free rein to build their business. Reversing the model to focus on government priorities risks waste and failure, Norton said.

These are small businesses that are being nurtured because they have the potential to become alternative suppliers. How do you grow it? You throw money at them, he said.

The little giant has become a popular target for venture capitalists. Many venture capitalists lost money in portfolio companies during the crackdown on Beijing. One VC said some start-ups in the program were able to raise money in the last six months, raising their valuations by 50% to 75%. Another VC is reportedly investing only in companies identified by the government as small giants.

Guizhou Changtong Electric Ltd. Co-founder Zhang Hui applied for the program in Guizhou in 2020 and received this award last year based on his company’s power equipment technology. The startup soon landed more than 100 million yuan from state-sponsored funds, and other investors are knocking on his door to provide additional capital.

Of course, he said venture investors would chase little giants for investment. It would be a surprise if they didn’t.

Despite the crackdown, venture investment in China set a record last year. According to research firm Preqin, transaction value increased by about 50% in 2021 to $ 130.6 billion.

Read how venture investment in China reached a record last year

EcoFlow Inc, a portable battery startup in Shenzhen. Announced a Sequoia-led funding of 100 million yuan for acquiring a small giant label from MIIT. The 4-year-old company is currently planning an initial public offering in a local city within three years.

The government is also facilitating the disclosure of these start-ups. This is another incentive for entrepreneurs and venture investors. Last year, China set up a dedicated stock exchange in Beijing to help small businesses raise money.

Guan of ForwardX Robotics pointed out that even if the founder participates in such a government program, he will continue to control the company. Her company, which manufactures mobile robots used in the manufacturing and logistics industries, has about 300 employees and plans to expand to Japan and the United States.

She said many of them are now very small compared to multinationals. But the government thinks they could one day become real giants.

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