Key Findings on Chinese Innovation

Nordic Innovation Seminar December 2012

The annual Nordic Innovation Seminar was held in Shanghai 5 December 2012 for members of the Nordic community. Again this year, Innovation Centre Denmark in Shanghai coordinated the seminar in collaboration with the Nordic representations present in Shanghai: FinPro, Innovation Norway, the Nordic Centre at Fudan University, the Swedish General Consulate and all the Nordic Chambers of Commerce. The collaborating partners behind the seminar issued an ambitious goal for the afternoon and evening: the line-up of presenters shared their insights and experiences, and hopefully challenge the audience when answering the much-repeated question “what is Chinese innovation?”. Four compelling speakers with each their distinct areas of expertise highlighted their insights from an academic, research, consultancy, and practical standpoint. Renowned business strategist Martin Roll came to moderate the presentations and weaving together a cohesive telling while energising the audience. The speakers were:

Martin Roll, Business Strategist Martin Roll Company

Wei Dou, Ph.D. scholar National Institute of Innovation Management at Zhejiang University

Dr. Max von Zedtwitz, Director Research Centre for Global R&D Management and Reverse Innovation

Anna Maansson, Principal Booz & Co.

Ian Lee, Creative Director frog

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From “made in China” to “created with China” As the seminar progressed one major insight emerged stressed by the presenters: China’s move into the high value accentuated early stages of the value chain is no longer just a priority with political mandate, but a very real and observable phenomenon as a result of clever innovation practices. The key findings provided below present an organised telling of the drivers and inhibitors of Chinese innovation dating up until anno 2012:

Outgrowing Demand   

China’s economic growth sparked a reinforcing cycle of ever-increasing number of needs and wants resulting in even greater growth rates. The insatiable demand on the Chinese domestic market triggered growth rates for companies with little or no capacity to innovate. China’s growth rates are now deflecting, and their continued growth is contingent on their ability to demonstrate true innovative capabilities when moving up the value chain to get involved in e.g. R&D.

Credit: Dr. Max von Zedtwitz, GLORAD

History Repeats Itself when Emerging Economies Catch Up    

From an academic perspective, the story of emerging countries is well-documented and repetitive: emerging economies’ innovative capabilities are underdeveloped to begin with. Their ability to compete with the developed incumbents is often limited to low cost manufacturing. Domestic innovation capabilities such as science, knowledge, and know-how must first be acquired and is done so through imitation. Chinese imitation, shanzhai (山寨), is the result of the incumbents’ dominant design lock-in of proven science, technologies, and solutions.

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The imitation strategy can bring an emerging economy on par with incumbents, but never beyond as the emerging economy’s growth is dependent on the incumbents’ development trajectory.

Credit: Wei Dou, NIIM

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China’s young innovation policy emphasises the move towards science, technology, and knowledge leadership to stimulate continued growth. The move is supported through exhaustive government financial support. Chinese patent grants are skyrocketing these years, signalling a wider prevalence of innovative science and technology solutions. The high grade “invention” patent grant is catching up with the lesser types of patents (“utility model” and “design”).

Thousands

Chinese patent grants 450 400 350 300 250 200 150 100 50 0

Invention Utility Model Design

Source: State Intellectual Property Office of the P.R.C.

Building a Successful Innovation Strategy  

Being innovative is a diverse concept, but in terms of three generic types of innovation strategies Chinese companies are well equipped to become global top innovators. In a global study among hundreds of multinational companies, three different types of innovation strategies with fundamental different approaches emerged: o Need seekers o Market readers o Technology drivers 3/6

Credit: Anna Maansson, Booz & Co.

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The majority share of the global top innovators are characterised as need seekers. China is the one of only two places in the World where need seekers innovation strategies constitute a higher share than the global average. …the other is Silicon Valley! China’s share of technology drivers is lower than the global avg. which may be due to their still nascent move from imitation to independently pursue innovation.

Credit: Anna Maansson, Booz & Co.

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The study illustrates that Chinese companies are well positioned to become global innovation contenders because of their distinctive ability to tap into unarticulated user needs.

Contemporary Chinese Innovation in a Nutshell   

A prevalent form of innovation in developed countries is a protracted and structured stage gate process model isolated from too much interference from the outside. The underlying principles governing Chinese innovation are counteracting to the Western model inasmuch that it emphasises speed, agility, and flexibility. Five proven practical advices were provided on how to innovate for China – by China: 1. Get out of your comfort zone When the foreign global brands set up operations in China, they all targeted the developed tier 1 cities because of the general convergence of market demand with their home markets. At the same time, their Chinese equivalents targeted the less developed needs of tier 2 and 3 cities. 4/6

For expansion purposes, the foreign businesses were limited to target in one direction: downwards. Their Chinese competitors, however, were positioned so that they could aim both downwards in the tier levels as their market needs developed, and upwards to take on the foreign companies’ domain. This currently manifests itself as a competitive advantage of Chinese companies across the spectrum of city tier levels, and signals a need for foreign companies to submerge their business into the Chinese market instead of skimming the surface.

Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Tier 6 Tier 7 Credit: Ian Lee, frog

2. Innovate how you innovate Chinese innovation emphasises speed to a degree where the elongated stage gate model is cut down to very short development cycles. Perfection is achieved by many development iterations according to real market testing and feedback. This facilitates an agile innovation process with the flexibility required to adapt to the ever-changing society. Chinese consumers are more forgiving, allowing such an innovation process to roll out as a high pace exchange of launching products, leveraging feedback, redesigning, and relaunching products according to market needs. 3. Innovate outside in – not inside out Many of the novel Chinese innovations share the characteristic that they were fostered from externally identified unmet and unexpressed needs. Through observations of the environment, an unarticulated need may emerge with the potential for a smart and seamless solution. 4. Consumers are your company In realisation of that individual consumer needs may vary from one another, there is potential in letting go of the design and content side of a product, service, or solution and let the users personalise the product according to their wants on your underlying platform. Here, Chinese innovators hold the advantage on two levels: 1) they share a common cultural understanding of identity and needs and 2) they discern the market with a finer granularity. China cannot be treated as a singular entity because of its diversity with hugely varying needs, purchasing power, demographics, etc. 5. Leverage your consumers’ perception What consumers associate with a given impression may unlock the secret to successes and failures. Chinese innovators are strong in altering products and marketing to complement consumer perception, which means either accentuating positive associations and novelty or mitigating the negative sides. To serve as an example of how to bring both tactics into play, a retail store brands itself as “made in Shanghai” to emphasise the novelty and success of Shanghai whilst setting itself apart from the poorly received “made in China” tags. 5/6

Future Challenges to Chinese Innovation 

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The practical implications of Chinese innovation profess trial and error as the learning needed to develop on products. The Chinese companies’ boldness will prove difficult to sustain with their steadfast transformation to become brand names. With a brand come expectations of premium value for premium prices. Telecommunications companies such as Huawei and ZTE are maturing to the point where they are going global. In the developed markets they offer only their high-end products to reflect the requirements of more demanding consumers. In conclusion, the current state of Chinese innovation is highly favourable in leveraging core technologies and fundamental science to develop solutions in accordance with environmental needs, be they articulated or not. As such, Chinese innovators find themselves in the sweet spot between state of the art R&D and market needs. However, China has yet to prove its ability to procure ground-breaking technologies and science independent of the incumbent economies. The government’s political and financial support is in place, and given the explosion in patent grants, it seems to be but a matter of time.

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