Ka Xiaoxi for Bloomberg Businessweek
Lee Kai-Fu, China’s foremost evangelist for innovation, works on the 12th floor of a Beijing office building with a sprawling electronics mall in the basement. On a hot, gray summer day, the view outside his window is anything but inspiring. That doesn’t seem to bother Lee, who’s thinking about Steve Jobs. “One would believe, because China has four times as many people as the U.S., for every American Steve Jobs, China should have four,” he says as he fixes his wire-rimmed glasses. “But we don’t. We don’t have a single Steve Jobs.”
Ever since the iPhone was introduced in the country in 2009, the mystery of the missing Chinese Steve Jobs has become something of a national obsession. The people who brought the world compasses and gunpowder have earned an unwanted reputation for low-quality, copycat manufacturing. Although China’s new cadre of leaders is calling for “economic transformation,” the quest for disruptive, paradigm-changing innovations has been frustrating.
From 2006 to 2011 government spending on research increased by more than 20 percent annually. In 2012, China spent more than $164 billion on research and development and issued 217,105 new patents. China is investing in supercomputers and superconductors. Its universities are churning out postdoctoral students. Yet when it comes to creating pathbreaking products—and at a time when economic growth is decelerating at an alarming rate—Chinese companies are lagging.
This is where Lee comes in. A bespectacled 51-year-old computer engineer who favors wrinkle-free khakis, he has an online following that rivals Justin Bieber’s. His appearances on university campuses are known for creating scenes of near-pandemonium. For 20 years, Lee’s been at the center of an industry that is both promoted and tightly controlled by the Chinese government. He served as the head of Google (GOOG) in China until 2008 and is currently chief executive officer of Innovation Works, an incubator and venture capital fund. Lee’s engineering knowledge, business savvy, and familiarity with Silicon Valley have made him a symbol of everything China’s entrepreneurs hope to achieve.
Lee says Chinese Internet companies have room to grow, even within the strict boundaries of government censorship. “We believe that China can innovate, but not the way that Apple (AAPL) and Google have innovated,” he says. Instead, what Chinese entrepreneurs are capable of is “iterative innovation”—he also calls it “Facebook-style innovation”—taking an existing model or idea and tweaking it for the Chinese market. Eventually, he says, these small steps will pave the way for bigger and better breakthroughs.
“Lee is not talking about game-changing innovation,” says Adam Segal, the Maurice R. Greenberg Senior Fellow for China Studies at the Council on Foreign Relations. Segal says Lee and other investors are focused on safe bets, such as mobile gaming and Android operating systems. “You can still create products that are not going to bump up against the [government’s] barriers,” he says. “It just gets you to the question of where you think the wall is—how far innovation can go.”
Lee’s office at Innovation Works is surrounded by glass windows and visible to all of his employees, a rarity in China. He moves from meeting to meeting with a practiced fluidity, shaking hands and making introductions as he walks. Everything about him is understated except for his hair, which, while cropped and neatly parted, is surprisingly voluminous. It gives his head at least a few extra inches.
Lee has more than 50 million followers on Sina Weibo, China’s answer to Twitter. Others on the top 10 most-followed list include pop stars and a bubbly presenter from a variety show called Happy Camp. “You can see that there are different opinions,” Lee says, swiveling his computer around to show a list of his recent posts. “In an education system where you are often taught that there is only one answer, you now see that there are many ways to think. This is a wonderful source of knowledge and news.”
Weibo is a model of the kind of piecemeal innovation Lee believes China can produce. Like Twitter, it allows users to post in 140-character increments, which goes a lot further using Chinese characters than English letters. Weibo has a different look and a few features that distinguish it from Twitter, including the ability to insert videos, music, emoji, and, occasionally, polls without using a plug-in.
The microblogging platform has drawn increasing scrutiny from China’s censors. Last February, after Lee complained on Weibo about censorship and poked fun at a search engine released by the state-run People’s Daily, he was banned from Sina Weibo for three days. Lee shrugs it off. “I don’t actually think I’m outspoken,” he says. “I don’t use any extreme words. I just want to share the experiences I have.”
Lee was born in Taiwan and moved to the U.S. when he was 11. His brother was working as a scientist at Oak Ridge National Laboratory in Tennessee, and Lee’s parents sent him to live there. “I encountered computer science in high school, and I fell in love with it,” he says. “There were no PCs at the time. … We had one old IBM (IBM) mainframe—we programmed it with punch cards.” These experiences were what Lee calls touches, early encounters with technology that give people a framework for innovation later. “Steve Jobs and Bill Gates both touched computers two years before I did. A poorer version of Bill Gates, who didn’t get to touch computers, probably would not have the same chance to do what he did.” Lee went on to get his Ph.D. in computer science, writing some of the first speech-recognition software while completing his doctorate at Carnegie Mellon in the late 1980s. Then, in 1998, Microsoft (MSFT) sent Lee to China to open the country’s first research center.
“Even before I met him, Lee was famous,” says Ye Wang, a former employee of Lee’s and now the CEO of Doodle Mobile, a Chinese mobile gaming company backed by Innovation Works. “He used to travel around to universities and talk to students. They treated him like a pop star.” Those travels convinced Lee that the barriers that keep China from innovating lie deep within its educational system and culture. “The Chinese education system makes people hard-working, teaches people strong fundamentals, and makes them very good at rote learning,” Lee says. “It doesn’t make them creative original thinkers.” Too often, iconoclastic minds are sanded down through the examination process. “Either that or they would become outcasts and their parents would think they’d gone crazy.”
Under Lee, Microsoft’s lab came up with the most accurate program to input Pinyin—a phonetic transliteration system—and set the standards for speech recognition and media compression in China. Among the lab’s former employees are the CEO of software giant Kingsoft and the chief technology officer of Alibaba. At a time when U.S. technology companies were just beginning to move into the Chinese market, the government welcomed Microsoft’s presence, Lee says. “It was like a dream—we did what we wanted, and everybody liked us.”
When he moved to Google in 2005, things got more complicated. Making the jump was difficult: Microsoft sued Google and Lee in Washington State court for breaking a noncompete agreement. Google and Microsoft eventually reached an out-of-court settlement. “At Google, my job was to run the whole business,” he says. “And I found out immediately … that it was going to be one crisis after another.” When Lee tells this story, he takes a moment to clarify, a smile still on his face. Google, he says, “was showing things to people that could be viewed as not harmonious or maybe dangerous to the state.”
Google had agreed to subject itself to some amount of censorship to operate in China, but the lines were less than clear. “The first crisis was Taiwan. We had labeled it a province of China [on Google Maps], and Taiwan got mad,” Lee says. Calling it anything else, however, would incite an angry response from China. “In the end, we managed it with fonts. We changed it a little and made the font so it was bigger than a Chinese province but smaller than China.”
In 2006, Google executives were called to appear before a U.S. congressional committee and defend concessions the company had made to Chinese authorities. In China, Google had “a censored version and an uncensored version that was available one link away,” Lee says. But even the uncensored version was filtered for Chinese users—all Google could do was notify a user when censors removed a result from the search engine. The company also vowed not to store any user information inside China.
“I was obviously an advocate for accepting censorship,” Lee says. “I don’t like it, but if you don’t have it, you can’t enter. And if you don’t enter, you can’t provide people with information. People will only have one choice, and that can’t be good.”
Lee’s role at Google landed him in the middle of other controversies. Three state-owned news programs ran stories on pornography turning up in Google searches. They featured interviews with traumatized school children. Other search engines were also mentioned, but Google bore the brunt of condemnation. According to Lee, it took months to smooth over the scandal. One of many fixes, he says, was to gather a group of people in a room and have them search for and remove pornography sites one by one.
“I had one meeting where 16 [government] officials were in a room together, and three of us from Google entered,” Lee says. “The search was projected on the wall. And they said, ‘OK, let’s search for “boobs.” ’ And then they searched something more graphic than boobs. The people pouring the tea were shocked.” In 2010, Google announced it would no longer self-censor searches conducted inside China and removed its servers from the mainland. Any Google search in Mandarin Chinese is now routed through a Google.hk site.
Lee’s university talks had already become so popular that he had to make sure there was a back exit he could slip out if the crowd got unruly. In 2008 at a university in the central Chinese city of Chongqing, 10,000 teachers and students spent two hours lining up in the rain to hear him give a speech.
Lee left Google in 2008 to start Innovation Works, attracting investors and entrepreneurs from all over the country. He assembled a management team drawn from the technology, finance, and media sectors. In September 2009 he announced that he’d raised $115 million from a list of investors including Foxconn Technology (2354:TT), the venture capital fund WI Harper, and Steve Chen, co-founder of YouTube.
Lee says China’s venture capital landscape often limited the types of startups that received funding. “Many VCs prefer to see safer investments,” he says. “The venture capital ecosystem doesn’t favor investments that are outliers.” In the second quarter of 2013, venture capital firms in China raised $73 million, compared with $250 million a year earlier, according to VentureSource. Lee’s fund is now valued at $500 million. Innovation Works has invested in more than 50 companies, including Tapas Mobile Technology (called Dianxin in China), a smartphone operating system based on Google’s Android; Ye’s Doodle Mobile; a mobile analytics company called Umeng; and Wandoujia, which creates a desktop management system similar to iTunes for Android systems.
Lee’s approach to encouraging innovation in China combines his investments at Innovation Works with his college lectures and relentless but carefully cultivated online posts. Lee, who began using Weibo in earnest a year ago, posts about 16 times a day, never more than once every half hour but rarely less often than once an hour. A tool developed by one of the companies Innovation Works has invested in, Maibo Wang, streamlines the way he uses Weibo: It tracks his followers, looking at what times they’re online and when they’re most likely to repost comments on different topics. The morning is a good time to catch China’s white-collar workers as they arrive at work and scan Weibo before they settle in for the day. People aren’t online during lunch and dinner, so Lee’s posts tend to flag around noon. At night people are relaxing and want more entertainment, so Lee makes jokes. They’re also more likely to be looking at Weibo on their mobile phones, so he includes a lot of photos and videos. “Since I started, I have never missed a day. Except, of course, for the three days I was silenced,” he says.
The post that likely got the attention of China’s censors commented on the difficulty of creating a culture of innovation in a place where the government keeps a tight grip on the media and the Internet: “Can it be possible to run a search engine business without believing in free information flow?” Lee asked about the People’s Daily search engine, Jike.
“I know what I can’t say, so I don’t go over the line,” Lee says. “Of course, if you don’t push the line sometimes, the line will never change.” He says censorship is not his overriding concern. His chief goal is to get Chinese entrepreneurs to think creatively. He insists that incremental innovations will open more doors and, over time, change more people’s thinking. Other innovation watchers, such as Segal at the Council on Foreign Relations, doubt that the formula will work outside China’s domestic market. “Some companies are managing to get close enough to the line and managing to innovate. When they move abroad, however, there will be more competition and increasing demand for transparency and good corporate governance,” Segal says. “The barriers are incredibly high.”
Nonetheless, Lee persists in thinking he can strike a balance, opening people’s minds through technology without threatening the stability of the Chinese system. “I’m a strong believer that technology will break down the status quo,” he says. “We need to empower people with technology tools, social networks, and search engines and give people a way to harness the technology and decide for themselves what they want to learn, what they want to be, what is good and bad for society. That is how things will change.”