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90% of Chinese VR Startups Have Gone Bankrupt. Here’s Why That’s a Good Thing.

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It may look like China’s VR industry is imploding, but that’s not actually the case.

In a recent news update via China.org.cn, Wu Jin reports that approximately 90 percent of start-ups in the Chinese domestic market have declared bankruptcy. This arrives amid a complicated year for the VR industry on both sides of the Pacific, including the revelation that projected headset sales numbers missed their targets by a factor of 1 to 3 (depending on headset), amounting to a 65% differential between projects and actual sales. Expectedly, the many seized the opportunity for a feeding frenzy.

The first bit to point out, of course, is that 90% of startups in any industry fail.

But leaving that aside, a bit of background. In 2015, China saw 200-300 firms jump to produce their own VR HMDs. Now, that number hovers around 10. And even the ones still in the game—including AlfaReal, Miido, and Storm Magic Mirror—have begun downsizing and delaying salary payments to employees.

Research about this rapid decline was conducted and issued by iiMedia Research, a third-party data collector and analyst of technological digital platforms. In the report, iiMedia claims that consumer interest in the headsets these companies produced flagged in 2016, claiming: “70 percent of respondents among smart cell phone users [expressed] no willingness to buy one.”

In many regards, China is leading the way for VR innovation and adoption. En masse, consumers have expressed their demand for VR content more clearly than those of us in Western countries, leading to (among other triumphs) a successful VR arcade model—something those of us across the Pacific are still having trouble figuring out. And this reaches all the way up to the major players. In October, we wrote about how HTC took the lead in opening the first Vive-branded cafe in Shenzhen.

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I can see where the progress China has made in VR is daunting to Western audiences, hence the clickbait share-storm. But before you write off the progress the Chinese VR industry has made (and continues to make), let’s actually take a look at what’s being said here: VR headset startups are taking a dramatic hit in China. With notable exceptions, these are often companies producing cheap replicas of existing mobile hardware like Google Cardboard and Samsung Gear without any additional, unique features. As it turns out, investment is still flowing into the Chinese VR industry. In the wake of Facebook’s acquisition of Oculus in 2014, investment spiked: 270 million yuan ($38.9 million). The next year, that number would cap at 2.4 billion yuan ($345.1M)—an increase of almost 900%. And another 1.54B ($221.4M) fueled the Chinese VR industry in the first half of 2016.

So, no, the Chinese VR industry is not imploding or crashing and burning. It’s growing. In many ways it’s still doing a whole lot better than America and Europe.

Just not in the headset market. Why? HTC, Oculus, Sony, Samsung, and Google—all of which offer higher quality headsets with the reliability of market-testing, customer support, and general accountability. In China, according to Jin, the “cheap copycats” have disrupted the market in negative ways, “blocking the channels necessary for high-end innovation to reach customers.”

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This is not to belittle the individual startups facing bankruptcy or the employees who will need to seek new opportunities. But given that a healthy proportion of these companies weren’t providing a service for which there was a corresponding market demand, this “news” was more of an inevitability than a shocking revelation at year’s close.

According to Zhao Ziming, an analyst from Analysys, Ltd., this “reshuffling” will allow bigger companies to elevate the threshold of the market, as well as organize and deploy resources to greater effect. This will give headset startups in China and abroad (like Japan’s FOVE) enough space to see if an innovative indie product can hold its own against the big leagues—particularly in a competitive market like China.

About the Scout

Jesse Damiani

Jesse Damiani is Editor-at-Large of VRScout and the Co-Founder/Creative Director of Galatea.Design, a tool for unframed writing in immersive storytelling. He's also Series Editor for Best American Experimental Writing (Wesleyan University Press) and the author of @endless$pectator: The Screens Suite #sweetpicsbro #pixelated #loliloquy (BlazeVOX [books], 2017). Other writing can be found on IndieWire and The Huffington Post.

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