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Protocol | China

Your favorite startup might have its engineers in China

But few founders want to talk about it, fearful of becoming "the next TikTok."

Your favorite startup might have its engineers in China

In today's geopolitical environment, American companies aren't eager to feed the impression that their engineering work is being performed in China.

Lucas Schifres/Getty Images

Jack Yang, CEO of a stealth video fashion shopping startup founded in New York last year, spends a lot of time in the eastern Chinese city of Hangzhou these days. When he started hiring, Yang ran into a problem: The U.S. lags far behind China in ecommerce penetration, and U.S. candidates were not familiar with the tactics Chinese ecommerce platforms have become so adept at using. So Yang, who grew up in the Chinese coastal city of Tianjin and moved to the U.S. in 2005 for high school, crossed the Pacific. He's recruiting talent where the most robust ecommece ecosystem lives: Hangzhou, home to Alibaba.

Now Yang's company, which plans to sell only to U.S.-based buyers, is building an R&D offshoot in the Chinese ecommerce hub. Yang is filling dozens of positions in Hangzhou, including software engineers, data scientists, product managers and quality assurance engineers. For now, the U.S.-based team will focus on sales and marketing, he says.

"It wasn't my plan to build a China team," Yang told Protocol. "All my business is in the U.S. But I couldn't find talent with comparable skills here."

Yang is not alone. In today's geopolitical environment, American companies aren't eager to feed the impression that their engineering work is being performed in China. But according to a Protocol investigation, that's happening widely. No publicly available data tracks the number of U.S. tech startups outsourcing engineering work in China, but according to eight U.S. startup executives, hiring managers and VCs Protocol interviewed, most U.S. startups with Chinese co-founders (as distinguished from Chinese American co-founders) have either established a separate team in China or outsource parts of their businesses to China. Those Protocol interviewed estimate that one in five U.S. startups without Chinese founders do the same.

In fact, the question for startup founders across America is not whether to outsource their engineering work, but where to outsource it. There's a serious software developer shortage in the U.S., with 1.2 million unfilled jobs projected by 2026. Many American tech companies outsource projects globally via services like Upwork or via contract brokers in India or eastern Europe. Meanwhile, U.S.-based Chinese entrepreneurs like Yang are increasingly leveraging their language skills and networks to build engineering teams across the Pacific. These startups are tapping China's vast and growing engineering talent base, as well as expertise in areas such as ecommerce and short video where technological innovation leads the U.S. — all at a lower cost.

It starts with the raw numbers. China's engineering talent base is vastly larger, and less expensive, than that found stateside. Chinese government data shows Chinese Big Tech employs over 7 million programmers, software developers, data scientists and AI trainers. The population of software developers is expected to grow between 6% and 8% percent by 2023, as one in every 10 Chinese college graduates major in computer science. By contrast, U.S. software developers numbered fewer than 1.5 million in 2019, the most recent full year for which data is available. Their median annual wage was $107,510, more than double what the majority of their peers in China earned in 2020 (less than $40,000). Costs aside, engineers in China are generally accustomed to a grueling work schedule known as "9-9-6" — from 9 a.m. to 9 p.m., six days a week — or worse still, "11-11-7" — 11 a.m. to 11 p.m, seven days a week. (Tech workers have become vocally sick of this arduous schedule, but bosses still consider it the norm.)

As the tech landscape has grown more competitive in major Chinese cities, sending tech worker salaries higher, smaller American startups are commonly building R&D centers in Chinese cities outside of the glitzy, expensive places like Beijing, Shanghai, Shenzhen and Guangzhou. These "second-tier" cities include (still massive) places like Chengdu, Wuhan and Nanjing, according to Richard Xu, who runs the U.S. operations of Grand View Capital, a fund investing in cross-border startups. Xu says "almost all" of the U.S. companies in his fund's portfolio have China operations.

There's also the coastal Chinese city of Fuzhou, a sprawling industrial and port city with nearly 8 million people. Paul Lang, co-founder of Yunbanbao, a U.S.-based bulk-ordering food and grocery delivery service that caters mostly to Chinese immigrants on the East Coast, has placed his entire software development team there. It represents about a third of the company's total staff. Personnel in Fuzhou cost (in salary) about one-third of American employees, Lang, a Shenzhen native who moved to the U.S. in 2004, told Protocol.

China's not always cheaper. Positions that require cutting-edge know-how, such as an AI architect, are equally difficult to fill in China, Xu says, and the compensation for those jobs in China is no less competitive than in Silicon Valley.

Moving up the value chain

R&D centers in China aren't new; multinationals like Microsoft and Google started setting them up in the early 2000s. But the China-Silicon Valley talent ecosystem began to change in the mid-2010s when technologies invented in China started going abroad, fueled both by Beijing's policies promoting innovation and a Chinese VC boom. Around the same time, a wave of young Chinese immigrants started joining the U.S. tech labor force, following a massive spike in the number of Chinese international students attending American universities. Some of them eventually became U.S.-based founders who are comfortable operating — and hiring — in both countries.

Lime and TigerGraph are among U.S. tech unicorns founded by Chinese immigrants that have established offshoots in China. Wish, an online ecommerce platform co-founded by Danny Zhang, who's originally from China, launched its China operation in Hangzhou in 2017. The company went public on Nasdaq last year. Zoom, perhaps the best-known Chinese immigrant-led tech company, has three R&D centers in China and is hiring 15 more engineers there.

The result is an ecosystem that knows no borders. "The transnational flow of IT entrepreneurs, workers, capital and technologies have shaped a new China-Silicon Valley tech ecosystem that is benefiting both countries," Lin Zhang, an assistant professor at the University of New Hampshire who studies global digital entrepreneur and labor, told Protocol. China's no longer the place where stuff gets made; it's a tech hub. "We see China's position in the international division of labor improving, though it's still behind in many key areas, such as semiconductors," Zhang said.

Tech, meet geopolitics

Chinese cross-border entrepreneurs are not eager to talk about their China R&D operations, especially amid heightened conflicts between the U.S. and China since the emergence of COVID-19. Last summer, Zoom came under close scrutiny over its data practices in the U.S. after the firm suspended the user accounts of Tiananmen dissidents to meet Beijing's demands.

As Washington becomes increasingly concerned about forced tech transfers to China and data security issues, Chinese investors and entrepreneurs worry they will be subject to unfair suspicion and scrutiny. "U.S. startups in our portfolio kept a very low profile last year, fearing that they would be perceived as multinationals," Xu says. "Every company was afraid to become the next TikTok." TikTok's parent company ByteDance spent last year at the center of U.S. controversy over data-sharing with Beijing, although recent cybersecurity research shows that TikTok does not pose a national security threat to the U.S.

The political tensions don't mean Chinese founders in the U.S. have changed their outsourcing plans. Smaller startups Protocol talked to believe that as long as they put in place mechanisms to ensure data integrity, their China teams won't pose a security risk to U.S. users. Lang said Yunbanbao makes sure to follow data collection and user privacy laws wherever the company operates. He says the company doesn't collect any sensitive user information, such as credit card numbers. Lang adds his company's servers are in the U.S., and it stores all production data on American cloud services. "We take privacy issues seriously," Lang says. "What a company can do or not do should not have anything to do with where you are based or your nationality."

An employee who works at a U.S. AI-driven news aggregator and requested anonymity told Protocol that the company has established a firewall to bifurcate data access. The company's core AI engineering teams are not in China, and no employee in China can access algorithmic data or tools that could impact the selection and ranking of stories.

Of course, there are some things that good data hygiene just can't fix. An American VC investor told Protocol they worry that, at a time of worsening U.S.-China relations and rising xenophobia and anti-Asian racism, the U.S. public will assume startups run by Chinese immigrants with operations in China cannot be trusted. "People see the Chinese government as having 100% control over everything," the investor, requesting anonymity, said. "Of course, that makes no sense." Shazeda Ahmed, a doctoral student at University of California, Berkeley's School of Information who studies cybersecurity and internet policy in China, told Protocol that even if Beijing wants to access private company data, it still needs a warrant. "I go to talks with people who used to be in the U.S. government. And they'll say things like, 'You know, they just give the data to the Chinese government,'" Ahmad said. "But people who have been working on this for years don't have evidence of that."

Yang is still building his ecommerce business on both sides of the Pacific and said he's not concerned about his company being singled out for scrutiny. But he understands the fate of his startup is ultimately at the mercy of the broader U.S.-China relationship. "I don't know what will happen in the future," Yang said. "I'm taking one step at a time."

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