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The Innovation Power of China

China’s Innovative Strengths

About 10 years ago, China was still the country of copycats, and “Chinese product” was synonymous of low-end, low-quality merchandise. Today, China leads the world in many industries, such as mobile telephones, solar panels, digital payment, high-speed trains, and construction. In terms of number of filed patents, utility models, industrial design applications per unit GDP (PPP), or total value of creative goods exports, China ranks as number one, according to the Global Innovation Index [1]. Overall, China has been catching up at a pace of three to five countries every year over the last five years, ranking 17th in 2018.

Why has China gained so much power in the area of innovation? In what fields is China particularly innovative? What are China’s innovative strengths? These are the questions we want to address in our article series. Our answers should lead to recommendations on how Swiss firms can benefit from China’s innovative power.

Situation
40 years ago, China introduced its Reform and Opening-Up Policy, triggering something of an economic miracle: China’s share of the world GDP (PPP) grew from a mere 1.8 percent in 1978 to a staggering 18.2 percent in 2017 [2], drastically improving the quality of life of its citizens. Average wages in manufacturing rose almost sevenfold [3] in this time period. As China’s labor force is starting to decline, however, debt levels are rising and returns on fixed asset investments have fallen. China must improve its labor productivity and move up the value chain in order to escape the middle-income trap. An essentially important approach is fostering innovation.

Areas of Chinese Innovation
As China is trying to evolve from its role as the «factory to the world» to becoming an innovation leader, its progress varies according to industry. Rather than focusing on the type of innovations that China should embrace, it is therefore more interesting to look at the industries with specific driven factors for innovation in which China’s innovative power is strong. In examining different industries, the McKinsey Global Institute has created four «archetypes»[4]

  • Efficiency-driven innovation involves improving processes in production, product design, and supply chain management to reduce cost and accelerate time to market in industries such as generic pharmaceuticals, solar panels, steel, and textures;
  • Customer-focused innovation involves identifying and addressing customer needs to develop new products, services, and business models in industries such as household appliances, internet services, internet retailing, and consumer electronics;
  • Engineering-based innovation involves solving engineering problems using accumulated expertise and integrating technologies from suppliers and partners in industries such as railroad equipment, wind turbines, and communication equipment; and
  • Science-based innovation involves generating new discoveries and turning them into products in industries such as branded pharmaceuticals, bio technology, and semiconductor design.

The McKinsey study concluded that, as the «factory to the world», China became a leading innovator in efficiency-driven innovations. Chinese manufacturing companies are no longer simply a source of low-cost labor but are gaining ground in knowledge-intensive manufacturing categories such as electrical equipment and construction equipment. They are driving efficiency in a variety of ways, including agile manufacturing, modular design, and a flexible approach to automation. To support its bid for leadership China has announced a series of programs starting with «Made in China 2025».

With China’s middle class growing into the biggest in the world, Chinese companies have learned to read their customers’ needs in time and to develop and scale up new products and services quickly to meet these needs. Chinese innovators have developed «good-enough» home appliances and «cheaper-and-better» mobile phones, and they have introduced e-payment tools to address especially the needs of Chinese consumers living in smaller cities and rural areas.

Mixed results have been achieved in engineering-based innovation which requires extensive experience and learning. The best performers have been in markets where the Chinese government has supported an infant industry by providing local demand and where companies have managed to acquire the knowledge needed to develop innovations. Good examples of such industries are high-speed rail transportation, telecom equipment, and wind power.

Although China has made science-based innovation an important priority and has invested substantially in this area, it is not yet a top global competitor. However, Chinese companies are taking distinctively Chinese approaches, such as human-wave tactics − employing tens of thousands of researchers − to speed up science innovation.

China’s Innovative Strengths

Firstly, China has the largest consumer base of any country, which enables rapid commercialization of new ideas. The large size of the Chinese market is conducive to standardization and mass production of new innovations. [5]

Secondly, China has the world’s most extensive manufacturing ecosystem, with more than five times the supplier base of Japan, 150 million manufacturing workers, an output of STEM (science, technology, engineering and mathematic) graduates which triples annually, and modern infrastructure which enables efficiency-driven innovation.

Thirdly, the Chinese government has become increasingly involved in supporting domestic levels of innovation. Government support in form of research funding and policies for creating local demand, providing subsidy programs, lowering taxes, or giving low interest loan for strategic emerging industries (SEI) plays an important role in driving innovation.

Furthermore, Chinese R&D engineers are known for their pragmatic and market-driven approach to innovation. While they tend to be less independent and less creative due to their national culture and education system, they do not overengineer and are willing to try and launch 80-percent solutions and make adaptations according to the user feedback quickly, as needed.

Leveraging China’s Innovation Power

Many success stories indicate that international companies can benefit from aligning their global innovation strategies with the comparative advantages of China as an innovation location. They can start by making a larger commitment to innovation in China, locate more R&D activities in China, or partner with local companies to engage in innovation. They can adopt the rapid development and commercialization processes («China speed») that have helped China’s innovation leaders. They can also use China as an innovation hub to access from there other emerging markets since their own consumers may have much more in common with consumers in China than with those in Europe or the US. Finally, they can enter into a cooperation agreement with the Chinese government concerning innovation, not only to gain government support but also to improve their image with Chinese consumers.

Future Articles 2019

We are planning to analyze success stories in SEI and related industries in China to establish the similarities and differences of their R&D activities. This will enable us to determine how Swiss SMEs can use the lessons learnt from the rising Chinese power of innovation to gain access to the Chinese and other emerging markets.

[1] Global Innovation Index is an annual ranking of countries by their capacity for, and success in, innovation. It is published by Cornell University, INSEAD, and the World Intellectual Property Organization
[2] Jean-Guy Carrier 2018, The real heroes of China story, China Daily
[3] National Bureau of Statistics of China
[4] McKinsey Global Institute 2015, The China Effect on Global Innovation
[5] Joachim Jan Thraen 2015, Mastering Innovation in China, Springer Gabler