E-commerce innovation at the center of an economic and geopolitical challenge: Amazon vs. Alibaba

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2.2 CLASH FOR INNOVATION BETWEEN EAST AND WEST 
The Consumer Electronics Show (CES) in Las Vegas where every year the latest gadgets offered by 
technology companies are presented to the world, is traditionally dominated by American 
companies. But in the last years, the show was marked by the increased presence of Chinese 
companies. More than a third of the 4,000 exhibitors were from China, most of them headquartered 
in the southern city of Shenzhen, which is rapidly emerging as a technology hub rivaling Silicon 
Valley. Among the Chinese products on display were virtual reality devices and smart cars with facial 
recognition software.
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The CES has shown that China is becoming a breeding ground for innovation, and its ambitions are 
not limited to consumer gadgets. Spurred by the government initiative "Made in China 2025", 
Chinese manufacturers are developing advanced industrial robots and high-speed trains. Internet 
companies like Alibaba and Baidu are leading the way in areas where American companies were once 
predominant, such as Artificial Intelligence, while ecosystems of technological start-ups with a spirit 
of conquest are developing in cities Chinese.
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China has a powerful culture of innovation and entrepreneurship and it’s free of regulatory barriers 
as a factor in the rise of license-free innovation.  In order to understand why the Chinese government 
is so keen to promote technological progress, it is important to understand the role of innovation in 
economic growth. At the beginning of the 20th century, the Austrian economist Joseph Schumpeter 
identified five different types of innovation
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: 
- The introduction of new products 
- New production process 
- The opening of new market 
- New sources of supply  
- New organizational structures. 
 
13
 Source: ces.tech 
14
 Source: ispionline.it/it/tag/made-china-2025 
15
 Source: economicsdiscussion.net
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According to him, the combination of these factors stimulates the type of "creative destruction" which 
generates rapid economic development. 
East Asia has been the cradle of this kind of development for the past fifty years. During the post-war 
years, Japan became prosperous by targeting its investments in education and new technologies, and 
its model was followed by the "Asian tigers".
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 Starting with the manufacturing of basic products, 
these countries have skillfully turned towards more value-added sectors as they develop. 
China was inspired by this example. The rapid development of the country since Deng Xiaoping's 
“Reform and opening '' period, in the 1980s, depended on the use of the large Chinese labor force to 
manufacture products intended for export to the world market, first in low-wage sectors like textiles, 
then in more complex and creative fields. 
The Chinese government wants to capitalize on this progress. Despite its incredible rise in the past 
thirty years, China still lags behind the United States and Western European countries in the 
manufacturing of high-end products. This is the motivation of the '' Made in China 2025 '' plan, 
officially launched in 2015. Modeled on German '' Industry 4.0 '', this initiative aims to revive 
technological innovation in the sector via targeted public investments. As it grows, China may find 
itself trapped in the middle of the value chain, between countries that offer low-cost outsourced labor 
and nations with better manufacturing quality. China invests heavily in factories and assembly sites 
through robotic automation, which tends to improve the quality of production. The government is 
particularly concerned with building a national semiconductor industry to reduce dependence on the 
import of computer chips and has allocated billions of US dollars in public and private funds for these 
purposes.  
Another priority is aeronautics, where the government encourages companies to cooperate with 
foreign players to develop their expertise. French multinational Airbus agreed to increase assembly 
operations at a facility in the eastern city of Tianjin, which it runs as a joint venture with Aviation 
Industry Corporation of China (AICC), owned by the State. Airbus will benefit from increased access 
to what is now the largest commercial aircraft market in the world, while AICC will gain knowledge 
of engine design and engineering methods. 
 
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 “The Four Asian Tigers are the high-growth economies of Hong Kong, Singapore, South Korea, and Taiwan. Fueled by 
exports and rapid industrialization, the Four Asian Tigers have consistently maintained high levels of economic growth 
since the 1960s, and have collectively joined the ranks of the world's wealthiest nations. Hong Kong and Singapore are 
among the most prominent worldwide financial centers, while South Korea and Taiwan are essential hubs for the global 
manufacturing of automobile and electronic components, as well as information technology”. Source: investopedia.com
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According to some critics, China's willingness to engage in "knowledge transfer" with Western 
companies is tantamount to a state-sponsored industrial looting program. Robert Atkinson
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, 
president of the think tank “Information Technology and Innovation Foundation”, thinks that Made 
in China is an "aggressive strategy using whatever means necessary to manipulate series the market, 
plunder and force the transfer of American know-how ''. Donald Trump's administration has ordered 
a review of Chinese intellectual property practices, which could lead to punitive unilateral sanctions 
under Section 301 of commercial authority.
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 Whether the charge of theft is justified or not, there is 
evidence that the Chinese government's technology investment program is not just about improving 
growth and productivity. 
For investors hoping to identify the next step forward, in Chinese innovation, it may be helpful to 
understand the government's broader goals. Considering the one of the industrial technological areas, 
in which China is becoming a world leader, is the machine vision. Equipping industrial machines 
with sensors capable of capturing and recognizing images thanks to Artificial Intelligence (AI), 
allows companies to automate the elements of the production line and refine quality control. But this 
technology is also useful in surveillance. HikVision, a Hangzhou-based company leader in industrial 
cameras and sensors, is also specialized in the manufacture of advanced video surveillance 
cameras. HikVision's largest shareholder is a Chinese state-owned enterprise, China Electronics 
Technology Group
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, the products of which are used to monitor population and early signs of civil 
unrest, a priority of the Xi Jinping government. The need to monitor citizens in public spaces and on 
the internet is a source of strong growth in Artificial Intelligence and facial recognition. HikVision 
has created advanced facial recognition software, which can identify and zoom in on an unknown 
face in a crowd. The company has attracted public investment as well as a large number of private 
funds focused on AI automation. 
Beijing has developed close relationships with the Chinese trio of internet giants, Baidu, Alibaba and 
Tencent (the "BATs"), for similar reasons. Unlike the large Western technology companies, which 
 
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 “As founder and president of the Information Technology and Innovation Foundation (ITIF), recognized as the world’s 
top think tank for science and technology policy, Robert D. Atkinson leads a prolific team of policy analysts and fellows 
that is successfully shaping the debate and setting the agenda on a host of critical issues at the intersection of 
technological innovation and public policy”. Source: itif.org 
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 “Section 301 of the Trade Act of 1974 provides the United States with the authority to enforce trade agreements, 
resolve trade disputes, and open foreign markets to U.S. goods and services. It is the principal statutory authority under 
which the United States may impose trade sanctions on foreign countries that either violate trade agreements or engage 
in other unfair trade practices. When negotiations to remove the offending trade practice fail, the United States may 
take action to raise import duties on the foreign country's products as a means to rebalance lost concessions”.  
Source: legacy.trade.gov 
19
 Source: HikVision - 2019 Quarter 1 Report - January to March 2019
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have faced governments over the sharing of user data in recent years, BATs systematically provide 
the State with information on the online behavior of customers. This mass of data facilitates the 
development of the planned "social credit system", which aims to monitor the financial situation, 
political obedience and civic conscience of citizens.
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But the history of innovation in China tells much more than the only existence of an authoritarian 
government seeking to control its people. China has invested heavily in quality education for its 
citizens and now has millions science and engineering graduates, way more than the United States
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. 
Technology hubs have emerged in better universities in cities like Guangzhou, Beijing, Shanghai and 
Hangzhou, while companies seek to attract the best talented graduates.  Taking WeChat
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 application 
as an example, what started out as a simple messaging service, now works as a complete operating 
system. Users can book taxis and holidays abroad, restaurants, play games, pay their bills, and buy 
items from physical stores, without ever leaving the app.  
The harmonious integration of financial elements into this kind of platforms, accompanied by similar 
innovations from Alibaba and Baidu, has transformed China into a world leader in FinTech.
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 These 
companies have started to move beyond digital payments to insurance, wealth management and peer-
to-peer lending, taking advantage of their ability to collect data on potential customers to offer them 
new products and services. BATs are also more efficient in certain disciplines of Artificial 
Intelligence: Baidu is now the recognized leader in voice recognition technology, for example. When 
Microsoft announced in October 2016 that its software had surpassed human recognition standards, 
Baidu's announced that it had accomplished the same thing, for the Chinese language, 12 months 
earlier.  
 
20
 Source: eurozine.com 
21
 “Growth in the number of engineering students has been particularly explosive as part of the government’s push to 
develop a technical workforce which can drive innovation”. Source: weforum.org 
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 “WeChat is a mobile text and voice messaging communication service developed by Tencent in China, first released in 
January 2011. The app is available on Android, iPhone, BlackBerry, Windows Phone platforms. WeChat has over 700 
million downloads, with 300 million active users. This makes it one of the most popular social apps in the world, and a 
valid competitor to WhatsApp and Viber. WeChat has multiple features including video chat, voice calling, SMS, games, 
QR code scanning and much much more. WeChat offers full M-commerce capabilities inside the app. WeChat was built 
and owned by Tencent Holdings Limited, which is China’s first globally known Internet brand.” Source: 
whatiswechat.com 
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 “Financial technology (abbreviated fintech or FinTech) is the technology and innovation that aims to compete with 
traditional financial methods in the delivery of financial services. It is an emerging industry that uses technology to 
improve activities in finance”. Source: wikipedia.org