Why Europe is losing out in China

One of the most amazing experiences of visiting Beijing is to feel the giant vibrations the city offers. After work, Beijing is also exciting, but in this article the definition of vibrations is the economic dynamism and growth that can be found in the Chinese capital. I am especially referring to the district of Zhongguancun, China’s answer to Silicon Valley.

The area and the development of Beijing is by no means a new invention. But the current vibrations originate from the growth explosion at existing companies and the growing number of new software start-ups. This means that Zhongguancun has become one of the world’s most important IT and software “valleys” and it is still moving forward. Also, the New Third Board OTC listing for start-ups is gaining pace, with around 800 companies listing so far. I see this as a further indication of growing investment opportunities.

But when I get off the plane in Europe, the dynamic vibrations found in Beijing seem as far away as an unreal dream. There are, indeed, some time zones in between Beijing and Europe, but I feel a silence in meetings in Europe when it comes to the definition of the right investment or business opportunities in China. In Europe I often feel that China is considered just a outsourcing destination that has lost its economic importance. The growth is slowing and there are problems in the property market throughout the country. I can tell that an area like Zhongguancun is simply not on the radar in Europe. Just as a non-representative test I visited the online version of the leading newspaper in a small, but export-intensive European country. I searched for “Zhongguancun” and the result was one article written about 15 years ago. This is by no means representative, and still it tells us something.

I judge this as particularly worrying because the Europeans are leaving very good opportunities to others and therefore lose out in China. This concern embraces European exports to China but even more so European investments in Chinese companies covering the domestic market. In Europe, we think very rigorously about exports and many conversations about opportunities in China turn into how to export European products to the Middle Kingdom. The focus on exporting goods (and some know-how) glosses over another opportunity – direct investments in China’s booming sectors.

That is one of several reasons why American and Asian investors seize on more opportunities than European-based investors. A look on the statistics supports that view. The growth rate of investments into China is relatively stable. However, investments into China from Europe fell by 22 percent during the first five months of this year compared to the same period last year. It fits into the picture that Europeans are not progressive enough to find opportunities in China.

But there are a number of areas in which Europeans could maximize their opportunities. The dynamic vibrations found in Zhongguancun are a great example of excellent investment opportunities. The growth explosion is apparent within the field of software for mobile phones. Here the 700 million Chinese users of smartphones are of interest, and this number is still rising at a breakneck speed. The market provides endless possibilities for apps, games and all sorts of other functions. The right app can get 30 to 40 million users in six to 12 months. Of course this will lead to a huge boom in software programming for smartphones. Europe can only take part in this adventure to a very limited extent through exports, as all software is developed and programmed in accordance with Chinese conditions by Chinese programmers and developers. The only way for Europe to participate in this is via direct investments, either as an investor or through the acquisition of Chinese software companies.

The boom in Zhongguancun is on track and traveling at a high speed, so what can Europeans contribute? One fundamental asset is obviously capital for start-ups or very young companies. And there are risk-seeking investors in Europe who are ready to back young Chinese companies. Another issue that I think should be discussed openly is the quality and qualifications of the 8 million students coming out of Chinese universities every year. A growing number are searching for a golden future within the start-up world and many of them are tech savvy. A risk is that the foundation for developing leadership and management skills is lacking. I have noticed that some Chinese start-ups have difficulties attracting qualified staff. One reason is a natural tendency among many candidates to choose large companies for the safety. Good candidates also value their future manager, but if the management skills are lacking, this certainly becomes a problem when attracting good people. A supervisory board, or advisory board, representing some of the investors with management experience could compensate for this.

The Europeans should not be involved in marketing and sales within China. In Europe, we do not understand the explosive way sales can take off in China. But my observation is that some Europeans have a good understanding of the local culture and values. This sensibility for local issues combined with risk capital could turn out to be very successful when young companies grow bigger. Some entrepreneurial companies would benefit from the European knowledge about getting the organizational structure shaped, plus they could develop leadership and management skills with respect for Chinese values.

It is clear that Europeans have to figure out how to join the fray in China. Zhongguancun might be a win-situation for marketing the Chinese Silicon Valley toward European investors more intensively.

*Peter Lundgreen is the CEO and founder of Lundgreen’s Capital, an investment consulting and advisory company. The views expressed are his own.