Chinese Hardware Startups: Challenging the Global Market

Bill Zhang demonstrated the advantages of the comprehensive training apparel he had on by performing lunges on a cushioned floor covering. Our conversation took place in his compact, unpretentious workspace in Xili, a district of Shenzhen known for both its university population and numerous hardware manufacturers. The integrated muscle stimulation system incorporated into the Balanx suit aims to deliver what’s known as electronic muscle stimulation, which proponents claim can enhance metabolic rate and facilitate fat reduction.

“Currently, our primary focus isn’t the Chinese market,” Zhang stated, noting that he launched Balanx in 2014. “The suit is intended for more sophisticated customers in Western countries.”

The outlook for hardware companies appeared promising until approximately two years ago, when the Trump administration initiated the implementation of trade restrictions against China. The relationship between the two nations has experienced a decline following a sequence of contentious issues, ranging from Beijing’s approach to Hong Kong to the emergence of the coronavirus pandemic.

Chinese business owners do not anticipate an improvement in relations between the two countries in the near future, however, a significant number believe the incoming administration will adopt policies that are “less unpredictable” and “more logical,” based on discussions TechCrunch conducted with seven Chinese hardware startups. Chinese technology companies, regardless of size, are rapidly adjusting to the evolving landscape of U.S.-China competition while continuing their efforts to attract international clientele.

Designed in China

Zhang represents a growing number of entrepreneurs focused on introducing cutting-edge Chinese hardware to the global market. This new wave of founders is distinct from those previously associated with inexpensive, imitative electronics linked to the older “Made in China” perception. Extensive knowledge sharing, product innovation, manufacturing expertise, export experience, and supportive government policies have positioned China as a leading producer of both innovative and affordable technologies.

Products like Anker’s portable power banks, Roborock’s robotic vacuums, and Huami’s wearable fitness trackers have cultivated dedicated customer bases in numerous international markets, alongside well-known global brands such as Huawei, Xiaomi, Oppo, and DJI.

Attitudes among consumers are also evolving. Frank Wang, marketing director at Dreame – a Xiaomi-supported company specializing in high-end home appliances including cost-effective alternatives to Dyson products – notes that European views on the quality and innovation of “Made in China” goods have “improved considerably” over the past decade to fifteen years.

These emerging companies are actively pursuing the achievements of their forerunners. They actively seek coverage from the media and partnerships with retailers at international events like CES, independently learn digital marketing strategies on platforms like Facebook and Google, and engage with technology enthusiasts through crowdfunding websites. A diverse range of investors, including GGV Capital and Xiaomi, are eager to support promising startups that are already distributing millions of units worldwide.

Donny Zhang, a Shenzhen-based supplier of electronic components to hardware manufacturers, has observed a decline in business since the start of the trade dispute. He explains, “My customers are experiencing difficulties as the expenses associated with sourcing materials have risen,” particularly those with direct or indirect connections to American companies.

While many businesses reliant on exports are concerned about reduced profits, some are adapting and identifying potential benefits. This has unexpectedly opened up new avenues for factory owners within China. Indiegogo, a prominent global crowdfunding platform, has directly witnessed these shifts.

“When tariffs increase, manufacturers often find their profit margins significantly reduced because intermediaries typically absorb a large portion of their earnings,” explains Lu Li, Indiegogo’s general manager for global strategy, in an interview with TechCrunch.

“A viable solution is for factories to bypass intermediaries and sell directly to consumers under their own brands. Once they prioritize brand development, they frequently turn to us for assistance with marketing as a crucial first step in establishing themselves as a global consumer brand.”

This “direct-to-consumer,” or D2C, trend aligns with China’s national strategy to promote manufacturing advancements and foster domestic innovation to enhance global competitiveness, an initiative that began to take shape around 2015. Consequently, China has become Indiegogo’s fastest-growing region in the last two years; businesses originating from China increased by 50% year-over-year during the first three quarters of 2020, according to Li.

Localize

Possessing a desirable product and a strong brand is only the initial step. Shifting trade regulations and global political dynamics have compelled numerous Chinese companies to prioritize localization, which may involve establishing a foreign subsidiary or assembling a local workforce.

Tuya, a provider of IoT solutions for device manufacturers globally, has experienced a “minimal” impact from the trade war due to its U.S. presence since 2015, where it employs local sales and technical assistance personnel. However, the majority of its research and development efforts remain with its engineering teams in India and China, a situation that could potentially create challenges, as demonstrated by the recent difficulties faced by TikTok in the United States.

“Adherence to regulations is crucial. We have a specialized team of security professionals dedicated to addressing compliance matters. For example, we were among the first to achieve GDPR certification in Europe,” stated Eva Na, the company’s chief marketing officer.

The company’s preparedness stems from practical requirements. A significant number of its customers are large Western corporations that require strict legal compliance from their suppliers, prompting Tuya to proactively obtain the necessary certifications. Currently connecting 200,000 different products, Tuya operates in over 190 international markets, which generate more than 60% of its revenue.

While well-capitalized Tuya possesses the financial resources and operational capabilities to support an overseas team, localization can represent a significant expense and a complex learning process for smaller startups. Many have chosen to establish a Hong Kong entity to leverage the city’s position as a global financial center and circumvent trade restrictions imposed on China, an advantage that has diminished following Beijing’s enactment of the national security law.

Balanx, a manufacturer of smart training suits, has a Hong Kong entity, similar to many of its hardware counterparts focused on exports. In response to evolving global challenges, it registered a virtual company in Nevada but soon discovered that the entity offered limited value without a physical presence and operational base in the U.S.

“Local banks often require documents like utility bills when opening an account, which we didn’t have. We came to understand that establishing a local team is essential,” explained the company’s founder.

Hope

Zhang expresses confidence that smaller businesses, similar to his own, will continue to operate successfully despite U.S. sanctions. He advises, “The key is to maintain independence from any governmental affiliations.”

In fact, certain products considered less sensitive and focused on specific niches are still experiencing growth in the international market. PopuMusic, a company creating smart musical instruments such as ukuleles and guitars designed for beginners, and which receives backing from Xiaomi, is an example. Zhang Bohan, PopuMusic’s founder, stated, “Our business isn’t impacted by the trade conflict. We operate in a sector that doesn’t present any threat or aggression,” noting that the United States represents a significant overseas market for the company.

Chinese companies are also capitalizing on the advantages presented by the global spread of the coronavirus and the resulting stay-at-home orders affecting millions. Companies like Balanx, Dreame, and PopuMusic have already developed expertise in e-commerce and logistics, skills honed in a country where online shopping is extremely common.

Wang from Dreame observes, “Customers in both Europe and the U.S. are becoming increasingly comfortable with online purchasing, mirroring the trend seen in China five to eight years ago.”

Instead of reconsidering its approach to the U.S. market, PopuMusic is actively pursuing further expansion by introducing a new connected guitar through an Indiegogo crowdfunding campaign. The founder emphasizes that global expansion is fundamental to the startup’s overall strategy. “We were designed to be a global company from the outset, adopting an English name even before establishing a Chinese one.”

As these hardware companies strive for profitability, Li from Indiegogo suggests they may need to minimize the emphasis on their “Made in China” or “Designed in China” origins. This strategy could help them avoid potential geopolitical issues and unwanted scrutiny as they expand internationally. However, it raises questions about how this new generation of entrepreneurs balances their national identity with the broader goals of their businesses. How will they navigate the directive from Beijing to champion Chinese innovation on the world stage? This is a delicate balance that Chinese entrepreneurs will need to carefully manage as they continue their global endeavors in the coming years.