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Reporter's notebook: China's shedding its copycat image with innovation after innovation

  • China has become an emerging name in technology due to the success of internet companies like Tencent, Alibaba and Baidu
  • Mainland firms dominate areas of tech including payments, drone manufacturing and artificial intelligence
  • In order to make money in China's tech and innovation space, investors need to bet on the right company
Kiszon Pascal | Getty Images

This article is part of a "Reporter's Notebook" series, wherein CNBC journalists submit tales and observations from the field.

China's shift from a country that copies ideas from the West to a tech and innovation powerhouse is no longer an aspiration — it's a fact.

That was the repeated conclusion last week at one of Asia's largest tech conferences.

"China is changing from the so-called copycat nation to innovation nation," Jing Ulrich, managing director and vice chairman of APAC at JPMorgan Chase, told audiences at the RISE conference in Hong Kong last week.

China's rise in technology has been spurred by the emergence of large companies such as Tencent, Alibaba and Baidu that paved the way for other local firms to follow.

Leading innovation at home

Both consumer appetite and government support led to the creation of new industries and the domestic dominance of Chinese firms in existing areas of technology.

For example, a new sector closely watched by investors is China's massive bike-sharing industry. Though there are several competitors vying for market share, two prominent companies stand out: Mobike and Ofo. They have both raised large chunks of money from local and overseas investors.

JPMorgan's Ulrich said Chinese companies are also leading in areas including mobile payments, internet finance, drone manufacturing, social media and artificial intelligence.

"Tencent especially — they're so powerful in China, people actually line up, take numbers trying to see them, to do business with them because of that powerful status" -Bessie Lee, Founder and CEO, Withinlink

Part of that success comes from the government's efforts to drive mass entrepreneurship and innovation. Last month in Dalian, Premier Li Keqiang said in a speech that, in the last three years, more than 15,000 enterprises were registered every day on average and about 70 percent of them were active in business.

Ulrich told CNBC that China's mass-entrepreneurship drive shows the emphasis was to push "innovation at the grassroots. That's going to help China go to the next level, in terms of economic development."

And while the government is key, consumers are also driving technological advances in the country.

Alan Bollard, executive director at the Asia Pacific Economic Cooperation Secretariat, said China is altogether "moving to another zone, particularly driven by this huge middle class which is saying they want a whole lot of new technologies."

Still, while Chinese companies are innovating in established technological categories, they are not yet broadly creating new classes of technology.

Yet overseas success remains elusive

Despite their massive presence in the domestic market, many Chinese tech companies struggle to find strong demand overseas. Outside China, Alibaba and Tencent, for example, face stiff competition from the likes of Amazon and Facebook — both U.S. brands are considered established major players in multiple markets and have amassed a loyal brand following.

When Chinese tech companies arrive in U.S. and European markets, they need to start from scratch, according to Bessie Lee, founder and CEO at Chinese start-up incubator and early stage venture fund Withinlink.

"You see more mergers happening between number one (firm in a sector) and number two so that it becomes easier for someone to take over the market and make money." -Hans Tung, Managing partner, GGV Capital

Lee, who was the former CEO of WPP China, contrasted that state of affairs to Chinese tech giants' dominance at home. "Tencent especially — they're so powerful in China, people actually line up, take numbers trying to see them, to do business with them because of that powerful status," she told audiences at RISE, adding that success outside of China for these companies may look very different from their dominance in the domestic market.

While tech companies figure out ways to conquer markets outside China, the mainland also has to grapple with another key issue — jobs. Its massive population requires about a million new jobs every month while Beijing fends off competition from relatively cheaper places like Myanmar, according to APEC's Bollard.

Betting on the right horse

But China's domestic market is still an attractive investment prospect for investors looking to ride on the wave of technological developments in the mainland.

In recent years, many Chinese start-ups have seen their valuations rise: Data from CB Insights show more than 50 Chinese companies with valuations above $1 billion. For one, Didi Chuxing, which dominates China's ride-hailing market, is valued at $50 billion — only behind rival Uber on the global list of "unicorns."

While some argue valuations for many tech firms are too high, GGV Capital Managing Partner Hans Tung told CNBC that it ultimately comes down to betting on "the right horse."

"Whoever ends up (becoming) number one in the category wins big because the market's massive," Tung said. "So the premium you pay along the way (is) kind of being affected in a positive way by just the growth ahead."

The key is to be able to pick one of the top two companies to bet on because, Tung explained, those firms often merge to expand their market share. Didi Chuxing was, for example, the result of a merger between two major ride-sharing companies Didi Dache and Kuaidi Dache.

"You see more mergers happening between number one (firm in a sector) and number two so that it becomes easier for someone to take over the market and make money," Tung said.