Monday, August 7, 2017

Dancing with Gorillas in the Land of the Dragon

- How Chinese Startups can Partner Effectively with Large Multinationals

By Associate Professor of International Business & Strategy Shameen Prashantham

Startups in emerging economies like China are increasingly ambitious in the scope and scale of the technological innovations they seek. However, realizing the dream of achieving genuine high-level innovation will not be easy for startups, because China, like most emerging markets, has significant limitations.

First, sophisticated entrepreneurial ecosystems have only begun to emerge recently – and even these are scarce. Despite growing access to venture capital funds in China and India, the competition is fierce, and it is not easy for ventures to stand out from the crowd.

Second, sophisticated technological expertise is not easily accessible locally. Even though China has some very strong domestic companies in e-commerce, these companies are usually successful because of major innovations in their business model rather than in their technology per se.

Third, they struggle with go-to-market strategies, especially when targeting enterprise customers in B2B markets.

Who then can help Chinese startups to realize their ambitions of achieving higher levels of technological innovation by overcoming these obstacles? My research in China for the past four years, which builds on earlier work on what I call “dancing with gorillas” – startups partnering with largely multinationals – undertaken with Julian Birkinshaw and others, suggests that foreign multinational corporations constitute an important, but often overlooked, potential partner.

Why would multinationals want to partner with Chinese startups?

Of course, an obvious question is: why would large multinationals with a global reputation want to partner with startups in China? There are three important reasons.

The first applies to all markets: multinationals have come to realize that they cannot be self-sufficient in innovation – and that they often need to collaborate with other companies, especially startups, to access novel ideas and technology. To illustrate, Intel have introduced “Maker Labs” that support startups in many cities of China including Beijing, Hangzhou, Shanghai and Shenzen.

The second applies specifically to emerging markets: multinationals have begun to search for new ideas and innovation in emerging markets such as China, not just in advanced economies. To illustrate, GE has developed innovations in emerging market like China and India (e.g. low-cost medical devices) and then sold these in advanced markets. For this reason, Chinese startups with frugal innovation-based solutions in particular will be increasingly attractive partners to multinationals.

The third is specific to China: multinationals are constantly seeking to improve their performance in China. Many have been struggling in the face of growing competition from domestic companies. One of the ways in which multinationals may try to improve their reputation with local stakeholders is to align their strategies with the priorities of the Chinese government. Unsurprisingly, many multinational corporations like IBM and Microsoft have introduced their startup engagement programs in China.

How can multinationals help innovative Chinese startups to achieve their dreams?

Consistent with my research in other countries as well, foreign multinationals can have useful benefits for Chinese startups that help them tackle each of the obstacles identified above.

First, in terms of compensating for less sophisticated entrepreneurial ecosystems, partnering with a large multinational can be an important source of legitimacy that then allows a new venture to get the attention of potential funders more easily. Legitimacy is conferred on promising startups by targeted efforts by multinationals to showcase them to potential funders. Microsoft’s accelerator within their research facility in Zhongguancun (a district of Beijing dubbed the “Silicon Valley of China”) has graduated over 100 start-ups that have collectively raised funding of nearly $1 billion serving over 500 million customers and creating more than 10,000 jobs.

Second, in terms of accessing technological expertise, large multinationals represent an important source of learning for Chinese startups. Multinationals like Amazon, IBM, Microsoft, Qualcomm and SAP are all at the cutting edge of their respective technological areas. Many of these multinationals have research labs in China which innovative startups may be able to access for further refinement of their products.

Third, in terms of finding appropriate go-to-market strategies, the multinational’s distribution channels can be a potent source of trade leads which new ventures can pursue, especially when targeting enterprise customers in B2B markets. To illustrate, startups in IBM’s Global Entrepreneur Program gain valuable sales and marketing support from relevant IBM teams for solutions that complementary to the multinational’s technologies.

Lessons for startups

Based on my research in China for the past four years I have identified four important lessons that startups in China should pay attention to in order to succeed in partnering with large multinationals.

Lesson #1: Recognize the opportunity.

Startups need to be alert in recognizing opportunities for startups to cultivate win-win relationships with multinationals that are especially relevant to China. The following are three important opportunities that are especially relevant in China:

  • Catering to Chinese policy-induced demand. Local startups may have their ear closer to the ground and sense opportunities stemming from policy measures – such as incentives for adopting certain technologies — more readily than large multinationals operating in China. But startups can rarely take on large-scale opportunities by themselves. There is thus scope for a win-win collaboration, as illustrated by the case of Chinajey, an ERP technology startup that worked with SAP’s attention by identifying an opportunity to participate in smart manufacturing initiatives in Zhejiang province where SMEs were subsidized to adopt new technologies.
  • Plugging gaps in China-specific solutions. In some cases, the multinational may have most but not all of the building blocks required to deliver a solution that will be effective in the Chinese context. Consider the case of IBM’s effort to develop cloud-based logistics solutions for the seafood industry. This involved ensuring that trucks were not only kept at a low temperature but also that they were secured in a way that could be remotely controlled. Wuxi-based startup Delian Technologies which had developed precisely such a locking device was able to have its offering incorporated into IBM’s pilot logistics solution.
  • Providing China-based success stories. Multinationals seek successful partnering stories in China – an important market for many companies – that they can showcase. Gridsum, a technology venture established in Zhongguancun, built innovative products on Microsoft platform technology that the multinational was then able to demonstrate to other local Chinese companies. Indeed, Microsoft’s corporate headquarters in the US eventually paid attention to this startup, and Gridsum’s CEO Qi Guosheng was invited to speak at an event in Beijing with Steve Ballmer, then CEO of Microsoft.

Lesson #2: Identify the appropriate MNC partner.

The choice of the partner needs to “fit” with the opportunity.

  • In terms of compatibility of technological expertise, Chinajey’s focus on ERP solutions made them a suitable partner for SAP but necessarily other partners. Similarly, a startup with a focus on robotics technology such as Slamtech has had a successful relationship with Intel.
  • In terms of compatibility of partnering approaches, some multinationals will provide excellent partnering support (without investing) whereas others may have more corporate investing opportunities. Beijing-based Testin worked with Microsoft as an incubator and with IBM as a partner – since IBM does not have accelerators but rather a partner program with activities like smartcamps.
  • In terms of compatibility of geographic focus, while most multinationals are very interested in China, there are some exceptions at the present time. For instance, Google’s operations in China are very small compared and would be less attractive as a partner than those with a stronger China presence.

Lesson #3: Focus on a clear win.

Even after starting a relationship with a multinational, one of the great challenges for startups is to get the attention of the key people within that company. In fact, startups are often competing with each other for multinational managers’ attention. To increasing their chances of attracting multinationals’ attention, startups should try to come up with a clear and tangible outcome – which is related to some priority of the multinational. In the early stages of its relationship with Microsoft, Gridsum developed an innovative application on Silverlight when Microsoft first introduced this technology. This was a clear, tangible outcome which Microsoft’s Silverlight sales team could promote heavily in China.

Lesson #4: Adjust your approach depending on your location.

In a vast country like China, not all new ventures are located in places like Zhongguancun that have a reputation for technology – which makes it easier to forge partnerships with large MNCs. New ventures in other locations should be alert to nonobvious opportunities. For instance, a few new ventures in Ningbo were able to leverage the city’s Smart City initiative – which isn’t obviously a platform for multinational-startup collaboration – to form partnerships with large MNCs such as IBM, which had established a local research facility to develop solutions for Ningbo’s smart logistics program. This created the opportunity to establish a new venture called Ningbo Smarter Logistics that worked closely with IBM. And more importantly, this entity could also act as a bridge between the multinational and other local start-ups.

As China makes purposeful strides in seeking genuine technological innovation, partnering with multinationals is one important strategy that could help ambitious startups up their game and fulfil their dreams in a manner that is a win-win, both for the startup and the “gorilla”.

This column was first published by, from a version originally published by Harvard Business Review China.

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