From Imitation to Innovation

The Chinese economy is moving aggressively from a strategy of imitation to one of innovation.

-By JAN HÖKERBERG, Managing Director of the Hong Kong- and Shanghai-based branding, marketing and communications company Bamboo Business Communications Ltd, www.bambooinasia.com

The People’s Republic of China is not only the world’s most populous nation and the world’s second largest economy – dominated by huge state-owned enterprises within natural resources, infrastructure, construction, banking, and so on it is also dubbed the world’s factory, where foreign-owned companies manufacture electronics, clothes and many other things at low production costs.

Every day, most of us use products that are made in China.

For a long time, China was also known as the world’s largest manufacturer of counterfeit and pirated products – from bags and watches to car parts and pharmaceuticals.

A new phase

What may come as a surprise for many, however, is the fact that the Chinese economy has now entered a new phase and is moving aggressively from a strategy of imitation to one of innovation. Driven both by domestic needs and by global ambition, China is establishing itself at the forefront of technological innovation.

“Western businesses need to prepare for a tidal wave of innovation from China that is about to hit Western markets, and Chinese businesses need to understand the critical importance of innovation in their future,” according to the book China’s Next Strategic Advantage (The MIT Press) by professors George S Yip and Bruce McKern.

Some business people, such as Hewlett-Packard’s former chief executive Carly Fiorina, have claimed that China cannot innovate.

“Chinese students may test well,” Fiorina said in an interview in 2016, “but they fall short when it comes to innovation.”

She added: “I have been doing business in China for decades, and I will tell you that yeah, the Chinese can take a test, but what they can’t do is innovate. They are not terribly imaginative. They’re not entrepreneurial, they don’t innovate, that is why they are stealing our intellectual property.”

Fiorina’s view is shared by many other China watchers, who say that China cannot be innovative due to many factors, such as the education system, which is based on rote learning, the hierarchic corporate structures that do not encourage initiative, the fact that China is a collectivist society, which means that thinking differently is not seen as a good thing, and that face-saving is extremely important.

Innovation abounds

It may be true but it is also a fact that a wave of innovation is happening at this moment all over China. Take the southern Chinese city of Shenzhen, for example. In the late 1970s, it was a small fishing village; today it is an 18-million people modern metropolis linking Hong Kong to mainland China.

Shenzhen has become a melting pot for young entrepreneurs from all over China. It is probably the most open city in China and allows companies to operate more freely than elsewhere on the mainland. It has the big advantage of being close both to the manufacturing industry in Guangdong province as well as to Hong Kong which has a well-established financial infrastructure and a highly educated workforce. Large technology companies such as Huawei, ZTE and Tencent are all based in Shenzhen.

It is also the home of young dynamic companies such as Dajiang Innovation Technology Co (DJI), which less than 10 years ago was a small firm operating from a private flat in Shenzhen but has since grown to a global corporation with more than 4,000 employees worldwide and 70 percent of the world market for civilian drones.

According to Shenzhen’s 13th Five-Year Plan, released in 2016, more than 100 billion yuan – or 4.25 percent of its annual GDP – will be earmarked for R&D by 2020. The plan expects six emerging industries – the biotechnology, internet, new energy, new materials, IT and cultural and creative industries – to account for 42 percent of the city’s GDP in 2020.

Beijing’s Zhongguancun Science Park is another innovation center, often dubbed as China’s Silicon Valley, and home to many established Chinese technology companies, from PC maker Lenovo Group to search engine operator Baidu as well as smartphone maker Xiaomi, which was established in the district six years ago. The science park was approved as China’s first high-tech park in 1988.

Beijing has the advantage of having proximity to strong research universities such as Tsinghua and Peking University.

Driven by customer focus and efficiency

A recent study by the McKinsey Global Institute (MGI), The China Effect on Global Innovation, argues that Chinese companies do indeed show promise when it comes to innovation.

The MGI study analyzed 20,000 public companies in China and around the world in 31 industries, representing about 30 percent of global GDP, and looked for where Chinese companies were getting more than their GDP share of global revenue – more than 12 percent, which is China's share of global GDP.

The study found that China's greatest strengths are customer-focused and efficiency-driven innovation. In customer-focused innovation, China has more than its share in several industries, including appliances (36 percent of global revenue) and internet software and services. Innovators in these industries benefit from the massive size of the Chinese market, which allows rapid commercialization of innovations and provides an open-minded test-bed for new ideas. Chinese consumers are happy to take early versions of new smartphone features, for example, and collaborate with manufacturers via online forums and other means, to perfect them.

However, in terms of engineering and science-based innovation, China still has more to do, the study says. Engineering-based innovation requires deep knowledge. In industries such as high-speed trains (41 percent of global revenue), communications equipment (18 percent) and wind turbines (20 percent), Chinese companies have learned rapidly, thanks in part to government support and technology transfers. In the automotive sector, Chinese brands have seized less opportunities and Chinese players have just 8 percent of global revenue.

Fast and quick

Chinese innovation today is not so much about new technology, but more about product development, new processes and business models. The Chinese mind-set is to work very fast and to quickly release products and services. They have the advantage of a huge home market and have the ability to find and develop new processes to reduce costs.

Chinese companies also have less barriers than Western companies to enter new areas and not only stick to their core products.

Western companies should be aware that their Chinese counterparts are on the way to becoming stronger competitors, not only by offering the lowest prices but also by making use of digitization and automation as means to conquer both domestic and global markets.