Co-authored with Bruce McKern
China’s Premier Li Keqiang told the World Economic Forum in Tianjin on 10 September that China will step up science and technology innovation and improve the technological sophistication, quality and brand awareness of Chinese industry. This comment reflects the Chinese government’s continuing emphasis on technological innovation, including R&D spending which is now around 42% of the US level. But our research on innovation by companies in China shows that there are at least eight types of innovation, and that null .
Cost innovation: China’s first advantage
Cost innovation occurs when changes in the product design, production or delivery process, technology or materials result in reduction in production or delivery costs. In China, it is well known that the extensive use of lower cost unskilled or semi-skilled labor creates products that are cheaper than those made in developed countries. null Chint, a maker of electrical equipment such as transformers and power supply units, flexibly substitutes labor for automation to both reduce costs and to better align automatic production lines with manual lines. But this cost advantage has been eroding fast.
Process innovation: a big focus in China
Process innovation occurs when the company creates a new process for producing or delivering an existing product or service. In China, much process innovation seeks to reduce the cost of production. For example, Guangzhou Crane Corporation has pioneered single rather than double welding of sections as a way to reduce costs while maintaining the same performance.
Application innovation: low hanging fruit
Application innovation occurs when existing products (or services) or technologies are combined in a new way to produce a new product. The humble but ubiquitous sandwich, and also the credit card, are classic examples. Chinese companies, with their strong pragmatism and customer focus, eagerly embrace application innovation. Antas Chemical Company has reformulated and repackaged butane-based sealants for easy use in the construction industry; and Broad uses waste heat or natural gas to generate cool air directly for large-scale buildings (e.g. skyscrapers or airport terminals).
Supply chain innovation: much needed in China
Paradoxically, while China has become critical in the global supply chains of foreign companies, supply chains inside China still have much room for improvement; infrastructure is needed to catch up with the country’s very rapid growth. But null
Product innovation: incremental to radical
China has produced relatively few product innovations that are truly new to the world. But based on extensive experience with incremental innovations, null Huawei is an example. It is starting to make radical innovations with its distributed base stations and its SingleRAN based LTE solution for mobile operators. Sanyi Heavy Industry Company, another example, produces the world’s most powerful crawler crane.
Technological innovation: China’s dream
China has yet to produce high-impact technology innovations with global significance. But we have seen examples of minor but world class technology being implemented to create innovations. We visited SVG Optronics, a start-up company that uses nanotechnology to create very thin films that provide hologram patterns that can be printed onto such things such as identity cards, and are very difficult to copy. As a result of this film, null . Another company, Suzhou Nano-Micro BioTech, produces very, very small particles which are of uniform size and shape and tailored to the customer’s specific needs. There is a very high degree of precision in particle size and shape, which is very important for certain sophisticated applications ranging from LCD displays to high efficiency LEDs.
Business model innovation: often copied and adapted
null Although Alibaba.com, for example, copied the eBay platform with its competing service Taobao, it quickly overtook eBay, based on its earlier B2B platform experience and innovations to suit the Chinese customer. Tencent, China’s largest Internet portal, experimented with multiple business models in order to monetize its products and it now generates most of its revenues through Internet value-added services. Like some foreign companies, such as Apple or Google, Tencent has created an ecosystem of service offerings centered on its QQ instant messaging service. For its instant messenger service QQ, Tencent did not copy global leader ICQ’s unprofitable business mode. Instead, Tencent created a new business model that was the first to include advertising and that includes an ecosystem where it can monetize all the value-added services surrounding the free QQ instant messenger application.
Non-customer innovation: huge opportunity
Non-customer innovation occurs when a business is able to serve a customer segment not previously served in this category elsewhere in the world or in a particular country. An example is the Tata Nano car, designed at such a low price point as to serve first time auto buyers, who had previously used motorcycles or other modes. An even better example is Apple’s iPad, whose simplicity drew in many older users who had previously been unable to use more complex personal computers. China’s modern, market economy is so new that there are many non-customers to be tapped in almost every category. For example, in banking many small enterprises still have no bank accounts. Minsheng Bank succeeded in capturing small-sized companies’ business as a first mover to create a new segment.
Chinese companies are adept at exploiting all of these forms of innovation, due to their relentless focus on customers, their search for unmet needs, and remarkable speed. null
George S. Yip is Professor of Strategy and Co-Director of the Center on China Innovation at China Europe International Business School. (firstname.lastname@example.org).
Bruce McKern is Visiting Fellow, Hoover Institution, Stanford University, and Visiting Professor of International Business and former Co-Director of the Center on China Innovation at China Europe International Business School. (email@example.com).