Venture capitalists beware: Chinese factories may eat your lunch
Hong Kong: For decades China’s contract manufacturers have been content mostly to churn out gadgets designed by the world’s tech companies. Now they’re going a step further—seeking out entrepreneurs and building their designs in hopes of finding the next must-have device.
Plants like Jetta Co. Ltd in Guangzhou are cutting out the traditional role of venture capital firms by shouldering some of the risk of developing a new product. They seek out ideas at trade events or from referrals. Then in-house teams build and test prototypes and even make small batches to gauge the market.
Chinese electronics factories are trying to adapt as Donald Trump targets the US trade balance with China and competition rises from plants in Southeast Asia with cheaper labour. Backing startups may provide a way to weather those challenges, said Paul Travers, founder of New York-based Vuzix Corp., which produces augmented reality lenses.
“The VC structure has given manufacturers a model of investment,” said Travers, whose company had worked with Jetta for four years. “Investing also ensures future business.”
The trend has fuelled the biggest wave ever of new devices, said Benjamin Joffe, a Shenzhen-based partner at hardware startup accelerator HAX. A walk down Shenzhen’s Huaqiangbei electronics market shows how varied that wave is.
A plethora of gadgets cram the shelves, from a neon-lit unicycle blasting music from embedded Bluetooth speakers, to a smartphone that doubles as an electric shaver. Most will fail to catch on, but like the VCs, the plants only need a few hits to make it worth the risk.
“They are backing startups not with money but with manufacturing abilities and sometimes generous payment terms,” said Joffe. They are “thinking that home-runs come from swinging the bat more often.”
One of the biggest hits for Jetta is Sphero’s BB-8. Long before the Star Wars robot toy became a staple of Christmas wish-lists around the world, Jetta worked with Boulder, Colorado-based Sphero to realize co-founder Paul Berberian’s vision of building a ball that could be controlled by a smartphone.
The Chinese factory, which counts Hasbro Inc. and Mattel Inc. among its clients, leveraged 600 engineers and developers to help create a remote-controlled orb that could roll a metre per second in a straight line. Sphero’s popularity eventually led to the production of 3 million units, prompting other start-ups to flock to Jetta for partnerships.
“It’s a nice symbiotic relationship,” said Berberian. “Jetta was able to make something really refined, and we put our software on it and it really took off.”
“Factories are starting to take these startups seriously by taking on their projects, in the past they wouldn’t even look at them,” said Wayne Xiong, a partner at China Growth Capital, a Beijing-based venture capital fund which manages about $650 million of assets. He said that, while some factories have realized the value of doing what VCs traditionally do, there will still be a need for venture capitalists who provide funding and expertise in areas such as choosing suppliers, negotiating distribution and poaching talent.
For Jetta, if it likes an idea, engineers help create a prototype, sometimes before any money is paid, said product manager Yang Siping. The method has helped the company build a reputation through word of mouth.
“We try to identify startups five to six years before they become big, then we try to nurture them and help them grow,” said Lewie Leung, 42, assistant director at the research and development unit of Jetta. “An important thing for us is to keep up with new technology, and at the time we felt that this was something we needed to learn about.”
Jetta’s relationship with Sphero shows how startups are protecting intellectual property. While Jetta helped develop the hardware, the key to the BB-8’s cute, bumbling behaviour is Sphero’s internet-enabled encrypted software, with updates that users can download.
It’s a model used by Dallas-based Robokind which makes humanoid robots that help teach autistic children. chief technology officer Richard Margolin said one of the most important factors in choosing a manufacturing partner was reliability.
“There are a lot of fly-by-night factories that will say yes to anything,” Margolin said. “What they can produce is a totally different story.”
Andrew Wen, director of manufacturing for Vuzix, said there are a number of factories in Guangdong province now that invest in customers’ product development. Big, established players like GoerTek Inc. and US-based Flex Ltd, with client lists including many of the world’s big consumer electronics brands, are being joined by smaller Chinese factories looking to move up from traditional contract design and prototyping.
“We value innovation, especially projects that could be important for future business,” said Jia Yang, GoerTek’s Shandong-based investment relations manager. GoerTek has invested in smartwatch makers Mobvoi Inc. and Pacewear, and in January bought $23.9 million of shares in US wearable technology startup Kopin Corp.
The growth of the sector reflects a wider shift in Guangdong, which was the epicentre of China’s industrial transformation in the 1990s. The province is locking horns with dozens of regions in a race to build a Silicon Valley-like hub, allotting resources for more than 1,100 incubators and startup spaces. The shift has helped the province’s economy double to 7.95 trillion yuan ($1.15 trillion) in the seven years to 2016. Bloomberg