I have been reading and sharing lots of news and insights into China and the country’s way of digital transformation recently. First, it’s simply exciting to see what’s happening in China when it comes to digital innovation. There’s a never ending stream of new products, services and, that’s most remarkable – since it is nowadays unique and bred locally – new digital use cases, life styles and ways of integrating technology into every day life.
But secondly, I do have my strong concerns when it comes to top notch digital innovation driven by a country that is an autocracy without a humanistic agenda. Here’s an example:
So let’s take a closer look at what is really going on, what drives technological development in China and how it relates to other markets. Namely the US and Europe.
Technology in China is growing like crazy and China is taking technological leadership role, especially in AI.
Everything runs on smartphones, mobile internet and platform services:
In China we see the next generation of money & payments:
E-Commerce… on a different scale:
That was 2017… here’s fresh data from 2018:
Simply a gigantic market, growing, growing, growing:
Yes, that’s from 2016. A nice and compact graphic though. And since then it has only been going north.
The impressive development is reflected in market capitalization – Chinese companies now stand for almost 50% of global biggest tech players
These growth examples already heavily resonate in impressive market & company KPIs. Mary Meeker has gathered some remarkable and unambiguous data in her latest 2018 internet trends report. Five years ago China ranked only 2 companies among the largest technology groups in the world. The US had 9.
Today, 11 of the 20 largest technology companies are located in the US – and the remaining nine in China. And alongside the rapid development the total value of the Chinese internet economy is already greater today than that of the American economy, according to Thomas Friedman.
The effect: China produces just much more data than anyone else
The sheer volume of data generated by Chinese users is absolutely impressive. Imagine how much data Facebook collects from its users and how this data drives the company’s algorithms. Now comes the supercharging component: China’s WeChat app is basically Facebook, Twitter, Uber, and your online bank account in one. They have more than 1 billion monthly active users (MAU), while the second most used app, Tencent’s QQ, has MAU of almost 700 million.
Altogether there are about four times as many mobile phone users in China vs. the US, about three times more vs. Europe. And Chinese users spend almost 50 times as much on mobile phone payments. In 2017 there were already north of 500mn mobile payment users in China. The entire volume of mobile payment transactions reached almost 13 trillion US dollars in the 10 months from January to October 2017. The data associated with these transactions is “rocket fuel” for AI and can be exclusively harvested by local technology giants. And the lack of strongly enforced data protection from an end-user perspective provides even larger amounts of data and even more valuable data.
A key advantage is the wealth of data on each individual user
It is not only the sheer size of the population and the sheer size of the data pool just described. Much more important, however, is the wealth of data on each individual Chinese user who can be digitally exploited for an algorithm. There is a much higher willingness to trade private data for concrete services. The payment stats are impressive, but the fact that Chinese people today use mobile phone apps for almost all everyday things – such as grocery shopping, doctor’s appointments, electricity bills or small loans – is an invaluable advantage. In contrast, Western companies usually only know what they are doing about their users via Google, YouTube, Facebook or Amazon.
Chinese users are very willing to trade their private data for concrete services and other benefits. Users in the United States and much more so in Europe, on the other hand, attach more importance to private data protection. As a result, China is already the technology leader in many areas. A trip from China to the USA or Europe may sometimes feel like a trip back in time. The entire Chinese life has become digitally-injected in a way not imaginable in the US or Europe.
Today it is fair to say that China, as once termed by The Economist, can be regarded as the Saudi Arabia of data. When it comes to data privacy, protections are on the rise in China, but they are still weaker than those in the US and much weaker than those in Europe. This puts data aggregators in a strong position in what they can do with what they collect.
Autocratic structures pave the digital road a little ‘better’ than elsewhere
China has some fundamental advantages over the West in building a robust AI infrastructure. And those are rooted in causes that particularly favor authoritarian states over democratic ones. The fact that in a country like China a decisive digital agenda can be planned and carried out in an unprecedented command & control style, is a strong asset for impact, but not the only one.
When it is combined with a clean-sheet situation and no burdening legacy structures like traditional banking systems, traditional credit scoring systems, etc., exceptional traction and opportunity can unfold. Add the fact that the government can access personal data for reasons of public or national security without the same legal constraints a democracy would face. And voilà!
In contrast to the West, the Chinese government follows a proactive and agile approach towards technology. They are closely observing key technologies and then they are very quick to implement them if they see fit. It is a techno-utilitarian approach, in letting technologies launch earlier and then figuring out if they need to be regulated later. It might work out really well for AI. Since in AI it usually works like: launch services, collect the data, use for fast and iterative service improvements and thus, service gets better and better over time.
With all of this, spurred by the people’s mindset of extremely openly embracing digital technology and progress, you have the digital powerhouse that is likely going to reign the world.
AI can not only thrive better in an autocratic environment – it also pays off with accelerating returns and strengthen the driving political system
In the future, artificial intelligence will super-charge the impact of both large tech companies and social media platforms, and offer autocratically minded leaders new tools for entrenching their power. Big Data and fast computing power allow information to flow very quickly to the center. And autocratic regimes thrive on centralized power. The sudden ability to monitor and assess subjects 24/7 is a boon for top-down power, and a blow to the more chaotic and dispersed bottom.
Artificial intelligence powered tools are proving to be a new advantage to autocratic governments in that they make it easier for authorities to track what is going on, influence the flow of information, and marginalize dissident voices. At the same time it is easier through social media to find extreme voices and to exploit societal divisions, and harder to bring people together in a common purpose. And of course, think of the planned and already launching social credit systems by which the government monitors its citizens and assigns them a “score” according to their behavior.
Strong lever on and influence over tech companies puts China in a position to push and harvest AI much better compared to democracies
The relationship between Chinas government and its largest companies pretty much follows a single and simple rule: don’t undermine the state! This helps the country specifically to play out strongly in the era of AI. Private-sector companies at the cutting edge of AI innovation feel obliged to keep the national priorities in mind.
Under president Xi’s leadership, Communist Party committees within companies have expanded. And in November 2017, China proclaimed Baidu, Alibaba, Tencent, and iFlytek (voice-recognition software company), as the founding members of its “AI National Team”. The logic: if they adhere, invest and push forward, then the government will ensure that the breakthroughs have a market not just in China, but beyond. This is all part of China’s goal to become the world’s AI superpower until 2030. A goal that receives funding, consideration and prioritization that is unprecedented in the rest of the world.
And for those players willing to participate, China’s government is throwing in significant financial weight and trying to open doors and move away road blocks wherever possible. That’s why the best way for tech companies to thrive in China is to make themselves useful to the state.
The ‘China-Flywheel’ for digital world domination
Putting all these aspects into a big picture, it looks to me like this. A flywheel that is fed by its own success, accelerating and ever accelerating for digital world domination:
China vs. US vs. Europe – how does it compare?
Let’s compare the three markets / economic areas in some key criteria that determine ease of play in digital technology utilization:
That does not look so good for either the US and even much less Europe. The strength of the US lies in its visionary technological inventions and, compared to Europe, a more innovation friendly environment and mindset while having a far more homogeneous home market.
Europe seems completely lost in the middle between China and the US. Especially in Germany, we still seem to prefer to be working on the exhaustion of the last optimizations in classical engineering disciplines rather than trying out groundbreaking new digital projects. And in cases of ground-braking innovation there is no shortage on examples of poor subsequent implementation.
German obsession with incremental improvement vs. big shots
That reaches from inventing the maglev train (but not implementing it), breakthrough research in genetic engineering (but subsequently enacting strict laws that do not even allow to produce insulin on a bacterial basis domestically) or being a front-runner in designing electronic health cards and services (that until today store only basic data and do not realize e.g. digital prescriptions).
When it comes to e-scooters (which have not arrived yet in the country), Germany for example will have by far the strictest regulation in the world, which is why many internationally active suppliers are likely to avoid Germany for the time being, as it is too costly to adapt the system and the scooters for Germany.
China in a different ball park regarding government support & funding
Where this attitude gets really problematic is when it comes to government support and fostering of basic research and public / private cooperation. According to a recently published AI strategy paper, the German government intends to enable “internationally attractive and competitive working conditions” for research in artificial intelligence. On closer inspection, however, it becomes clear how financially insignificant and timid the essay of this project is. The financial framework is three billion euros over six years. This is really puny when you consider that in 2018 alone the country invested ca. EUR 14 billion in transport infrastructure alone. Meanwhile China set the goal of spending $150 billion to achieve global leadership in this high-tech area by 2030. Different ball park…
Data privacy – boon and bane at the same time
To be honest, I struggle with the data privacy topic. There’s two hearts beating in my chest. I am unhappy with the degree of exploitation of user data that is going on and how users are left out of the equation in terms of fair participation in the gigantic profits that are fueled by their data. On the other hand it cannot be denied how local or regional technological progress, growth and entrepreneurial pace and opportunity is hampered by strict privacy laws and regulations.
As long as there are strongly deviating ways of handling, regulating and enforcing data privacy, those players who value and adhere to it, have economic disadvantages. On the level of the global technology arms race this circumstance results in Europe falling behind in it because of the strong emphasis on data protection.
Europe, strongly driven by German ambitions, has introduced the General Data Protection Regulation (GDPR), which has received kudos and much criticism at the same time (depends on individual starting point and world view). With GDPR, you could argue that Europe is making life particularly difficult for itself and is building even greater hurdles to establish itself in the league of leading technology regions. On the other hand, don’t you feel the reflex, too, that European humanistic values of course need to be in the center of our considerations?
China and US on a completely different path regarding data privacy regulations
The US continues to grapple with implementing proper data privacy laws and as long as that is the case, big data and AI innovation and business can spur on the back of weak consumer protection. In contrast, China began implementing its own cyber security law in 2017, which includes punishment for the illegal usage and sales of personal data. However, while in Europe the edge is clearly on protecting individual rights and rein in the actions of large corporations on the internet, the focus in China seems to be on ensuring competitiveness for Chinese corporations and shielding data transmission to locations outside of China for all data that is gathered or produced in the country. It explicitly centers around economic, technological or scientific data that could pose a threat to national security or the public interest (with a broad interpretation of what that might be).
Playing AI right/successfully in an authoritarian context is likely turning into a significant threat for the justification of Western liberal democracies
When you think everything talked about here, one step further, it becomes very obvious that AI and related technological developments pose a big danger for our liberal democracy. In my view, it is obvious that a system competition has begun, spurred by the AI arms race.
In the past, Western prosperity and legitimacy has been achieved through skillful use of technology and efficiency in the organization of the economy and society. In contrast, the socialist countries of Eastern Europe, the Soviet Union and other socialist systems in the world have in turn perished primarily because of their inability to create prosperity for all. Only for this reason did their citizens become all the more aware of the bigwig extravaganza, a democratic deficit and deprivation of liberty.
So far it seemed unthinkable that the West itself could lose the efficiency competition at any time. But this is exactly what it looks like at the moment. China in particular is proving that an autocratic one-party system can overtake pluralistic democracies. China’s digital economy has already outstripped Europe.
In the path of digital transformation and the development of stronger and more capable AI capabilities in the coming decades, China has the best chance of becoming the world’s most important technology nation. The situation is similar for other key technologies.
The current climate of trade wars and intensifying conflicts between the US and China could actually make things a lot worse, respectively even accelerate the development. The more China encounters trade barriers, the more likely it is that it will concentrate on its home market and its technology leadership. In this course, many Western companies could lose sight of the Chinese market – and thus miss the boat when it comes to the extent to which global cutting-edge technology can be used.
Democracy needs to prove its appeal in the efficiency & prosperity competition
From a European perspective (my perspective), we are not only losing the most important markets of the future. In doing so, we are also allowing democracy as such to be endangered. Once it has been proven that autocracies are able to and actually make a more comfortable life possible than democracies, and when it becomes obvious to everyone, then democracy loses one of its most important arguments.
With the West and China locked in a race to master artificial intelligence, but also quantum computing, biotech/bio-engineering and robotics (and the list could be continued), mastery of any or all of these technologies is a key to geopolitical and economic power in the coming decades.
If it is the autocrats who succeed and guarantee a better standard of living, democracy will sooner or later collapse under its own weight. Democracies, like buildings, can hollow out from the inside. Hardly anything erodes a state as effectively as a lack of skill in organizing the foundations of its citizens’ lives.
Not a nice outlook, in my view.
ANDRÉ CRAMER 
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