Leveraging “International Innovation Resources” Through Engagement with Silicon

The Chinese leadership is pursuing an “innovation-driven” strategy for civilian and military development, seeking to become a science and technology superpower ⁹⁰⁴and emerge as a leading innovator by 2030.⁹⁰⁵ In pursuit of this agenda, Chinese investment activities have been particularly prevalent in U.S. technology centers such as Silicon Valley and Boston.

895 Chinese Firm Wins A123 Despite U.S. Tech Transfer Fears, REUTERS, Jan. 29, 2013.

896 J. Voelcker, Fisker Assets Sold for $149 Million to Wanxiang, Chinese Parts Maker, GREEN CAR REPORTS, Feb.

15, 2014; China’s Wanxiang Wins U.S. Bankruptcy Auction for Fisker Automotive, R^EUTERS,Feb. 14, 2014.

897 Chinese Battery Manufacturers Increasing Their Ternary Battery Production Volume, MEHR NEWS AGENCY, Aug. 29, 2016.

898 Lithium-ion Battery Market to Reach $41 Bn, INDUSTRIAL MINERALS, Sept. 2, 2013; Insight: Electric Car Revolution Brightens Outlook for a Medley of Metals, THE PENINSULA Oct. 5, 2016. A marginal increase in electric vehicle units translates into a large increase in battery demand; for example, each Tesla electric vehicle contains battery capacity of approximately 85,000 watt-hours (Wh), compared to just 5 Wh for an average cell phone.

899 Joyson Electronics Receives RMB 14.95 Million for a Great and Strong New Energy Vehicle Industry [Chinese], N^INGBO J^OYSON ELECTRONICS H^OLDING L^TD C^ORP. (Apr. 16, 2014), available at

http://www.joyson.cn/index.php?a=shows&catid=84&id=169.

900 WANXIANG GROUP,2015ANNUAL REPORT 131 [Chinese] (2015).

901 WANXIANG GROUP,2016ANNUAL REPORT 132 [Chinese] (2015).

902 W^ANXIANG G^ROUP,2015A^NNUAL R^EPORT 53 [Chinese] (2015).

903 WANXIANG GROUP,2015ANNUAL REPORT 53 [Chinese] (2015).

904 English translation of the Chinese term keji chuangxin qiangguo.

905 Xi Jinping: Comprehensively Advance an Innovation Driven Development Strategy, Advance New Leaps in Realizing National Defense and Military Construction [Chinese], XINHUA NEWS, Mar. 13, 2016,

http://news.xinhuanet.com/politics/2016lh/2016-03/13/c_1118316426.htm. See also the official strategy released on innovation-driven development: CCP State Council Releases the “National Innovation-Driven Development

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According to data from CB Insights, China-based investors have engaged in technology investments (i.e., corporate, VC, angel, private equity, etc.) amounting to $19 billion in the United States, across 641 different deals, since 2012, with particular focus on AI, robotics, and augmented or virtual reality.⁹⁰⁶ China’s sovereign wealth fund, CIC, is reportedly taking steps to begin direct investment in U.S. technology start-ups.⁹⁰⁷ In recent years, Chinese investment activities have accounted for approximately 10 percent of all U.S. venture deals per year, and have started to receive greater attention.⁹⁰⁸

Chinese investments in U.S. technology start-ups are part of a multifaceted technology and knowledge transfer strategy. This strategy is reflected in several national plans, including the Made in China 2025 policy, the “Internet Plus” Artificial Intelligence Three-Year Action Implementation Plan, the Robot Industry Development Plan (2016-2020), ⁹⁰⁹ and the 13th Five- year National Science and Technology Innovation Plan. The Next-Generation Artificial Intelligence Development Plan, released in July 2017, calls for a “Going Out” strategy that includes overseas mergers and acquisitions, equity investments, VC, and the establishment of research and development centers abroad.⁹¹⁰

Reflecting these objectives, Chinese entities have established research centers and “talent bases”

in Silicon Valley, directly funded and partnered (e.g., joint laboratories) with academic research institutions, and actively recruit top talent through government programs.

For example, iFlytek, a prominent Chinese AI start-up focused on intelligent voice recognition and speech-to-text products established an office in Silicon Valley in 2016.⁹¹¹ According to iFlytek’s website, it receives 863 program funding⁹¹² for speech technology and is recognized as a key software enterprise under the National Planning and Layout of Key Software

Companies.⁹¹³ iFlytek also serves as the leading unit on MIIT’s “Working Group on Technical

Strategy Guidelines [Chinese], XINHUA NEWS, May 19, 2016, http://news.xinhuanet.com/politics/2016- 05/19/c_1118898033.htm.

906 From China with Love: AI, Robotics, AR/VR Are Hot Areas For Chinese Investment In US, CBINSIGHTS, Aug. 1, 2017.

907 Theodore Schleifer, Chinese investors are making moves to increase their spending in Silicon Valley, RECODE, Oct. 29, 2017. To date, China Investment Corporation investments in U.S. tech start-ups have been through investments in VC firms as a limited partner.

908 Paul Mozur, Jane Perlez, Chinese Tech Investment Flying Under the Radar, Pentagon Warns, NEW YORK TIMES, Apr. 7, 2017.

909 Release of the Robot Industry Development Plan [Chinese], NATIONAL DEVELOPMENT AND REFORM COMMISSION (Apr. 26, 2016), http://www.ndrc.gov.cn/zcfb/zcfbghwb/201604/t20160427_799898.html.

910 State Council Notice on the Issuance of the New Generation Artificial Intelligence Development Plan (State Council, Guo Fa [2017] No. 35, issued July 8, 2017), http://www.gov.cn/zhengce/content/2017-

07/20/content_5211996.htm.

911 iFlytek – Why is it One of the ‘World’s Most Intelligent Companies’? [Chinese], ECONOMICS DAILY, Aug. 17, 2017, http://www.ce.cn/cysc/tech/gd2012/201708/17/t20170817_25062923.shtml.

912 The 863 program is a National High-Tech R&D Program which provides funding to promote advances in technology. See National High-tech R&D Program (863) Program, MOST, available at

http://www.most.gov.cn/eng/programmes1 (last visited Dec. 22, 2017).

913 Administrative Measures for Accreditation of National Planning and Layout Key Software Enterprises (SAT, MOFCOM, and MIIT, Fa Gai Gao Ji [2005] No. 2669, issued Dec. 20, 2005), pursuant to the Several Policies on Encouraging the Development of the Software and Integrated Circuit Industry (State Council, Guo Fa [2000] No.

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Standards for Interactive Chinese Language Technology.”⁹¹⁴ In addition, iFlytek operates from the Anhui Hefei High-tech Industry Development Zone, one of at least 28 MIIT designated national-level MCF bases.⁹¹⁵ MCF bases seek to foster development of China’s high-tech industry to support military modernization and economic development.⁹¹⁶

A number of major Chinese technology companies have established offices and laboratories in Silicon Valley, and there are even a number of new incubators that seek to establish closer engagement with start-ups. These same companies, in turn, are cooperating with the Chinese government to establish technology centers within China, often in the form of local government initiatives that focus on emerging and dual-use technologies.

For instance, in 2014, the Hangzhou Hi-Tech Venture Capital Co. Ltd., a company owned by the municipal government of Hangzhou,⁹¹⁷ founded the Hangzhou Silicon Valley Incubator,⁹¹⁸ located in Redwood City, California.⁹¹⁹ As of late 2016, the incubator had supported 30 projects, investing a total of $3.4 million, and attracting 41 overseas projects to settle or plan to return to Hangzhou, which has the official goal of becoming “China’s Silicon Valley.” ⁹²⁰ Projects promoted in the incubator include autonomous driving and smart vehicles, robotics, and the conversion of exhaust gas into electrical energy.⁹²¹

In this context, it is important to consider that the “Going Out” strategy is part of a dual “Going Out and Drawing In” approach. While China incentivizes domestic companies to invest abroad, it also encourages innovative enterprises from Silicon Valley and worldwide to establish

operations in China under the “Drawing In”⁹²² strategy. For example, the concept of “Drawing

18, issued June 24, 2000). Becoming an accredited “key software enterprise” requires companies to submit corporate records, including contracts, exports, and financial data, to the China Software Industry Association for examination. Accredited “key software companies” receive preferential tax treatment, notably a corporate income tax rate of 10 percent. See also Company Profile, IFLYTEK, http://www.iflytek.com/about/index.html (last visited Nov. 8, 2017).

914 Company Profile, ^IF^LYTEK, http://www.iflytek.com/about/index.html (last visited Nov. 8, 2017).

915 Description of National New Industrial Demonstration Base [Chinese], MIIT (Feb. 2012),

http://sfjd.miit.gov.cn/BaseInfoAction!findListIndustry.action; Huai Chuai, Let the World Hear

‘Anhui’s Voice’—Hefey High Tech Industry Development Zone Smart Language Industry’s Concentrated Development Base Quest [Chinese], ANHUI DAILY, May 4, 2016,

http://www.iflytek.com/content/details_135_2092.html

916 Description of National New Industrial Demonstration Base [Chinese], MIIT (Feb. 2012), http://sfjd.miit.gov.cn/BaseInfoAction!findListIndustry.action.

917 Company profile available on Hangzhou municipal government website, available at http://www.hangzhou.gov.cn/art/2015/11/12/art_810110_1100.html (last visited Jan. 9, 2018).

918 Hangzhou Silicon Valley Incubator Going Out to Promote 41 Overseas High-tech Projects [Chinese],

HANGZHOU NEWS, Dec. 6, 2016, http://hznews.hangzhou.com.cn/jingji/content/2016-12/06/content_6410731.htm;

Hangzhou, Cross-Border Venture Capital Investment Gradually Improving [Chinese], HUANQIU NET,Dec. 21, 2016, http://finance.huanqiu.com/roll/2016-12/9838718.html.

919 The Journey to Knowledge Acquisition: Hangzhou Silicon Valley Incubator “Accomplish Great Things with Little Effort [Chinese], H^ANGZHOU N^ET, Sept. 26, 2017, http://hznews.hangzhou.com.cn/jingji/content/2017- 09/26/content_6671062.htm.

920 Hangzhou Silicon Valley Incubator Going Out to Promote 41 Overseas High-tech Projects [Chinese],

HANGZHOU NEWS Dec. 6, 2016, http://hznews.hangzhou.com.cn/jingji/content/2016-12/06/content_6410731.htm.

921 Hangzhou Silicon Valley Incubator Going Out to Promote 41 Overseas High-tech Projects [Chinese],

HANGZHOU NEWS Dec. 6, 2016, http://hznews.hangzhou.com.cn/jingji/content/2016-12/06/content_6410731.htm.

922 English translation of Chinese term zou jin lai or yinjin.

IV. Outbound Investment

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In” regularly appears in the context of MOST initiatives and high-tech parks administered by local governments.⁹²³

Below, this dual “Going Out and Drawing In” approach is discussed in the context of the activities of Zhongguancun Development Group (ZGC Group).

Zhongguancun and the Zhongguancun Development Group

ZGC Group is an SOE established in April 2010 by the Beijing municipal government in order to accelerate development of Zhongguancun,⁹²⁴ a Beijing-based technology park vying with other localities to become China’s next Silicon Valley.⁹²⁵ ZGC Group is actively seeking

opportunities to expand its overseas presence, particularly in the United States’ Silicon Valley.

The ZGC Group website states:

[W]e are accelerating the expansion of overseas operations with a view toward “One Belt One Road” and the internationalization of Zhongguancun, in accordance with the concept of “drawing in, going out, and localization,” we are establishing a “one office, one fund, one center” constellation of operations in Silicon Valley, and are constructing a platform that links Zhongguancun to Silicon Valley through reciprocal exchanges. And by emulating the Silicon Valley model, we are undertaking an expansion of our operations toward innovation resource cluster areas and national strategic node areas in North America, Europe, and elsewhere, advancing the global distribution of Zhongguancun enterprises and accelerating the internationalization of Zhongguancun.⁹²⁶

In pursuit of these objectives, ZGC Group established the ZGC Group Silicon Valley Incubator Center in December 2012. According to ZGC Group, this center is “ZGC Group’s trial base for establishing a branch entity in the United States’ Silicon Valley.”⁹²⁷ It is located inside the Zhongguancun Hanhai Science and Technology Park, established by another Chinese company, Beijing Hanhai Zhiye Investment Management Co., Ltd.,⁹²⁸ a subsidiary of Beijing Hanhai Holdings Group.⁹²⁹ The Zhongguancun Hanhai Science and Technology Park is designed to

923 See, e.g., Aligning to the Standards, Promote the Close Promotion of Science and Technology—Take Advantage of Strength, Build a Science Technology Innovation Center [Chinese], S^HENZHEN M^UNICIPAL SCIENCE AND T^ECHNOLOGY I^NNOVATION C^OMMITTEE, (Nov. 18, 2016), available at http://www.szsti.gov.cn/news/2016/11/18/1.

924 About Us [Chinese], ZHONGGUANCUN DEVELOPMENT G^ROUP, http://www.zgcgroup.com.cn/about/index.html (last visited Jan. 11, 2018).

925 Vying for “China Silicon Valley” [Chinese], XINHUA NEWS,Apr. 20, 2017, http://news.xinhuanet.com/fortune/2017-04/20/c_129557023.htm.

926 Group Overview [Chinese], ZHONGGUANCUN DEVELOPMENT GROUP, http://www.zgcgroup.com.cn/about/intro.html (last visited Jan. 11, 2018).

927 ZGC Group Silicon Valley Incubator Center Established and Open for Business [Chinese], ZHONGGUANCUN DEVELOPMENT GROUP, Dec. 6, 2012, http://www.zgcgroup.com.cn/news/details_16_927.html.

928 Zhongguancun Hanhai Silicon Valley Science and Technology Park Reaches Out Feelers to Silicon Valley to Influence the World [Chinese], PEOPLE’S DAILY, Nov. 14, 2012, http://usa.people.com.cn/n/2012/1114/c241376- 19581508.html.

929 Beijing Hanhai Holdings Group manages numerous science and technology parks outside China, and in introducing these overseas projects on its website, states: “In recent years, Beijing Hanhai Holdings Group, under the resolute guidance of leaders at all levels, including the national Ministry of Science and Technology, the

IV. Outbound Investment

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serve as an incubator for U.S and Chinese ventures and to facilitate Chinese investment in the United States, promoting the combination of “drawing in⁹³⁰” – i.e., attracting investment and talent to China – and implementing the “Going Out” strategy.⁹³¹

In October 2014, ZGC Group established ZGC Capital Corporation, a wholly-owned subsidiary based in Santa Clara, California.⁹³² Subsequently, in May 2016, the ZGC Innovation Center @ Silicon Valley, co-founded by ZGC Capital Corporation and the California-based fund C.M.

Capital,⁹³³ officially began operations in Silicon Valley.⁹³⁴ The project is described by ZGC Capital Corporation as the “core of the Zhonggguancun overseas strategy,” as a means of

“advancing the going out of capital from Zhongguancun and the drawing in of advanced technology and talent,” and as a way to use a “‘fund plus incubator’ model” in order to “guide and support projects to come to Zhongguancun for industrial application.”⁹³⁵ An article by Xinhua News, republished on the Chinese government’s principal website, characterizes the ZGC Innovation Center @ Silicon Valley as “a strategic step” for Zhongguancun to establish a foreign presence and “leverage innovation resources.”⁹³⁶

ZGC Capital Corporation has been actively engaged in Silicon Valley. To date, the company’s investments there include Meta, an augmented reality platform; Everstring, a forecasting

platform; and Optimizely, which helps corporate entities improve user conversion and activity.⁹³⁷ ZGC Capital Corporation has also invested in a series of local Silicon Valley funds, including Danhua, Plug & Play, and KiloAngel.⁹³⁸

Ministry of Commerce, and the Beijing municipal government, […] has actively developed ‘Drawing In’ and

‘Going Out’ international science and technology exchange platforms […] [and has] actively explored and guided the internationalization development of China’s science and technology incubators.” Overseas Parks [Chinese], HANHAI HOLDINGS,http://www.hanhaiholding.com/overseas.aspx (last visited Jan. 11, 2018); Hanhai Holdings [Chinese],HANHAI HOLDINGS, http://www.hanhaiholding.com/ (last visited Jan. 11, 2018).

930 English translation of Chinese term yin jin lai.

931 Zhongguancun Development Group Leaders Guidance Work Touring Zhongguancun Hanhai Science and Technology Park [Chinese], HANHAI HOLDINGS, Jan. 3, 2014, http://www.hanhaiholding.com/newscon.aspx?id=80.

See also U.S. Silicon Valley Zhongguancun Hanhai Science and Technology Park [Chinese], HANHAI HOLDINGS, http://www.hanhaiholding.com/overseascon.aspx?id=66 (last visited Jan. 11, 2018).

932 About Us, ZGCCAPITAL CORPORATION,http://zgccapital.com/about-us/ (last visited Jan. 11, 2018).

933 Company Overview of CM. Capital Corporation, BLOOMBERG,

https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=3375306 (last visited Jan. 11, 2018) (“C.M. Capital Corporation is a private equity and VC arm of C.M. Capital (De) Inc. The firm also makes direct and indirect real estate investments. It also provides investment advisory services for various Cha Group affiliates. C.M.

Capital Corporation was founded in 1969 and is based in Palo Alto, California.”).

934 About Us [Chinese], ZGCINNOVATION CENTER @SILICON VALLEY,http://zgccapital.com/cn/about-us/. See also Zhongguancun Silicon Valley Innovation Center to Build a Bridge of innovation and Cooperation for Sino-US Enterprises [Chinese], PEOPLE’S DAILY, May 12, 2016, http://world.people.com.cn/n1/2016/0512/c1002- 28346254.html.

935 About Us [Chinese], ZGCINNOVATION CENTER @SILICON VALLEY,http://zgccapital.com/cn/about-us/. See also Zhongguancun Silicon Valley Innovation Center to Build a Bridge of innovation and Cooperation for Sino-US Enterprises [Chinese], PEOPLE’S DAILY, May 12, 2015, http://world.people.com.cn/n1/2016/0512/c1002- 28346254.html.

936 Zhongguancun Development Group Sets Up Innovation Center in Silicon Valley [Chinese], X^INHUA N^EWS,May 12, 2016, http://www.gov.cn/xinwen/2016-05/12/content_5072814.htm.

937 Structure of Overseas Funds, ZHONGGUANCUN CAPITAL, http://zgccapital.com/overseafund/.

938 Structure of Overseas Funds [Chinese], ZHONGGUANCUN CAPITAL, http://zgccapital.com/overseafund/.

IV. Outbound Investment

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In parallel, the company has engaged in talent recruitment. For example, in September 2017, ZGC Innovation Center @ Silicon Valley held a “Beijing-Silicon Valley Talent and Technology Summit” in Santa Clara, attended by the Acting Mayor of Beijing Chen Jining and the PRC’s San Francisco Consul General Luo Linquan. At the event, ZGC Capital Corporation described its ongoing efforts to identify overseas talent and technology that can “make a contribution to Beijing’s science and technology innovation development.”⁹³⁹ Furthermore, ZGC Group maintains an active partnership with Stanford University.⁹⁴⁰