Last month, Hua Yuan Science and Technology Association (HYSTA), an organization focused on the cross-section of technology between Silicon Valley and Asia, hosted its annual conference with the headlined theme of “Drivers of Growth and Innovation.” After glancing at the session titles, however, the conference could just have been well been titled “Drivers of Growth and Innovation in China’s Internet sector.” Nearly all the panels focused on some aspect of China’s growing online space.

Was China going to be the “next Silicon Valley?” How did China’s Internet sector compare with the US? I had a chance to talk with some of the investors and entrepreneurs in the space (more posts to follow), with an initial article on the subject:

“Online Firms Ready to Break Out?”

SAN FRANCISCO, CALIFORNIA– As social media sites such as Facebook and Twitter change the way people communicate in the United States, Internet companies in China are making significant headways of their own.

While many Chinese Internet communication companies continue to take their larger concepts from successful US companies, many experts and industry watchers caution against writing off these companies and the Chinese entrepreneurs behind them as only replicas of their US models.

“Especially in the online world, it’s really taking what’s successful in the US and undoing it in a Chinese way,” said Jack Jia, founder and executive chairman of Baynote, an adaptive Web platform, and a venture capitalist looking at investments in China. Jia points to the growth of Lashou.com, an e-commerce site that borrows heavily from the idea of collective shopping popularized by US-based Groupon, as an example of how Chinese business models that explore similar objectives as their US counterparts often take form in very different ways.

While Groupon can trace a large part of its success in becoming a fast growing company to an outreach model of cold calling businesses in different US cities, Lashou failed in trying to implement the same call-center sales strategy in China. Instead, the company launched local offices in different cities with employees making door-to-door sales calls.

“The taste is so dramatically different from city to city, from region to region in reality, China is more like Europe. There are so many different cultures,” said Jia. Since the company changed its business model in May, it has reportedly increased revenue 30 fold.

“The most important part of innovation from China isn’t from components, hardware, or even technology. Right now, we’re seeing innovation in business models,” said Lili Zheng, who primarily oversees Chinese services work as a managing partner with global accountancy and consulting firm Deloitte & Touche LLP.

Zheng believes that the time has come for China to grow as a center of innovation and is hoping to help companies make that transition through her work with Deloitte. At present, she notes that roughly 60 percent of the firm’s work in China focuses on compliance, while the other 40 percent is based on management and strategy consulting services.

On the policy side, the Chinese government is also increasing investments to encourage innovation. Spending in both education and research and development as a proportion of GDP is expected to increase significantly in the next 10 years.

Despite China’s Internet regulatory environment that is often considered restrictive, investors and industry watchers do not see it as the main reason why Internet companies in the US have found it difficult to break into the market in China.

“For even the first dotcoms like Yahoo, eBay or even Microsoft, they had pretty much unrestricted access but they didn’t succeed because China is different. It is similar in many ways but it is very different, especially at the execution level,” said Jia.

It is this difference that excites investors like Kevin Fong, special adviser to GSR Ventures, a venture capital firm that is focused on China.

“One of the reasons I’m in China is to see the same cycle (that happened in Silicon Valley in northern California) and apply it a second time around,” said Fong, who has 20 years of experience as a technology-focused venture capitalist.

Especially given the size of China’s Internet and mobile market with more than 420 million Internet users, Fong predicts that Chinese businesses are only skimming its potential. “When the Internet first broke out in China, I said that the biggest impact is going to be on society and how it shapes culture,” said Fong.

Although Fong notes that there are more copycat services that emerge in China, the country’s population and the way it operates still creates an environment that encourages this type of entrepreneurship. “China’s a very nimble society copycats don’t dilute the market the way they do (in the US),” said Fong. “The strategic chokehold is in developing the right user experience the number of experienced CEOs and management in China is still very low.”

In the US, interest in this space has also grown noticeably in recent years. At an annual conference hosted by the Hua Yuan Science and Technology Association, a Silicon Valley-based professional association focused on the cross section of technology between Silicon Valley and Asia, organizers reported increased interest.

This year’s conference on drivers of growth and innovation in China, particularly in online services, drew roughly 1,300 attendees, up from about 1,200 last year.

Focus in prior years centered more on general trends in the country’s high-tech sector, but this year had the added component of recruitment in China by Chinese companies. Companies such as Chinese interactive gaming company Shanda and e-commerce giant Alibaba.com attended the conference to recruit talent for their US and China offices.

“This wave of innovation is very significant,” said Fong. “It’s around communication. How we relate to people is changing.”

(as reported in China Daily)