What's the Deal with China?

Guy Kawasaki, managing director of Garage Technology Ventures, interviewed some insiders on Silicon Valley's relationship to the global economy at the Silicon Valley 4.0 conference a few months ago. This session was called From Valley View to World View.

Kawasaki: A couple of weeks ago I went to Shanghai, and I was truly amazed. I have never seen a city that has developed so fast, and there are so many peopleÖand the spirit, the energy. In Silicon Valleyódespite what Craig and Aaron might sayówe're kind of walking around looking at our shoes, kicking at the dust, wondering where we lost it. But in Shanghai, they are just kicking butt. You said you have offices in Asia now; you're opening in China. What's the deal on China? Frankly, does the United States have a chance against China? I'd like each of you to talk about China and your perspectives on China or Asia.

Joseph Chamie: Mr. Chamie is the director of the population division of the UN's Department for Economic and Social Affairs. If you look at the world's powers, the United States is a major super power. It's also the demographic power. We have 283 million people roughly in this country. We're receiving half of the international migrants. There are about 2.4 million people moving every year, and the United States is taking half of them. We're taking as fast as we can all the minds, all the brains. If you graduate from Princeton, Columbia, Berkeley, or Caltech and you want to stay here, you'll stay, so the United States has an advantage.

The European Union, on the other hand, generally is declining. At the end of the 90s, Europe's population maxed out. It had been growing for centuries, it maxed out, and now it's declining. They're not taking any migrants. Italy's labor force, for example, in 50 years will decline by 40 percent. Italy in 2050 will be smaller than it was in 1950.

Compare China, which went through a dramatic transition. The biggest country in the world reduced fertility in the 1960s from an average of about six children to less than two. China has the dynamic opportunity because it's getting a demographic bonus: few children, few elderly. It's really benefiting the same way Korea did. Korea, though, is past that.

The United States demographically is very dynamic, and Europe isn't. China is benefiting from its demographic bonus, and India is close on its heels. India and China are the only billion populated in the world and will remain that way for some time. But the United States by 2050 will [have] about 400 million people. You have to understand who's coming in, what they're speaking, where they're going, and what they're going to do to understand how you're going to compete with the Chinese.

Just keep this in mind: The Chinese are very hungry for advancement. They have all the values the Americans have. They want to advance, they want education, they want their children to do wellóand just rememberófor every two parents, there's one child. It's a great investment going on in China, and I think they're going to make massive improvements. As I said, the ultimate computers are human minds: when you educate the Chinese and the Indians, they're going to compete very aggressively.

Irwin Federman: Mr. Federman is a general partner at US Venture Partners. We've seen in the technology community an increasing presence of China specifically. It's very hard for usóor for me; I can speak for myselfóto project decades out and predict how things will change because along the way there are going to be a lot of mid-course corrections. In the next few years, the affect of 6,000 or 7,000 Chinese who have worked and been educated in the United States going back to ChinaóI believe that's the numberówill provision China with technology arts and know-how that didn't happen in Korea or Japan.

In addition to the number of graduates coming out of the Chinese universities, there's going to be an immigration of very keen American technology into China by virtue of these senior people who are going back to China and teaching their compatriots. That will probably have the effect of increasing the pace of innovation coming out of China. Again, something that hasn't happened in Japan and Korea.

Early on, Japan, some of the European countries, and later America viewed China as their market. China views the rest of the world as its market. Can they both be right? Perhaps. But the Chinese are not interested only in serving their own domestic economy; they're interested in the next full economy, and they want high currency. So our perception of China as a market is changing a little bit now, and it's going to change materially.

The worm in all this is globalization. If higher-paying jobs are shifted to other countries out of the United States, are the people thus relocated to other jobs going to be relocated at the same salary levels, at the same income levels? And if they are not, what's going to happen to the United States as a market, and will things start to shift? I believe they will. I don't believe you can just add on in different parts of the world, and everything else stays the same. It may not be a zero-sum game, but it's not totally additive either.

My sense is that as success comes to China, as incomes rise in China, there's going to be more opportunity for the United States as an exporter to China because we're not going to have the same disadvantage in economics as we have todayónot if we keep shifting higher-paying jobs over to China. If we hire Indian engineers for one-fifth of the salary in United States, what's going to happen to that engineering population here? What's the spending capability going to be? It's going to be dependent upon their earning capacity, and how is the balance in the world going to play out?

In the near term, China is hot. You don't have to be a genius or even half-awake to recognize that. But over time, I think that the prosperity for China is going to be a good thing for us, and I think if we stick to our strengths, which [include] innovation, and accelerate them, we're going to find new markets.

Aaron Gershenberg: Mr. Gershenberg is a managing director for Silicon Valley Bank. I recently caught up with Cliff Higgeron over at ComVentures, who has kind of staked out a ground in this discussion around China and Asia that's pretty controversial and interesting. His is that in the communications industry, the future is China, because they are investing the next-generation technologies that are going to be tested, proven, broken, and fixed, and the rest of the world is going to be forced to adopt those standards. Not that that's what's going to happen, but it's just an interesting perspective for someone who's been very successful investing in communications and who is basically seeding the future of the communications investing opportunity to China.

I'd say that from where we sit, we're looking at China and saying there are a lot of people, there are huge markets, and there's a lot of money going in there. We've got to get over there and understand what the rules are of the game, how we participate, and how we play. It's not clear that the fundamentals of our industry hereóthe inquisitive nature of companies, the public markets accepting technology companiesówhether that's something that does get replicated as easily over in Asia. So seemingly, I see the venture capital industry having to evolve to participate in what's happening in Asia, but we're going to have to understand what those rules are, and they are changing as we speak.

Craig Johnson: Mr. Johnson is chair and cofounder of Venture Law Group. Speaking from a service business perspective, it is an interesting new world. We've seen a shift toward Asia and, in particular, China and India for a long time, but it's becoming more pronounced. I had the experience of being in a board meeting with one of our venture-funded clients, and the company is headquartered here but has most of its engineers over in Shanghai. The first 10 minutes of the meeting were in English, and the rest was in Chinese, and I could kind of follow along because the slides were in English PowerPoint, but it was still an interesting challenge.

I think that there are going to be challenges for China, such as issues of legal systems and clarity. Laws and institutions there as well as in other countries are so evolving. I think the more certainty you have in terms of what the rules of the game are, the easier it is to play the game. And there is still some uncertainty, which I think impairs investment in places like China and in other Asian countries as well as other countries throughout the world.

I happen to still be pretty optimistic about Silicon Valley. I think we haven't lost the secret sauce. I think that there is still no better place in the world to get a cutting-edge company or a new industry started than here, because you have the informality, the know-how, the talented people, the multidisciplinary environments. What other area of the world has the dominance that we have in life sciences, semi-conductor technology, computer technology, software, and the Internet? I don't want to be chauvinistic, but I still think it's a pretty good place to start a company. But I do believe over time, each area will have its own distinctive advantage, and I'm very excited about what's going on in China right now. I think there's a tremendous amount of opportunity.

This material was excerpted from the Silicon Valley 4.0 conference, hosted by the Churchill Club and Garage Technology Ventures. Guy Kawasaki led the discussion with Joseph Chamie, director of the population division of the UN's Department for Economic and Social Affairs; Aaron Gershenberg, managing director for Silicon Valley Bank; Craig Johnson, chair and cofounder of Venture Law Group; and Irwin Federman, general partner of US Venture Partners. Part five of five; see part one, part two, part three, and part four.