How will China innovate?

Doubting whether China can really innovate, a la Silicon Valley? China sure can copy a U.S. technology and implement it in its own market. We’ve seen that in search engine Baidu (very similar to Google), semiconductor company SMIC, and job search company 51Job. So they’re just copying our stuff, right? Surely, they’ll never lead!

Not so fast. We talked the other day with Ronald Chwang, over at Acer Technology Ventures.

He’s one of four partners in the Silicon Valley office (Santa Clara) of the venture firm, a spin-off from the Taiwanese computer company Acer. The firm was on the early side of the latest wave of VC firms scrambling to invest in China, making its first investment there in 2000.

True, Chwang is here in Silicon Valley, he says, because it still leads technology innovation broadly. Hands-down winner. Developments in intellectual property, new business models, or just divining things that are “very hard to do” — it’s largely happening here in the San Francisco Bay Area. So the trick so far has been to apply the innovations here to the market back in China, tweaking products so they fit in with local usage habits, cultural preferences and so on.

But then Chwang says things have been shifting lately. In some areas where China’s market size so exceeds the U.S., they’re poised to sneak ahead with several technology innovations. Take the mobile phone usage, where China clearly exceeds the U.S. Chinese companies, he says, are developing new ring tone, music/picture/video messaging capabilities not yet seen here. “Just because of sheer population,” he says. Short Messaging Service (SMS) is taking off faster in China because of the country’s censorship of official newspapers and online news sites. “SMS is China’s underground news media,” he notes. He predicts new innovations sprouting from that usage. Another area is in DVD media. China already has a higher DVD standard, offering higher quality and more storage capability than the going US standard. And with broadband usage taking off in China, companies are moving aggressively to offer video-on-demand — something slow to catch on here. So just as Japan forged a lead in consumer electronics, China has potential to lead in several of these new mobile/DVD/broadband areas, Chwang concludes.

This should be interesting to watch. Chwang’s firm, meanwhile, is putting its money where its mouth is. His firm recently raised a new venture capital fund dedicated solely for China.