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China tech

China's tech startups flourish in talent-rich second-tier cities

Cheap rent, plentiful graduates spur gaming industry in Chengdu and Wuhan

The company behind Douyu, a popular video-streaming platform, has grown into a top startup in Wuhan, Hubei Province. (Photo by Shunsuke Tabeta)

TOKYO/DALIAN, China -- Chinese technology startups are flocking to second-tier cities, taking advantage of large talent pools and operationals costs that are substantially lower than in main metropolises such as Shanghai and Shenzhen.

Chengdu, a city in Sichuan province, has become a hive of esports and gaming startups. In Hubei Province, Wuhan has enjoyed a flurry of startup activity spurred by the success of streaming unicorn Douyu.

Commercial rent and staff are cheaper than in key cities such as Beijing or Shanghai, and a wealth of universities offer fertile ground for companies seeking engineers. Regional governments are now working at the central government's behest to cultivate startups, and Chengdu and Wuhan are seizing those opportunities.

"Chengdu has a good environment for developing games," said Wang Jian, chairman of game startup Chengdu Uminton Interaction Technology.

Uminton was established in 2014 and began to branch out after landing a hit in 2017 with a basketball game developed for online services conglomerate Tencent Holdings and is now worth 200 million yuan ($29 million). It is now working at developing a game for esports tournaments, Wang said.

Compared with bustling Shanghai, for example, Chengdu residents are more "laid-back" and enjoy online games more, said Yin Han, chair of the Association of Chengdu Cyber Game Industry esports organization.

Chengdu is home to roughly 300 production companies, which has in turn spawned contract developers in the area. One under Tencent was responsible for the hit smartphone game Honor of Kings, adapted for the West under the name Arena of Valor.

Startups armed with cutting-edge tech are proliferating in Chengdu and Wuhan. Wuhan hosted 3,527 such companies in 2018, according to China's National Bureau of Statistics -- the 10th-highest in the nation, while Chengdu came in at 13th with 3,000.

This is in part due to a wellspring of talented young people. According to China's Ministry of Education, Wuhan is just behind first-ranked Beijing in terms of the number of colleges it has in 2017, at 84 against the capital's 92. Chengdu placed 10th with 56.

Chengdu and Wuhan still trail Beijing, Shanghai, Guangzhou and Shenzhen, in terms of the number of startups. The main cities each host 10,000 to 25,000. But Chengdu and Wuhan are catching up with metropolises like Hangzhou, which ranks eighth with 3,919 high-tech businesses and hosts the headquarters of Alibaba Group Holding, China's leading e-commerce player.

Sichuan and Hubei were each home to four unicorns -- unlisted companies worth $1 billion or more -- in a late-2018 survey by research company itjuzi.com. This placed them among the top six provinces for unicorns from a national total of 202.

One Chengdu-based unicorn, Chengdu Yiyun Technology, offers an app that lets doctors share information. The service now has registered about 550,000 doctors throughout China, and the company is valued at $1.2 billion. Down the road, Chengdu Yiyun plans to expand into new areas like selling medicine online.

Meanwhile, Hubei's Douyu has risen to unicorn status operating its popular eponymous livestreaming platform. Over three days in mid-June, the welcomed crowds of young people to an open-air stadium for an annual Douyu festival.

The company was founded in 2014 and reported revenue of 3.6 billion yuan for 2018 -- up around 90% from the preceding year. Having gone public in the U.S. on July 17, Douyu, which counts Tencent among its investors, is now valued at roughly $3.3 billion. Registered users reached around 250 million in 2018. Viewers can interact with streamers in real time.

Information technology startups in fields from comics production to games and education have sprung up in Wuhan. Douyu Vice President Yuan Gang told Chinese media that he hoped his company will help bring greater prosperity in Wuhan's startup culture.

"Wuhan's concentration of colleges and research bodies supports the city's development," said Takehiko Saeki, head of the Wuhan office of the Japan External Trade Organization. The schools are academically strong and churn out talented tech workers. People also tend to settle longer in Wuhan, with a lower population outflow than coastal areas.

Office rent in China's second-tier cities can also be about half that in Shanghai, and average monthly income about 70%, industry sources said.

Investors are also seeking new targets in cities beyond the major metropolitan areas, said a report by Reality Institute of Advanced Finance, a research body.

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