China selects ‘Little Giants’ to compete against Silicon Valley in US tech war

It is the designation for a new generation of startups that have been selected under an ambitious government program aimed at fostering a technology industry that can compete with Silicon Valley. These often-vague companies have demonstrated that they are doing something innovative and unique, and they are targeting strategically important areas such as robotics, quantum computing and semiconductors.

Wu Gansha won the title of little giant for his autonomous driving startup after a government review of its technology. This gave Beijing-based company, UC, an extra dose of credibility and financial benefits. Last year, it raised more than 1 billion yuan ($157 million), including money from state-owned funds. It has also become a unicorn with a valuation of at least $1 billion.

“It’s an honor to wear the tiny giant label,” Wu said. “The essence of the project is that companies should have some feature that others don’t.”

The program has been around for more than a decade, but gained new prominence after Beijing launched sweeping crackdowns against major companies such as Alibaba and Tencent. The label of small giants has become an important measure of government support, a sign to investors and employees that companies are immune to regulatory penalties. President Xi Jinping has given his personal blessing to the program.

‘It’s helpful to startups in many ways: it’s a subsidy. This is a grant. It’s an honor. It’s a seal of approval,” said Lee Kai-fu, founding managing director of venture firm Synovation.

The program is key to the Communist Party’s ambitious strategy to restore the country’s technology industry. For two decades, China largely followed the Silicon Valley model, allowing entrepreneurs to pursue their ambitions with little government oversight. It garnered huge successes including e-commerce pioneer Alibaba, social media giant Tencent and ByteDance Ltd., maker of the hit TikTok short-video app.

But in a series of regulatory moves over the past year, Beijing made it clear that the technology industry must conform to the government’s priorities. Alibaba and Tencent were quickly forced to crack down on anti-competitive practices, while game companies were forced to limit minors to three hours of online play per week. Broadly speaking, the government has indicated that soft internet services are out of favor.

Instead, Beijing aims to shift resources to strategically important technologies such as chips and enterprise software. The Ministry of Industry and Information Technology has nominated 4,762 smallholders since 2019, many of them in the semiconductor, machinery and pharmaceutical industries. The designation typically comes with attractive incentives from central government or provincial authorities, including tax cuts, generous credit, and favorable talent acquisition policies.

“What the country is trying to promote is more hardcore technology,” said Yipin Ng, founding partner of Yunqi Partners, a venture fund investing in smaller giants. they are trying to do. Promoting – things that make China more competitive.”

Governments from the US to Africa have instituted programs to support small enterprises, but China’s efforts dwarf them in terms of scale, resources and ambition. Xi, the country’s most powerful leader since Mao, has launched half a dozen programs that will collectively distribute trillions of dollars in the pursuit of economic strength, social stability and technological freedom.

The American trade war further hardened the Communist Party’s resolve to create a self-sustaining industry. The country’s vulnerability was exposed when Donald Trump’s administration blacklisted national champions such as Huawei Technologies Co and Semiconductor Manufacturing International Corp, barring them from buying US components such as chipsets and industrial software, crippling operations.

The concept of small giants dates back to at least 2005, when the local government in Hunan Province established policies to support small enterprises. The central government’s powerful MIIT supported the Hunan Campaign, which included land grants and financial support, as a model for private sector development. In places like Tianjin, local governments started their own initiatives.

It was with the trade war in 2018, that the central government began to pursue the program seriously. MIIT announced plans to create around 600 smaller giants that would develop core technologies. The designation winning process was designed to boost competition and identify the most promising companies.

Candidates apply with a six-page form detailing financial position, number of patents and research achievements. In the first round of selection, each province could nominate no more than a dozen companies. The country’s top three technical centers – Beijing, Shenzhen and Shanghai – had a combined quota of only 17 candidates.

Guan Yaxin, chief operating officer of Beijing-based ForwardX Robotics, said the process was relatively easy for his company because it has proven innovations with 121 patents worldwide, including 25 in the US.

“This government support is very helpful when I expand the business because customers will understand that we are not just a random startup,” she said.

MIIT has since expanded the program to thousands of companies, with about 1,000 “priority small giants” at the top of the hierarchy. Members of this rare club, which includes Wu’s UC, receive funding directly from the central government. In January, the Ministry of Finance set aside at least 10 billion yuan to finance small and medium-sized enterprises by 2025, with the lion’s share directly funding the research of priority startups. The goal is to create 10,000 small giants by 2025.

“It is quite clear that this is a selection of companies very subordinate to China’s specific industrial policy and needs,” said Barry Naughton, a professor and Chinese economist at the University of California, San Diego. “They were selected partly because they are good firms, but an equally important criterion is that they meet the immediate policy needs of the government right now.”

There are many risks. The success of China’s technology industry over the past 10 years has come from giving entrepreneurs such as Alibaba’s Jack Ma and ByteDance’s Zhang Yiming the freedom to build their businesses. Naughton said inverting the model to focus on the government’s priorities leads to waste and failure.

“These are small companies that are being nurtured because they could potentially be alternative suppliers. How do you raise them? You throw money at them,” he said.

Smaller giants have become popular targets for venture capitalists, many of whom lost money on portfolio companies during Beijing’s crackdown. A VC said that some startups in the program have been able to raise capital in the past six months, while their valuations have increased by 50% to 75%. Another VC reportedly invests only in companies that are recognized by the government as small giants.

Guizhou Changtong Electric Limited co-founder Zhang Hui applied for the program in Guizhou province in 2020 and received an award last year based on his company’s power tool technology. The startup soon landed more than 100 million yuan from state-backed funds, and other investors are knocking on its door to offer additional capital.

“Of course, venture investors will pursue smaller giants for investment,” he said. “It would be surprising if they didn’t.”

Venture investment in China hit a record last year despite the crackdown. According to research firm Preakin, the value of deals increased nearly 50% to $130.6 billion in 2021.

EcoFlow Inc., a portable battery startup in Shenzhen, announced a 100 million yuan fundraising led by Sequoia as the company won the tiny giant label from MIIT. The four-year-old company is now planning an initial public offering in its hometown within three years.

The government is making it easier for these startups to go public, another incentive for entrepreneurs and venture investors. China established a dedicated stock exchange in Beijing last year to help small enterprises raise capital.

ForwardX Robotics’ Guan pointed out that founders retain control of their companies, even if they participate in such government programs. Her company, which makes mobile robots used in manufacturing and logistics, has about 300 employees and plans to expand into Japan and the US. Let’s try.

“Many of them are now much smaller than multinationals,” she said. “But the government sees the potential for him to become a real giant one day.”

This story has been published without modification in text from a wire agency feed. Only the title has been changed.