By Georges Haour and Max von Zedtwitz
China is fast transitioning from a low cost manufacturing to a higher value innovation-led economy. Summarising their book,1 the authors highlight important cornerstones in this momentous transition.
Western observers have underestimated the innovative capabilities of Asian countries many times in the past, first Japan, then Korea – and perhaps now China? Japan and Korea have managed to rapidly emerge as advanced industrial nations, and now they are formidable innovation powerhouses, especially in the technical arena.
When it comes to China, anticipating even just the next few years is fraught with difficulties. China is a much bigger, and more diverse country than either Japan or Korea. The upcoming transitions are of much greater scale and complexity than ever attempted before. Much has to change, and much already has, but not everything is innovation, and not everywhere.
After extensive field work and time spent in China, our conclusion is that China – despite all concerns and setbacks – is on its way to become a global power for innovation. This is mainly due to its private firms, essential engines of the wealth-creation process. These, however, operate in a unique environment, one in which the public sector is extremely powerful. China’s government is highly focussed on promoting innovation as a way to create new technologies and jobs, while preparing for an anticipated increasing internal demand.
What China has achieved so far is impressive, and it is captured in widely-used innovation metrics. But what are these metrics worth in a country that changes so fast, and that is so different from others?
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China’s Innovation Metrics
Innovation is about quality of output and not quantity of input. It is therefore extremely difficult to describe and to anticipate. Several of the elements commonly used are discussed below:
Investments in R&D: These are taken as a percentage of the country’s GDP (Gross Domestic Product). In the case of China, the increase of this figure of merit is spectacular, from 0.5% in 1995 to 2% in 2014, matching the average investments of the European Union. The objective is to reach 2.5% in 2020, thus catching up with the relative investment in R&D in the United States.
Given the rapid growth of China’s economy, numbers in absolute terms are even more impressive. In 2014, R&D investments in China were about $270 billion. Assuming recent trends to continue, China may overtake R&D investments of the USA as early as 2023.
Patent output: The top patent owners in China are the telecommunications companies ZTE and Huawei, as well as the car-maker Chery. In any country, overall patent statistics are only a proxy indicator of innovation. In 2014, China granted 233,000 patents. The quality and the business potential of the inventions, however, are more important than the number of patents.
In the case of China, this indicator is even more questionable, as the government has strongly incentivising firms and academics to file patents. Also, approximately half of all patents are utility patents, good for only 10 years as opposed to the 20 years of invention patents, are of highly questionable value. As a result, it is a rough estimate that perhaps two thirds of China’s patents are close to being worthless. On the other hand, the handling of patent litigation by the courts is steadily improving, and non-Chinese firms increasingly place confidence in the process. It is interesting to note that most of IP litigation cases nowadays involve one Chinese firm suing another Chinese firm, and that the share of invention patent filings is increasing while those of utility models is decreasing.
Non-technical innovations: the metrics discussed above concern technical innovations. Many important innovations have little to do with technology; one example is the self-service concept, which revolutionised retail stores in the 1950s. Indeed, most advances in the services sectors are not patentable, making it easy for one firm to copy the services offered by a competitor.
In China, many innovations concern aspects of the business model. For example, Haier, the manufacturer of refrigerators and air conditioners, guarantees one day delivery by imposing this condition to the transportation sub-contractor. Mobile phone-maker Xiaomi invests very little in advertising and mainly sells over the Internet. Furthermore, as will be seen later, product innovations are often the result of numerous, very small adaptations to existing products; these changes are seldom patented, but they are nevertheless the reason for the success of the offering in the Chinese market.
In brief, metrics used to assess the level of innovation in China are not that relevant, because they are either insufficient or do not reflect areas where change is happening.
Patterns for China Becoming a Global Innovator
Chinese society is, by and large, highly entrepreneurial, eager to make money and able to extract value very effectively. The Chinese consider innovations in a totally market-oriented way. They are ready to experiment and rapidly correct their product. Technology is only a tool to be successful in the market place. Furthermore, the Chinese are fully engaged with internet, with more than 650 million users in the country already.
Copying and improving many different elements of the products while adapting them to the Chinese market, represents a fully legitimate way to operate. Innovating to reduce cost by copying and improving explain the success of many Chinese companies, such as Baidu (copy of Google), Alibaba, initially inspired by eBay, or Xiaomi for mobile phones.
In brief, a Chinese entrepreneur may look at a Western product or service offering, deconstructs it and rebuilds in a leaner way, adapting it along the way to the Chinese consumers, and thus turning otherwise expensive products into a big success. There is even a name for it in China: “Shanzhai innovation”.
The China’s government is obsessed with providing a context favourable to innovation-led growth. Like in Japan and Korea before, innovation is perceived as a crucial ingredient of wealth-creation and economic development. Many Chinese top leaders have technical backgrounds. The current President Xi was initially trained as a chemist, then obtained a PhD in Law. But it is far from certain that this path will bring the hoped-for wealth, and the prospect of getting stuck in the middle-income trap looms mightily in China’s future.
Innovation policies range from favouring the digital revolution, “smart cities”, and fiscal incentives for “innovative firms” to an arsenal of programmes to foster R&D and technical developments. These include “3D printing” and informatisation of manufacturing, as well as the “Internet of Things”.
At the same time, a set of non-tariff barriers and practices favour domestic firms under the cover of a policy of promoting “indigenous innovation”. This is particularly the case of equipment to produce renewable energy. China wants to become strong in the wind and solar energy industries, but its protectionist policies may, in fact, hinder innovation, at least for these specific segments.
More and more Chinese firms are private and entrepreneurial and contribute a rapidly growing share of innovations. They are very active in the ICT (Information and Communication Technologies) and electronic games. The weight of the SOEs (State-Owned Enterprises) is decreasing, both as a factor in the GDP and in the production of innovative offerings.
The Shenzhen area is densely populated with innumerable firms able to rapidly produce prototypes and components. The “makers” movement has taken hold here, a bottom-up dynamic of inventing and rapidly commercialising all types of devices. This movement has received strong encouragement from the government, underlining the message that entrepreneurial spirit is central to tomorrow’s China.
A few large Chinese firms have ventured abroad. Huawei, Lenovo, Haier are notable examples. This number will grow, and in 2014 Chinese investments going abroad have equalled the flow of investments coming into China for the first time. We are at the beginning of a rapid increase of outflow of China’s investments, especially towards Europe.
Within China, firms compete fiercely and copy each other relentlessly. This alone is a reason why, when innovation begins in a sector, it will spread and be maintained. At the same time, success secured by a given offering is expected to be relatively short term. Thus, a rapid succession of “puffs of commercial success” may be expected.
Conclusion
A strong entrepreneurial spirit, a relentless market-orientation, an agile and rapid implementation in a vibrant economy demanding excellent quality to price ratios: these are the basic descriptors of the Chinese society.
China could be the ultimate internet country, given the sheer number of users, as well as by the intensity of its usage. Already the biggest market for on-line shopping, China is expected to soon lead in on-line financial services. Add to that a strong government committed to foster innovation for growth.
Looking at these characteristics, barring mishaps, Chinese firms are therefore expected to turn the country into one of the world’s major sources of innovation. Innovating in the way innovations are carried out comes with China’s specific strengths and weaknesses, but there is much to learn from the “Chinese way”. China is becoming a major source of innovation, and this is good for China and good for the world.
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About the Author
Georges Haour is Professor of innovation management at the executive education institute IMD, in Switzerland. For years, he was associated with the incubator Generics (now Sagentia), in Cambridge, UK.
He frequently acts as an adviser to companies on effective innovation, new ventures and technology commercialisation. He is on the boards of several start ups and technology transfer firms.
Georges was born and raised in Lyon, France. After obtaining a PhD in Chemistry & Materials Science from the University of Toronto, Canada, he joined the innovation outsourcing organisation Battelle, becoming manager of a 35 staff business unit. His clients were multinational companies. Several of his 8 granted patents have been licensed to create new activities in the client companies.
He has written four books. The most recent “From science to business” (see:www.sciencetobusiness.ch) is on technology transfer. His latest book: “Created in China – How China is becoming a Global Innovator”, is to be published by Bloomsbury, in London in January 2016.
Reference:
1. Created in China: How China is Becoming a Global Innovator, by Georges Haour and Max von Zedtwitz, (Bloomsbury, London, 2016)
http://www.bloomsbury.com/uk/created-in-china-9781472925138/
