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Copycats in the Coliseum

They called him The Cloner. Wang Xing (pronounced “Wang Shing”) made his mark on the early Chinese internet as a serial copycat, a bizarre mirror image of the revered serial entrepreneurs of Silicon Valley. In 2003, 2005, 2007, and again in 2010, Wang took America’s hottest startup of the year and copied it for Chinese users.

It all began when he stumbled on the pioneering social network Friendster while pursuing an engineering Ph.D. at the University of Delaware. The concept of a virtual network of friendships instantly clicked with Wang’s background in computer networking, and he dropped out of his doctoral program to return to China to recreate Friendster. On this first project, he chose not to clone Friendster’s exact design. Rather, he and a couple of friends just took the core concept of the digital social network and built their own user interface around it. The result was, in Wang’s words, “ugly,” and the site failed to take off.

Two years later, Facebook was storming college campuses with its clean design and niche targeting of students. Wang adopted both when he created Xiaonei (“On Campus”). The network was exclusive to Chinese college students, and the user interface was an exact copy of Mark Zuckerberg’s site. Wang meticulously recreated the home page, profiles, tool bars, and color schemes of the Palo Alto startup. Chinese media reported that the earliest version of Xiaonei even went so far as to put Facebook’s own tagline, “A Mark Zuckerberg Production,” at the bottom of each page.

Xiaonei was a hit, but one that Wang sold off too early. As the site grew rapidly, he couldn’t raise enough money to pay for server costs and was forced to accept a buyout. Under new ownership, a rebranded version of Xiaonei—now called Renren, “Everybody”—eventually raised $740 million during its 2011 debut on the New York Stock Exchange. In 2007, Wang was back at it again, making a precise copy of the newly founded Twitter. The clone was done so well that if you changed the language and the URL, users could easily be fooled into thinking they were on the original Twitter. The Chinese site, Fanfou, thrived for a moment but was soon shut down over politically sensitive content. Then, three years later Wang took the business model of red-hot Groupon and turned it into the Chinese group-buying site Meituan.

To the Silicon Valley elite, Wang was shameless. In the mythology of the valley, few things are more stigmatized than blindly aping the establishment. It was precisely this kind of copycat entrepreneurship that would hold China back, or so the conventional wisdom said, and would prevent China from building truly innovative technology companies that could “change the world.”

Even some entrepreneurs in China felt that Wang’s pixel-for-pixel cloning of Facebook and Twitter went too far. Yes, Chinese companies often imitated their American peers, but you could at least localize or add a touch of your own style. But Wang made no apologies for his mimic sites. Copying was a piece of the puzzle, he said, but so was his choice of which sites to copy and his execution on the technical and business fronts.

In the end, it was Wang who would get the last laugh. By late 2017, Groupon’s market cap had shriveled to $2.58 billion, with its stock trading at under one-fifth the price of its 2011 initial public offering (IPO). The former darling of the American startup world had been stagnant for years and slow to react when the group-buying craze faded. Meanwhile, Wang Xing’s Meituan had triumphed in a brutally competitive environment, beating out thousands of similar group-buying websites to dominate the field. It then branched out into dozens of new lines of business. It is now the fourth most valuable startup in the world, valued at $30 billion, and Wang sees Alibaba and Amazon as his main competitors going forward.

In analyzing Wang’s success, Western observers make a fundamental mistake. They believe Meituan triumphed by taking a great American idea and simply copying it in the sheltered Chinese internet, a safe space where weak local companies can survive under far less intense competition. This kind of analysis, however, is the result of a deep misunderstanding of the dynamics at play in the Chinese market, and it reveals an egocentrism that defines all internet innovation in relation to Silicon Valley.

In creating his early clones of Facebook and Twitter, Wang was in fact relying entirely on the Silicon Valley playbook. This first phase of the copycat era—Chinese startups cloning Silicon Valley websites—helped build up baseline engineering and digital entrepreneurship skills that were totally absent in China at the time. But it was a second phase—Chinese startups taking inspiration from an American business model and then fiercely competing against each other to adapt and optimize that model specifically for Chinese users—that turned Wang Xing into a world-class entrepreneur.

Wang didn’t build a $30 billion company by simply bringing the group-buying business model to China. Over five thousand companies did the exact same thing, including Groupon itself. The American company even gave itself a major leg up on local copycats by partnering with a leading Chinese internet portal. Between 2010 and 2013, Groupon and its local impersonators waged an all-out war for market share and customer loyalty, burning billions of dollars and stopping at nothing to slay the competition.

The battle royal for China’s group-buying market was a microcosm of what China’s internet ecosystem had become: a coliseum where hundreds of copycat gladiators fought to the death. Amid the chaos and bloodshed, the foreign first-movers often proved irrelevant. It was the domestic combatants who pushed each other to be faster, nimbler, leaner, and meaner. They aggressively copied each other’s product innovations, cut prices to the bone, launched smear campaigns, forcibly deinstalled competing software, and even reported rival CEOs to the police. For these gladiators, no dirty trick or underhanded maneuver was out of bounds. They deployed tactics that would make Uber founder Travis Kalanick blush. They also demonstrated a fanatical around-the-clock work ethic that would send Google employees running to their nap pods.

Silicon Valley may have found the copying undignified and the tactics unsavory. In many cases, it was. But it was precisely this widespread cloning—the onslaught of thousands of mimicking competitors—that forced companies to innovate. Survival in the internet coliseum required relentlessly iterating products, controlling costs, executing flawlessly, generating positive PR, raising money at exaggerated valuations, and seeking ways to build a robust business “moat” to keep the copycats out. Pure copycats never made for great companies, and they couldn’t survive inside this coliseum. But the trial-by-fire competitive landscape created when one is surrounded by ruthless copycats had the result of forging a generation of the most tenacious entrepreneurs on earth.

As we enter the age of AI implementation, this cutthroat entrepreneurial environment will be one of China’s core assets in building a machine-learning-driven economy. The dramatic transformation that deep learning promises to bring to the global economy won’t be delivered by isolated researchers producing novel academic results in the elite computer science labs of MIT or Stanford. Instead, it will be delivered by down-to-earth, profit-hungry entrepreneurs teaming up with AI experts to bring the transformative power of deep learning to bear on real-world industries.

Over the coming decade, China’s gladiator entrepreneurs will fan out across hundreds of industries, applying deep learning to any problem that shows the potential for profit. If artificial intelligence is the new electricity, Chinese entrepreneurs will be the tycoons and tinkerers who electrify everything from household appliances to homeowners’ insurance. Their knack for endlessly tweaking business models and sniffing out profits will yield an incredible array of practical—maybe even life-changing—applications. These will be deployed in their home country and then pushed abroad, potentially taking over most developing markets around the globe.

Corporate America is unprepared for this global wave of Chinese entrepreneurship because it fundamentally misunderstood the secret to The Cloner’s success. Wang Xing didn’t succeed because he’d been a copycat. He triumphed because he’d become a gladiator.

CONTRASTING CULTURES

Startups and the entrepreneurs who found them are not born in a vacuum. Their business models, products, and core values constitute an expression of the unique cultural time and place in which they come of age.

Silicon Valley’s and China’s internet ecosystems grew out of very different cultural soil. Entrepreneurs in the valley are often the children of successful professionals, such as computer scientists, dentists, engineers, and academics. Growing up they were constantly told that they—yes, they in particular—could change the world. Their undergraduate years were spent learning the art of coding from the world’s leading researchers but also basking in the philosophical debates of a liberal arts education. When they arrived in Silicon Valley, their commutes to and from work took them through the gently curving, tree-lined streets of suburban California.

It’s an environment of abundance that lends itself to lofty thinking, to envisioning elegant technical solutions to abstract problems. Throw in the valley’s rich history of computer science breakthroughs, and you’ve set the stage for the geeky-hippie hybrid ideology that has long defined Silicon Valley. Central to that ideology is a wide-eyed techno-optimism, a belief that every person and company can truly change the world through innovative thinking. Copying ideas or product features is frowned upon as a betrayal of the zeitgeist and an act that is beneath the moral code of a true entrepreneur. It’s all about “pure” innovation, creating a totally original product that generates what Steve Jobs called a “dent in the universe.”

Startups that grow up in this kind of environment tend to be mission-driven. They start with a novel idea or idealistic goal, and they build a company around that. Company mission statements are clean and lofty, detached from earthly concerns or financial motivations.

In stark contrast, China’s startup culture is the yin to Silicon Valley’s yang: instead of being mission-driven, Chinese companies are first and foremost market-driven. Their ultimate goal is to make money, and they’re willing to create any product, adopt any model, or go into any business that will accomplish that objective. That mentality leads to incredible flexibility in business models and execution, a perfect distillation of the “lean startup” model often praised in Silicon Valley. It doesn’t matter where an idea came from or who came up with it. All that matters is whether you can execute it to make a financial profit. The core motivation for China’s market-driven entrepreneurs is not fame, glory, or changing the world. Those things are all nice side benefits, but the grand prize is getting rich, and it doesn’t matter how you get there.

Jarring as that mercenary attitude is to many Americans, the Chinese approach has deep historical and cultural roots. Rote memorization formed the core of Chinese education for millennia. Entry into the country’s imperial bureaucracy depended on word-for-word memorization of ancient texts and the ability to construct a perfect “eight-legged essay” following rigid stylistic guidelines. While Socrates encouraged his students to seek truth by questioning everything, ancient Chinese philosophers counseled people to follow the rituals of sages from the ancient past. Rigorous copying of perfection was seen as the route to true mastery.

Layered atop this cultural propensity for imitation is the deeply ingrained scarcity mentality of twentieth-century China. Most Chinese tech entrepreneurs are at most one generation away from grinding poverty that stretches back centuries. Many are only children—products of the now-defunct “One Child Policy”—carrying on their backs the expectations of two parents and four grandparents who have invested all their hopes for a better life in this child. Growing up, their parents didn’t talk to them about changing the world. Rather, they talked about survival, about a responsibility to earn money so they can take care of their parents when their parents are too old to work in the fields. A college education was seen as the key to escaping generations of grinding poverty, and that required tens of thousands of hours of rote memorization in preparing for China’s notoriously competitive entrance exam. During these entrepreneurs’ lifetimes, China wrenched itself out of poverty through bold policies and hard work, trading meal tickets for paychecks for equity stakes in startups.

The blistering pace of China’s economic rise hasn’t alleviated that scarcity mentality. Chinese citizens have watched as industries, cities, and individual fortunes have been created and lost overnight in a Wild West environment where regulations struggled to keep pace with cutthroat market competition. Deng Xiaoping, the Chinese leader who pushed China from Mao-era egalitarianism to market-driven competition, once said that China needed to “let some people get rich first” in order to develop. But the lightning speed of that development only heightened fears and concerns that if you don’t move quickly—if you don’t grab onto this new trend or jump into that new market—you’ll stay poor while others around you get rich.

Combine these three currents—a cultural acceptance of copying, a scarcity mentality, and the willingness to dive into any promising new industry—and you have the psychological foundations of China’s internet ecosystem.

This is not meant to preach a gospel of cultural determinism. As someone who has moved between these two countries and cultures, I know that birthplace and heritage are not the sole determinants of behavior. Personal eccentricities and government regulation are hugely important in shaping company behavior. In Beijing, entrepreneurs often joke that Facebook is “the most Chinese company in Silicon Valley” for its willingness to copy from other startups and for Zuckerberg’s fiercely competitive streak. Likewise, while working at Microsoft, I saw how government antitrust policy can defang a wolf-like company. But history and culture do matter, and in comparing the evolution of Silicon Valley and Chinese technology, it’s crucial to grasp how different cultural melting pots produced different types of companies.

For years, the copycat products that emerged from China’s cultural stew were widely mocked by the Silicon Valley elite. They were derided as cheap knockoffs, embarrassments to their creators and unworthy of the attention of true innovators. But those outsiders missed what was brewing beneath the surface. The most valuable product to come out of China’s copycat era wasn’t a product at all: it was the entrepreneurs themselves.

THE EMPEROR’S NEW CLOCKS

Twice a day, the Hall of Ancestor Worship comes alive. Located within Beijing’s Forbidden City, this was where the emperors of China’s last two dynasties once burned incense and performed sacred rituals to honor the Sons of Heaven that came before them. Today, the hall is home to some of the most intricate and ingenious mechanical timepieces ever created. The clock faces themselves convey expert craftsmanship, but it’s the impossibly complex mechanical functions embedded in the clocks’ structures that draw large crowds for the morning and afternoon performances.

As the seconds tick by, a metal bird darts around a gold cage. Painted wooden lotus flowers open and close their petals, revealing a tiny Buddhist god deep in meditation. A delicately carved elephant lifts its trunk up and down while pulling a miniature carriage in circles. A robotic Chinese figure dressed in the coat of a European scholar uses an ink brush to write out a Chinese aphorism on a miniature scroll, with the robot’s own handwriting modeled on the calligraphy of the Chinese emperor who commissioned the piece.

It’s a dazzling display, a reminder of the timeless nature of true craftsmanship. Jesuit missionaries brought many of the clocks to China as part of “clock diplomacy,” an attempt by Jesuits to charm their way into the imperial court through gifts of advanced European technology. The Qing Dynasty’s Qianlong emperor was particularly fond of the clocks, and British manufacturers soon began producing clocks to fit the tastes of the Son of Heaven. Many of the clocks on display at the Hall of Ancestor Worship were the handiwork of Europe’s finest artisanal workshops of the seventeenth and eighteenth centuries. These workshops produced an unparalleled combination of artistry, design, and functional engineering. It’s a particular alchemy of expertise that feels familiar to many in Silicon Valley today.

While working as the founding president of Google China, I would bring visiting delegations of Google executives here to see the clocks in person. But I didn’t do it so they could revel in the genius of their European ancestors. I did it because, on closer inspection, one discovers that many of the finest specimens of European craftsmanship were created in the southern Chinese city of Guangzhou, which was then called Canton.

After European clocks won the favor of the Chinese emperor, local workshops sprang up all over China to study and recreate the Western imports. In the southern port cities where Westerners came to trade, China’s best craftspeople took apart the ingenious European devices, examining each interlocking piece and design flourish. They mastered the basics and began producing clocks that were near-exact replicas of the European models. From there, the artisans took the underlying principles of clock-building and began constructing timepieces that embodied Chinese designs and cultural traditions: animated Silk Road caravans, lifelike scenes from the streets of Beijing, and the quiet equanimity of Buddhist sutras. These workshops eventually began producing clocks that rivaled or even exceeded the craftsmanship coming out of Europe, all while weaving in an authentically Chinese sensibility.

The Hall of the Ancestors dates back to the Ming Dynasty, and the story of China’s own copycat clockmakers played out hundreds of years in the past. But the same cultural currents continue to flow into the present day. As we watched these mechanical marvels twirl and chime, I worried that those currents would soon sweep away the master craftspeople of the twenty-first century who stood all around me.

COPYKITTENS

China’s early copycat internet companies looked harmless from the outside, almost cute. During China’s first internet boom of the late 1990s, Chinese companies looked to Silicon Valley for talent, funding, and even names for their infant startups. The country’s first search engine was the creation of Charles Zhang, a Chinese physicist with a Ph.D. from MIT. While in the United States Zhang had seen the early internet take off, and he wanted to kick-start that same process in his home country. Zhang used investments from his professors at MIT and returned to China, intent on building up the country’s core internet infrastructure.

But after a meeting with Yahoo! founder Jerry Yang, Zhang switched his focus to creating a Chinese-language search engine and portal website. He named his new company Sohoo, a not-so-subtle mashup of the Chinese word for “search” (sou) and the company’s American role model. He soon switched the spelling to “Sohu” to downplay the connection, but this kind of imitation was seen as more flattery than threat to the American web juggernaut. At the time, Silicon Valley saw the Chinese internet as a novelty, an interesting little experiment in a technologically backward country.

Bear in mind that this was an era when copying fueled many parts of the Chinese economy. Factories in the southern part of the country cranked out knockoff luxury bags. Chinese car manufacturers created such close duplicates of foreign models that some dealerships gave customers the option of removing the Chinese company’s logo and replacing it with the logo of the more prestigious foreign brand. There was even a knockoff Disneyland, a creepy amusement park on the outskirts of Beijing where employees in replica Mickey and Minnie Mouse suits hugged Chinese children. At the park’s entrance hung a sign: “Disneyland is too far, please come to Shijingshan!” While China’s enterprising amusement park operators borrowed unabashedly from Disney, Wang Xing was hard at work copying Facebook and then Twitter.

While leading Google China, I experienced firsthand the danger that these clones posed to brand image. Beginning in 2005, I threw myself into building up our Chinese search engine and the trust of Chinese users. But on the evening of December 11, 2008, a major Chinese TV station dedicated a six-minute segment of its national news broadcast to a devastating exposé on Google China. The program showed users searching Google’s Chinese site for medical information being served up ads with links to fake medical treatments. The camera zoomed in tight on the computer screen, where Google’s Chinese logo hovered ominously above dangerous scams and phony prescription-drug services.

Google China was thrown into a full-on crisis of public trust. After watching the footage, I raced to my computer to conduct the same searches but curiously could not conjure up the results featured on the program. I changed around the words and tweaked my settings but still couldn’t navigate to—and then subsequently remove—the offending ads. At the same time, I was immediately flooded with messages from reporters demanding an explanation as to Google China’s misleading advertising, but I could only give what probably sounded like a weak excuse: Google works quickly to remove any problematic advertisements, but the process isn’t instantaneous, and occasionally offending ads may live online for a few hours.

The storm continued to rage on, all while our team kept failing to find or locate the offending ads from the television program. Later that night I received an excited email from one of our engineers. He had figured out why we couldn’t reproduce the results: because the search engine shown on the program wasn’t Google. It was a Chinese copycat search engine that had made a perfect copy of Google—the layout, the fonts, the feel—almost down to the pixel. The site’s search results and ads were their own but had been packaged online to be indistinguishable from Google China. The engineer had noticed just one tiny difference, a slight variation in the color of one font used. The impersonators had done such a good job that all but one of Google China’s seven hundred employees watching onscreen had failed to tell them apart.

The precision copying extended even to the most elegant and cutting-edge hardware. When Steve Jobs launched the original iPhone, he had only a few months’ lead time before electronics markets throughout China were selling “mini-iPhones.” The fun-size replicas looked almost exactly like the real thing but were about half the size and fit squarely in the palm of your hand. They also completely lacked the ability to access the internet via the phone’s data plan, making them the dumbest “smartphone” on the market.

American visitors to Beijing would clamor to get their hands on the mini-iPhones, thinking them a great joke gift for friends back home. To those steeped in the innovation mythology of Silicon Valley, the mini-iPhones were the perfect metaphor for Chinese technology during the copycat era: a shiny exterior that had been copied from America but a hollow shell that held nothing innovative or even functional. The prevailing American attitude was that people like Wang Xing could copy the look and feel of Facebook, but that the Chinese would never access the mysterious magic of innovation that drove a place like Silicon Valley.

BUILDING BLOCKS AND STUMBLING BLOCKS

Silicon Valley investors take as an article of faith that a pure innovation mentality is the foundation on which companies like Google, Facebook, Amazon, and Apple are built. It was an irrepressible impulse to “think different” that drove people like Steve Jobs, Mark Zuckerberg, and Jeff Bezos to create these companies that would change the world. In that school of thought, China’s knockoff clockmakers were headed down a dead-end road. A copycat mentality is a core stumbling block on the path to true innovation. By blindly imitating others—or so the theory goes—you stunt your own imagination and kill the chances of creating an original and innovative product.

But I saw early copycats like Wang Xing’s Twitter knockoff not as stumbling blocks but as building blocks. That first act of copying didn’t turn into an anti-innovation mentality that its creator could never shake. It was a necessary steppingstone on the way to more original and locally tailored technology products.

The engineering know-how and design sensibility needed to create a world-class technology product don’t just appear out of nowhere. In the United States, universities, companies, and engineers have been cultivating and passing down these skillsets for generations. Each generation has its breakout companies or products, but these innovations rest on a foundation of education, mentorship, internships, and inspiration.

China had no such luxury. When Bill Gates founded Microsoft in 1975, China was still in the throes of the Cultural Revolution, a time of massive social upheaval and anti-intellectual fever. When Sergei Brin and Larry Page founded Google in 1998, just 0.2 percent of the Chinese population was connected to the internet, compared with 30 percent in the United States. Early Chinese tech entrepreneurs looking for mentors or model companies within their own country simply couldn’t find them. So instead they looked abroad and copied them as best they could.

It was a crude process to be sure, and sometimes an embarrassing one. But it taught these copycats the basics of user interface design, website architecture, and back-end software development. As their clone-like products went live, these market-driven entrepreneurs were forced to grapple with user satisfaction and iterative product development. If they wanted to win the market, they had to beat not just their Silicon Valley inspiration but also droves of similar copycats. They learned what worked and what didn’t with Chinese users. They began to iterate, improve, and localize the product to better serve their customers.

And those customers had unique habits and preferences, ways of using software that didn’t map neatly onto Silicon Valley’s global one-size-fits-all product model. Companies like Google and Facebook are often loath to allow local changes to their core products or business models. They tend to believe in building one thing and building it well. It’s an approach that helped them rapidly sweep the globe in the early days of the internet, when most countries lagged so far behind in technology that they couldn’t offer any localized alternatives. But as technical know-how has diffused around the globe, it is becoming harder to force people of all countries and cultures into a cookie-cutter mold that was often built in America for Americans.

As a result, when Chinese copycats went head-to-head with their Silicon Valley forefathers, they took that American unwillingness to adapt and weaponized it. Every divergence between Chinese user preferences and a global product became an opening that local competitors could attack. They began tailoring their products and business models to local needs, and driving a wedge between Chinese internet users and Silicon Valley.

“FREE IS NOT A BUSINESS MODEL”

Jack Ma made an art of these kinds of attacks in the early days of the Chinese e-commerce company Alibaba. Ma founded his company in 1999, and for the first couple of years of operation his main competitors were other local Chinese companies. But in 2002, eBay entered the Chinese market. At that time, eBay was the biggest e-commerce company in the world and a darling of both Silicon Valley and Wall Street. Alibaba’s online marketplace was derided as another Chinese copycat with no right to be in the same room as the big dogs of Silicon Valley. And so Ma launched a five-year guerrilla war against eBay, turning the foreign company’s size against it and relentlessly punishing the invader for failing to adapt to local conditions.

When eBay entered the Chinese market in 2002, they did so by buying the leading Chinese online auction site—not Alibaba but an eBay impersonator called EachNet. The marriage created the ultimate power couple: the top global e-commerce site and China’s number one knockoff. eBay proceeded to strip away the Chinese company’s user interface, rebuilding the site in eBay’s global product image. Company leadership brought in international managers for the new China operations, who directed all traffic through eBay’s servers back in the United States. But the new user interface didn’t match Chinese web-surfing habits, the new leadership didn’t understand Chinese domestic markets, and the trans-Pacific routing of traffic slowed page-loading times. At one point an earthquake under the Pacific Ocean severed key cables and knocked the site offline for a few days.

Meanwhile, Alibaba founder Jack Ma was busy copying eBay’s core functions and adapting the business model to Chinese realities. He began by creating an auction-style platform, Taobao, to directly compete with eBay’s core business. From there, Ma’s team continually tweaked Taobao’s functions and tacked on features to meet unique Chinese needs. His strongest localization plays were in payment and revenue models. To overcome a deficit of user trust in online purchases, Ma created Alipay, a payment tool that would hold money from purchases in escrow until the buyer confirmed the receipt of goods. Taobao also added instant messaging functions to allow buyers and sellers to communicate on the platform in real time. These business innovations helped Taobao claw away market share from eBay, whose global product mentality and deep centralization of decision-making power in Silicon Valley made it slow to react and add features.

But Ma’s greatest weapon was his deployment of a “freemium” revenue model, the practice of keeping basic functions free while charging for premium services. At the time, eBay charged sellers a fee just to list their products, another fee when the products were sold, and a final fee if eBay-owned PayPal was used for payment. Conventional wisdom held that auction sites or e-commerce marketplace sites needed to do this in order to guarantee steady revenue streams.

But as competition with eBay heated up, Ma developed a new approach: he pledged to make all listings and transactions on Taobao free for the next three years, a promise he soon extended indefinitely. It was an ingenious PR move and a savvy business play. In the short term, it won goodwill from Chinese sellers still leery of internet transactions. Allowing them to list for free helped Ma build a thriving marketplace in a low-trust society. It took years to get there, but in the long term, that marketplace grew so large that in order to get their products noticed, power sellers had to pay Ma for advertisements and higher search rankings. Brands would end up paying even larger premiums to list on Taobao’s more high-end sister site, Tmall.

eBay bungled its response. In a condescending press release, the company lectured Ma, claiming “free is not a business model.” As a Nasdaq-listed public company, eBay was under pressure to show ever-rising revenues and profits. American public companies tend to treat international markets as cash cows, sources of bonus revenue to which they are entitled by virtue of winning at home. Silicon Valley’s richest e-commerce company wasn’t about to make an exception to its global model to match the wild pronouncements of a pesky Chinese copycat.

That kind of shortsighted stubbornness sealed eBay’s fate in China. Taobao rapidly peeled away users and sellers from the American juggernaut. With eBay’s market share in freefall, eBay CEO Meg Whitman briefly relocated to China to try and salvage the operations there. When that didn’t work, she invited Ma to Silicon Valley to try and broker a deal. But Ma smelled blood in the water, and he wanted total victory. Within a year, eBay fully retreated from the Chinese market.

THE YELLOW PAGES VERSUS THE BAZAAR

I witnessed this same disconnect between global products and local users while leading Google China. As an extension of perhaps the world’s most prestigious internet company, we should have had a major brand advantage. But that linkage back to headquarters in Silicon Valley turned into a big stumbling block when it came to adapting products to wider Chinese audiences. When I launched Google China in 2005, our main competitor was the Chinese search engine Baidu. The website was the creation of Robin Li, a Chinese-born expert in search engines who had experience working in Silicon Valley. Baidu’s core functions and minimalist design mimicked Google, but Li relentlessly optimized the site for the search habits of Chinese users.

Those divergent habits were starkest in the ways users interacted with a page of search results. Within focus groups, we were able to track a user’s eye movements and clicks across a given page of search results. We used that data to create heat maps of activity on the page: green highlights showed where the user had glanced, yellow highlights where they had stared intently, and red dots marked each of their clicks. Comparing heat maps generated by American and Chinese users makes for a striking contrast.

The American users’ maps show a tight clustering of green and yellow in the upper left corner where the top search results appeared, with a couple of red dots for clicks on the top two results. American users remain on the page for around ten seconds before navigating away. In contrast, Chinese users’ heat maps look like a hot mess. The upper left corner has the greatest cluster of glances and clicks, but the rest of the page is blanketed in smudges of green and specks of red. Chinese users spent between thirty and sixty seconds on the search page, their eyes darting around almost all the results as they clicked promiscuously.

Eye-tracking maps revealed a deeper truth about the way both sets of users approached search. Americans treated search engines like the Yellow Pages, a tool for simply finding a specific piece of information. Chinese users treated search engines like a shopping mall, a place to check out a variety of goods, try each one on, and eventually pick a few things to buy. For tens of millions of Chinese new to the internet, this was their first exposure to such a variety of information, and they wanted to sample it all.

That strikingly fundamental difference in user attitudes should have led to a number of product modifications for Chinese users. On Google’s global search platform, when users clicked on a search result’s link, it would navigate them away from the search results page. That meant we were forcing Chinese “shoppers” to pick one item for purchase and then, in effect, kicking them out of the mall. Baidu, by contrast, opened a new browser window for the user for each link clicked. That let users try on various search results without having to “leave the mall.”

Given clear evidence of different user needs, I recommended Google make an exception and copy the Baidu model of opening different windows for each click. But the company had a lengthy review process for any changes to core products because those changes “forked” the code and made it more difficult to maintain. Google and other Silicon Valley companies tried hard to avoid that, believing that the elegant products coming out of the Silicon Valley headquarters should be good enough for users around the globe. I fought for months to get this change made and eventually prevailed, but in the meantime Baidu had won over more users with its China-centric product offering.

Battles like this were repeated continuously over my four years with Google. In fairness to Google, headquarters gave us more latitude than most Silicon Valley companies give to their China branches, and we used that leverage to develop many locally optimized features, which won back substantial market share Google had lost in previous years. But headquarters’ resistance to forking made each new feature an uphill battle, one that slowed us up and wore us down. Tired of fighting with their own company, many employees left out of frustration.

WHY SILICON VALLEY GIANTS FAIL IN CHINA

As a succession of American juggernauts—eBay, Google, Uber, Airbnb, LinkedIn, Amazon—tried and failed to win the Chinese market, Western analysts were quick to chalk up their failures to Chinese government controls. They assumed that the only reason Chinese companies survived was due to government protectionism that hobbled their American opponents.

In my years of experience working for those American companies and now investing in their Chinese competitors, I’ve found Silicon Valley’s approach to China to be a far more important reason for their failure. American companies treat China like just any other market to check off their global list. They don’t invest the resources, have the patience, or give their Chinese teams the flexibility needed to compete with China’s world-class entrepreneurs. They see the primary job in China as marketing their existing products to Chinese users. In reality, they need to put in real work tailoring their products for Chinese users or building new products from the ground up to meet market demands. Resistance to localization slows down product iteration and makes local teams feel like cogs in a clunky machine.

Silicon Valley companies also lose out on top talent. With so much opportunity now for growth within Chinese startups, the most ambitious young people join or start local companies. They know that if they join the Chinese team of an American company, that company’s management will forever see them as “local hires,” workers whose utility is limited to their country of birth. They’ll never be given a chance to climb the hierarchy at the Silicon Valley headquarters, instead bumping up against the ceiling of a “country manager” for China. The most ambitious young people—the ones who want to make a global impact—chafe at those restrictions, choosing to start their own companies or to climb the ranks at one of China’s tech juggernauts. Foreign firms are often left with mild-mannered managers or career salespeople helicoptered in from other countries, people who are more concerned with protecting their salary and stock options than with truly fighting to win the Chinese market. Put those relatively cautious managers up against gladiatorial entrepreneurs who cut their teeth in China’s competitive coliseum, and it’s always the gladiators who will emerge victorious.

While foreign analysts continued to harp on the question of why American companies couldn’t win in China, Chinese companies were busy building better products. Weibo, a micro-blogging platform initially inspired by Twitter, was far faster to expand multimedia functionality and is now worth more than the American company. Didi, the ride-hailing company that duked it out with Uber, dramatically expanded its product offerings and gives more rides each day in China than Uber does across the entire world. Toutiao, a Chinese news platform often likened to BuzzFeed, uses advanced machine-learning algorithms to tailor its content for each user, boosting its valuation many multiples above the American website. Dismissing these companies as copycats relying on government protection in order to succeed blinds analysts to world-class innovation that is happening elsewhere.

But the maturation of China’s entrepreneurial ecosystem was about far more than competition with American giants. After companies like Alibaba, Baidu, and Tencent had proven how lucrative China’s internet markets could be, new waves of venture capital and talent began to pour into the industry. Markets were heating up, and the number of Chinese startups was growing exponentially. These startups may have taken inspiration from across the ocean, but their real competitors were other domestic companies, and the clashes were taking on all the intensity of a sibling rivalry.

Battles with Silicon Valley may have created some of China’s homegrown internet Goliaths, but it was cutthroat Chinese domestic competition that forged a generation of gladiator entrepreneurs.

ALL IS FAIR IN STARTUPS AND WAR

Zhou Hongyi is the kind of guy who likes to pose for pictures with heavy artillery. His 12 million social media followers are regularly treated to pictures of Zhou posing next to cannons or impaling cell phones with a high-powered bow and arrow. For years, one wall of his office was adorned entirely with the shot-up sheets of paper used for handgun target practice. When his PR team submits a stock photo to media outlets, it’s sometimes a picture of Zhou dressed in army fatigues, smoke rising in the background and a machine gun leaning by his side.

He is also the fiery founder of some of China’s most successful early internet companies. Zhou’s first startup sold to Yahoo!, which picked Zhou to head up China operations. Clashing endlessly with the Silicon Valley leadership, Zhou is rumored to have once thrown a chair out an office window during a shouting match. When I led Google China, I would invite Zhou to speak to our leadership team about the unique characteristics of the Chinese market. He took the opportunity to berate the American executives, telling them they were naive and knew nothing about what it took to compete in China. They would, he said, be better off just handing over control to a battle-hardened warrior like him. He later founded China’s leading web security software, Qihoo 360 (pronounced “chee-who”), and launched a browser whose logo was an exact copy of Internet Explorer’s but done in green.

Zhou embodies the gladiatorial mentality of Chinese internet entrepreneurs. In his world, competition is war and he will stop at nothing to win. In Silicon Valley, his tactics would guarantee social ostracism, antimonopoly investigations, and endless, costly lawsuits. But in the Chinese coliseum, none of these three can hold back combatants. The only recourse when an opponent strikes a low blow is to launch a more damaging counterattack, one that can take the form of copying products, smearing opponents, or even legal detention. Zhou faced all of the above during the “3Q War,” a battle between Zhou’s Qihoo and QQ, the messaging platform of web juggernaut Tencent.

I witnessed the start of hostilities firsthand one evening in 2010, when Zhou invited me and employees of the newly formed Sinovation Ventures to join his team at a laser tag course outside of Beijing. Zhou was in his element, shooting up the competition, when his cell phone rang. It was an employee with bad news: Tencent had just launched a copycat of Qihoo 360’s antivirus product and was automatically installing it on any computer that used QQ. Tencent was already a powerful company that wielded enormous influence through its QQ user base. This was a direct challenge to Qihoo’s core business, a matter of corporate life or death in Zhou’s mind, as he wrote in his autobiography, Disruptor. He immediately called together his team at the laser tag place, and they raced back to their headquarters to formulate a counterattack.

Over the next two months, Zhou pulled out every dirty and desperate trick he could think of to beat back Tencent. Qihoo first created a popular new “privacy protection” software that issued dire safety warnings every time a Tencent product was opened. The warnings were often not based on any real security vulnerability, but it was an effective smear campaign against the stronger company. Qihoo then released a piece of “security” software that could filter all ads within QQ, effectively killing the product’s main revenue stream. Soon thereafter, Zhou was on his way to work when he got a phone call: over thirty police officers had raided the Qihoo offices and were waiting there to detain Zhou as part of an investigation. Convinced the raid was orchestrated by Tencent, Zhou drove straight to the airport and fled to Hong Kong to formulate his next move.

Finally, Tencent took the nuclear option: on November 3, 2010, Tencent announced that it would block the use of QQ messaging on any computer that had Qihoo 360, forcing users to choose between the two products. It was the equivalent of Facebook telling users it would block Facebook access for anyone using Google Chrome. The companies were waging total war against each other, with Chinese users’ computers as the battleground. Qihoo appealed to users for a three-day “QQ strike,” and the government finally stepped in to separate the bloodied combatants. Within a week both QQ and Qihoo 360 had returned to normal functioning, but the scars from these kinds of battles lingered with the entrepreneurs and companies.

Zhou Hongyi was one of the most pugnacious of these entrepreneurs, but dirty tricks and anticompetitive behavior were the norm in the industry. Remember Wang Xing’s Facebook copycat, Xiaonei? After he sold it in 2006, the site reemerged as Renren (“Everyone”) and became the dominant Facebook-esque social network. But by 2008, Renren faced a scrappy challenger in Kaixin001 (kaixin means “happy” in Mandarin). The startup gained traction by initially targeting young urbanites instead of the college students already on Renren. Kaixin001 integrated social networking and gaming with products like “Steal Vegetables,” a Farmville knockoff, but one where people were rewarded not for cooperatively farming but for stealing from each other’s gardens. The startup quickly became the fastest growing social network around.

Kaixin001 was a solid product, but its founder was no gladiator. When he created the network, the URL that he wanted to use—kaixin.com—was already taken, and he didn’t want (or possibly couldn’t afford) to buy it from its owner. So instead he opted for kaixin001.com, which turned out to be a fatal mistake, equivalent to entering the coliseum without a helmet.

The moment Kaixin001 became a threat, the owner of Renren simply bought the original www.kaixin.com URL from its owner. He then recreated an exact copy of Kaixin001’s user interface, changing only the color, and brazenly dubbed it “The Real Kaixin Net.” Suddenly, many users trying to sign up for the popular new social network found themselves unwittingly ensnared in Renren’s net. Few even knew the difference. Renren later announced it would merge Kaixin.com with Renren, effectively completing its kidnapping of Kaixin001 users. The move kneecapped Kaixin001’s user growth, killed its momentum, and neutralized a major threat to Renren’s dominance.

Kaixin001 sued its unsavory rival, but the lawsuit couldn’t undo the damage from live combat. In April 2011, eighteen months after the lawsuit was filed, a Beijing court ordered Renren to pay $60,000 to Kaixin001, but the once-promising challenger was now a shadow of its former self. One month after that, Renren went public on the New York Stock Exchange, raising $740 million.

The lessons learned in the coliseum were clear: kill or be killed. Any company that can’t fully insulate itself from competitors—on a technical, business, or even personnel level—is a target for attack. To the winner go the spoils, and those spoils can amount to billions of dollars.

It’s a cultural system that also inspires a truly maniacal work ethic. Silicon Valley prides itself on long work hours, an arrangement made more tolerable by free meals, on-site gyms, and beer on tap. But compared with China’s startup scene, the valley’s companies look lethargic and its engineers lazy. Andrew Ng, the deep-learning pioneer who founded the Google Brain project and led AI efforts at Baidu, compared the two environments during a Sinovation event in Menlo Park:

 

The pace is incredible in China. While I was leading teams in China, I’d just call a meeting on a Saturday or Sunday, or whenever I felt like it, and everyone showed up and there’d be no complaining. If I sent a text message at 7:00 PM over dinner and they haven’t responded by 8:00 PM, I would wonder what’s going on. It’s just a constant pace of decision-making. The market does something, so you better react. That, I think, has made the China ecosystem incredible at figuring out innovations, how to take things to market. . . . I was in the US working with a vendor. I won’t use any names, but a vendor I was working with actually called me up one day and they said, “Andrew, we are in Silicon Valley. You’ve got to stop treating us like you’re in China, because we just can’t deliver things at the pace you expect.”

 

THE LEAN GLADIATOR

 

But the copycat era taught Chinese technology entrepreneurs more than just dirty tricks and insane schedules. The high financial stakes, propensity for imitation, and market-driven mentality also ended up incubating companies that embodied the “lean startup” methodology.

That methodology was first explicitly formulated in Silicon Valley and popularized by the 2011 book The Lean Startup. Core to its philosophy is the idea that founders don’t know what product the market needs—the market knows what product the market needs. Instead of spending years and millions of dollars secretly creating their idea of the perfect product, startups should move quickly to release a “minimum viable product” that can tease out market demand for different functions. Internet-based startups can then receive instant feedback based on customer activity, letting them immediately begin iterating on the product: discard unused features, tack on new functions, and constantly test the waters of market demand. Lean startups must sense the subtle shifts in consumer behavior and then relentlessly tinker with products to meet that demand. They must be willing to abandon products or businesses when they don’t prove profitable, pivoting and redeploying to follow the money.

By 2011, “lean” was on the lips of entrepreneurs and investors throughout Silicon Valley. Conferences and keynote speeches preached the gospel of lean entrepreneurship, but it wasn’t always a natural fit for the mission-driven startups that Silicon Valley fosters. A “mission” makes for a strong narrative when pitching to media or venture-capital firms, but it can also become a real burden in a rapidly changing market. What does a founder do when there’s a divergence between what the market demands and what a mission dictates?

China’s market-driven entrepreneurs faced no such dilemma. Unencumbered by lofty mission statements or “core values,” they had no problem following trends in user activity wherever it took their companies. Those trends often led them into industries crowded with hundreds of near-identical copycats vying for the hot market of the year. As Taobao did to eBay, these impersonators undercut any attempt to charge users by offering their own products for free. The sheer density of competition and willingness to drive prices down to zero forced companies to iterate: to tweak their products and invent new monetization models, building robust businesses with high walls that their copycat competitors couldn’t scale.

In a market where copying was the norm, these entrepreneurs were forced to work harder and execute better than their opponents. Silicon Valley prides itself on its aversion to copying, but this often leads to complacency. The first mover is simply ceded a new market because others don’t want to be seen as unoriginal. Chinese entrepreneurs have no such luxury. If they succeed in building a product that people want, they don’t get to declare victory. They have to declare war.

WANG XING’S REVENGE

The War of a Thousand Groupons crystallized this phenomenon. Soon after its launch in 2008, Groupon became the darling of the American startup world. The premise was simple: offer coupons that worked only if a sufficient number of buyers used them. The buyers got a discount and the sellers got guaranteed bulk sales. It was a hit in post-financial-crisis America, and Groupon’s valuation skyrocketed to over $1 billion in just sixteen months, the fastest pace in history.

The concept seemed tailor-made for China, where shoppers obsess over discounts and bargaining is an art form. Entrepreneurs in China looking for the next promising market quickly piled into group buying, starting local platforms based on Groupon’s “Deal of the Day” model. Major internet portals launched their own group-buying divisions, and dozens of new startups entered the fray. Yet what began as dozens soon ballooned into hundreds and then thousands of copycat competitors. By the time of Groupon’s initial public offering in 2011—the largest IPO since Google’s in 2004—China was home to over five thousand different group-buying companies.

To outsiders this looked like a joke. It was a caricature of an internet ecosystem that was shameless in its copying and devoid of any original ideas. And vast swaths of those five thousand copycats were laughable, the product of ambitious but clueless entrepreneurs with no prospects for surviving the ensuing bloodletting.

But at the bottom of that dogpile, at the center of this royal rumble, was Wang Xing. In the previous seven years, he had copied three American technology products, built two companies, and sharpened the skills needed to survive in the coliseum. Wang had turned from a geeky engineer who cloned American websites into a serial entrepreneur with a keen sense for technology products, business models, and gladiatorial competition.

He put all those skills to work during the War of a Thousand Groupons. He founded Meituan (“Beautiful Group”) in early 2010 and brought on battle-hardened veterans of his previous Facebook and Twitter clones to lead the charge. He didn’t repeat the pixel-for-pixel copying of his Facebook and Twitter sites, instead building a user interface that better matched Chinese users’ preference for densely packed interfaces.

When Meituan launched, the battle was just heating up, with competitors blowing through hundreds of millions of dollars in offline advertising. The going logic went that in order to stand out from the herd, a company had to raise lots of money and spend it to win over customers through advertising and subsidies. That high market share could then be used to raise more money and repeat the cycle. With overeager investors funding thousands of near-identical companies, Chinese urbanites took advantage of the absurd discounts to eat out in droves. It was as if China’s venture-capital community were treating the entire country to dinner.

But Wang was aware of the dangers of burning cash—that’s how he’d lost Xiaonei, his Facebook copy—and he foresaw the danger of trying to buy long-term customer loyalty with short-term bargains. If you only competed on subsidies, customers would endlessly jump from platform to platform in search of the best deal. Let the competitors spend the money on subsidizing meals and educating the market—he would reap the harvest that they sowed. So Wang focused on keeping costs down while iterating his product. Meituan eschewed all offline advertising, instead pouring resources into tweaking products, bringing down the cost of user acquisition and retention, and optimizing a complex back end. That back end included processing payments coming in from millions of customers and going out to tens of thousands of sellers. It was a daunting engineering challenge for which Wang’s decade of hands-on experience had prepared him.

One of Meituan’s core differentiations was its relationship with sellers, a crucial piece of the equation often overlooked by startups obsessed with market share. Meituan pioneered an automated payment mechanism that got money into the hands of businesses quicker, a welcome change at a time when group-buying startups were dying by the day, sticking restaurants with unpaid bills. Stability inspired loyalty, and Meituan leveraged it to build out larger networks of exclusive partnerships.

Groupon officially entered the Chinese market in early 2011 by forging a joint venture with Tencent. The marriage brought together the top international group-buying company with a homegrown giant that had both local expertise and a massive social media footprint. But the Groupon-Tencent partnership floundered from the beginning. Tencent had not yet figured out how to partner effectively with e-commerce companies, and the joint venture blindly applied Groupon’s standard playbook for international expansion: hire dozens of management consultants and use the temp agency Manpower to build out massive, low-level sales teams. Manpower headhunters made a fortune on fees, and Groupon’s customer acquisition costs dwarfed those of local competitors. The foreign juggernaut was bleeding money too quickly and optimizing its product too slowly. It faded to irrelevance while the bloodletting among Chinese startups continued.

From the outside, these types of venture-funded battles for market share look to be determined solely by who can raise the most capital and thus outlast their opponents. That’s half-true: while the amount of money raised is important, so is the burn rate and the “stickiness” of the customers bought through subsidies. Startups locked in these battles are almost never profitable at the time, but the company that can drive its losses-per-customer-served to the bare minimum can outlast better-funded competitors. Once the bloodshed is over and prices begin to rise, that same ruthless efficiency will be a major asset on the road to profitability.

As the War of a Thousand Groupons progressed, the combatants fought for survival in different ways. Like gladiators forming factions in the coliseum, weaker startups merged in hopes of achieving economies of scale. Others relied on bursts of high-profile advertising to briefly rise above the fray. Meituan, though, held back, consistently ranking in the top ten but not yet pushing to take the top spot.

Wang Xing embodied a philosophy of conquest tracing back to the fourteenth-century emperor Zhu Yuanzhang, the leader of a rebel army who outlasted dozens of competing warlords to found the Ming Dynasty: “Build high walls, store up grain, and bide your time before claiming the throne.” For Wang Xing, venture funding was his grain, a superior product was his wall, and a billion-dollar market would be his throne.

By 2013, the dust began to settle on what had been the wildest war of copycats the country had ever seen. The vast majority of combatants had perished as victims of brutal attacks or their own mismanagement. Still standing were three gladiators: Meituan, Dianping, and Nuomi. Dianping was a longstanding Yelp copycat that had entered group buying, while Nuomi was a group-buying affiliate launched by Renren, the Facebook copycat that Wang Xing himself had founded and sold off. These three accounted for more than 80 percent of the market, and Wang’s Meituan had grown to a valuation of $3 billion. After years spent photocopying American websites, he had learned the craft of the entrepreneur and won a huge chunk of a massive new market.

But it wasn’t by sticking to group buying that Meituan became what it is today. Groupon had largely stayed with its original business, coasting on the novel idea of discounts through groups. By 2014, Groupon was trading at less than half of its IPO price. Today it’s a shell of what it had been. By contrast, Wang ceaselessly expanded Meituan’s lines of business and constantly reshaped its core products. As each hot new consumer wave washed over the Chinese economy—a booming box office, a food-delivery explosion, massive domestic tourism, flourishing online-to-offline services—Wang pivoted and ultimately transformed his company. He was voracious in his appetite for new markets and relentless in his constant iteration of new products, a prime example of a market-driven lean startup.

Meituan merged with rival Dianping in late 2015, keeping Wang in charge of the new company. By 2017 the hybrid juggernaut was fielding 20 million different orders a day from a pool of 280 million monthly active users. Most customers had long forgotten that Meituan began as a group-buying site. They knew it for what it had become: a sprawling consumer empire covering noodles, movie tickets, and hotel bookings. Today, Meituan Dianping is valued at $30 billion, making it the fourth most valuable startup in the world, ahead of Airbnb and Elon Musk’s SpaceX.

ENTREPRENEURS, ELECTRICITY, AND OIL

Wang’s story is about more than just the copycat who made good. His transformation charts the evolution of China’s technology ecosystem, and that ecosystem’s greatest asset: its tenacious entrepreneurs. Those entrepreneurs are beating Silicon Valley juggernauts at their own game and have learned how to survive in the single most competitive startup environment in the world. They then leveraged China’s internet revolution and mobile internet explosion to breathe life into the country’s new consumer-driven economy.

But as remarkable as these accomplishments have been, these changes will pale in comparison to what these entrepreneurs will do with the power of artificial intelligence. The dawn of the internet in China functioned like the invention of the telegraph, shrinking distances, speeding information flows, and facilitating commerce. The dawn of AI in China will be like the harnessing of electricity: a game-changer that supercharges industries across the board. The Chinese entrepreneurs who sharpened and honed their skills in the coliseum now see the power that this new technology holds, and they’re already seeking out industries and applications where they can turn this energy into profit.

But to do that they need more than just their own street-smart business sensibilities. If artificial intelligence is the new electricity, big data is the oil that powers the generators. And as China’s vibrant and unique internet ecosystem took off after 2012, it turned into the world’s top producer of this petroleum for the age of artificial intelligence.