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The IoT demonstrates the interdependence of Chinese and U.S. tech companies

By November 8, 2016Article

As the world economy continues to globalize, large manufacturing and technology companies from different countries increasingly find themselves aggressively competing against one another. This is very much the case between the United States and China, especially as Chinese manufacturing companies and consumer internet services seek to extend their brands internationally. Although this is often portrayed as a battle for economic dominance, we see the reality as far more subtle – and optimistic. 

China is well known for its strength in manufacturing and, in fact, is dominant globally in this area. Originally building out its manufacturing prowess based on low-cost, high-volume capability, China has since evolved to become much more advanced, often leading the way with more efficient and effective designs for products ranging from air conditioners to home appliances. 

The United States, once a manufacturing center, has shifted its technology emphasis to software and services. Innovations from companies such as Facebook and Google paved the way for breakthroughs in data management such as Cassandra and Hadoop. Combining these innovations with the leadership from Amazon and other IaaS (Infrastructure-as-a-Service) providers, the United States now is the global leader in enterprise software and data analytics innovation. 

Both countries are very strong in mobile internet technologies. U.S. companies Google, Facebook and Amazon created amazing online services. Their equivalents in China are Baidu, Tencent and Alibaba, each of which has built similar businesses customized to the Chinese market. The massive Chinese market is perhaps even more mobile than the U.S. market, and it’s certainly larger. China may, in fact, be ahead of the United States in mobile-related innovation, consider the WeChat app, which is used for everything from chat to ride-hailing to mobile payments. 

The two countries will certainly face significant, growing competition in the future; but there will also be great opportunity to work together — especially as we move to the next stage of the internet. The Internet of Things, or IoT, is essentially an extension of the internet to all of the devices around us. Very significantly, the IoT not only connects these devices on networks, but it also results in the generation of huge amounts of data that can by leveraged to make better decisions. The flood of data from connected “things” to the internet will reach rates unprecedented in any other stage of the internet. 

This new massive set of data is, in fact, the great opportunity for U.S. and Chinese companies to work effectively together. China’s manufacturing prowess coupled with U.S.-based enterprise software and big data innovation is an awesome combination. There is long-term opportunity for these core strengths to lead to mutual growth. 

And yet, why is there such a history of failure for U.S. software companies seeking to establish a presence in China? And why has it been historically difficult for Chinese manufacturers to extend their brands into the U.S. market? 

Our experiences in launching, funding and building an IoT technology company have given us some interesting insights into U.S./China market dynamics that could be useful for other companies trying to navigate these often challenging paths. 

How the IoT merges both countries’ strengths 

As already mentioned, each country has different technology strengths. China is a manufacturing-first country, while the United States holds a clear leadership position in big data management and enterprise software development. Most chips and software inside the technology products manufactured in China come from the West. 

The Chinese government launched a bold “Made in China 2025” initiative, inspired by Germany’s “Industry 4.0” plan, to further improve the country’s manufacturing competitiveness and to completely upgrade Chinese industry. This initiative exemplifies a broader transition that the country is experiencing, from an industrial to a post-industrial economy — an evolutionary level that North America and much of Europe have already achieved. Key to that transition will be how China handles data. 

Here’s where the IoT comes into play, because it presents an interesting melding of both Chinese and U.S. strengths and interests. 

The IoT epitomizes the cutting edge of information technology, but it also has a hardware component because of the physical things of the IoT. The IoT naturally marries great hardware and great software, with a dash of mobile technology thrown in. 

Some Chinese companies are beginning to view the IoT as a way to marry their current hardware and manufacturing strength with the future they’re headed toward in IT. The combination can yield better products, big financial savings, new services and additional innovations. 

According to a recent Accenture report, “How the Internet of Things Can Drive Growth in China’s Industries,” the IoT could deliver up to US$1.8 trillion in cumulative GDP to China by 2030. That’s a very attractive incentive for U.S. companies to use their expertise in handling data and in enterprise software development to try to take a piece of that IoT market. 

Success = technology + attitude 

Still, it clearly takes more than just technology prowess for either U.S. or Chinese tech companies to find success in each other’s markets. We have discovered that the “more” needed is attitude. 

Reasons for why U.S. companies fail in China, and why Chinese companies fail in the United States, include not appreciating differences in culture, business models, and customer preferences; not establishing the right local partnerships; and not communicating in ways that resonate with local customers. 

For instance, U.S. companies can’t assume that they already know what Chinese customers want or how they should be approached. In doing business, Chinese culture gives primary value to strong relationships and social connections. This difference in emphasis translates into different approaches to meetings, negotiations, contracts and sales processes. 

For their part, Chinese companies can’t assume that they naturally understand U.S. consumer behavior and drivers, nor can they expect that their cultural ways of doing business will be effective in the United States. 

Some lessons learned as a dual-country tech company 

Ayla Networks is an IoT platform company. We recognized early the promise of the IoT, as well as the difficulty that manufacturers would encounter in trying to implement all the technologies required for successful IoT products. The Ayla IoT platform is designed to offload the “IoT” aspects of a connected product, freeing manufacturers to focus on their core competencies of building home appliances or HVAC equipment or coffee makers or door locks or whatever they are set up to make. 

Who needs an IoT platform? Manufacturers. And where are most manufacturers located? China. 

As a result, we built Ayla as a two-country company from the beginning. One of our three founders, Phillip Chang, has long-established relationships in China. We established a Shenzhen office that’s fully staffed with engineering, sales and marketing experts who are Chinese nationals. We have been financed by investors from China and the United States. Customers include manufacturers in China, North America, Europe and Japan. 

In 2014, Ayla became one of the few U.S. companies, and the only U.S. IoT platform company, to be granted a license to serve as an Internet Content Provider (ICP) in the People’s Republic of China. As a licensed ICP, we are permitted to collaborate with manufacturers, websites, social networks and others to build a nationwide framework for the IoT in China. 

And what have we learned from all this? That having roots in both the United States and China, and absorbing their respective cultures and business practices, is a path to success in both countries. We are neither U.S.-based or China-based. Rather, we’re tuned to be effective in both regions and to help both U.S. and Chinese companies do business more effectively in each other’s markets. 

We also believe that this dual-country approach is supported by our technology and market focus on the Internet of Things. Because the IoT combines both countries’ interests into a single market — and one where both countries have their fortes — the IoT market provides opportunities for the two cultures to meet in the middle and work together. 

Using the IoT as common ground, China can transition gracefully from a manufacturing to a service-based economy, while U.S. tech companies can learn how to do meaningful business in China. 

Recognizing the interdependence of Chinese and U.S. companies, and working with this realization rather than against it, could be a secret to success for everyone involved. 

David Friedman is a founder and the CEO of Ayla Networks. Prior to founding Ayla, he served as VP business development for ZeroG Wireless. He holds five U.S. Patents. 

Drew Lanza is chairman and a founder of Ayla Networks. He is a board member at several other organizations as well. Previously, he was a venture partner at Morgenthaler, where he focused on information technology, including semiconductors, cleantech, components and systems.