Innovation in China

Innovation in China: Is China the New Silicon Valley?

A new study by booz&co. revealed China is now competing with Silicon Valley on innovativeness. Although China is still portrayed in the media as a country that prefers reverse engineering and blunt copy-and-paste practices over R&D, research has shown that trend is disappearing rapidly. In this article we will discuss booz&co’s sneak-peak of their newest study on innovation in China and look at how MNC’s approach innovation in the Middle Kingdom.

In booz&co. 2012 research on innovation in China one thing became clear: Chinese companies are becoming more innovative and consequently more competitive on both a local and a global level. Of the MNC’s interviewed in 2012, 45% said they believed Chinese companies to be equally innovative. In 2013 this number had risen to 64%.

In total 260 companies participated in the research, which has brought forth surprising findings. Here we will list some of the most prominent findings.

Chinese companies and MNC’s differ strongly in their innovation strategies

Booz&co. identified three fundamental innovation strategies.

A. Need seekers: described as first-movers that pro-actively engage customers to determine needs and shape new innovations. E.g. Apple

B. Market readers: 2nd movers that focus on driving up value through incremental change. E.g. Samsung

C. Technology drivers: innovation through technological achievement. In this case innovation is achieved by leveraging technology for both incremental and breakthrough change. E.g. Google, Siemens.

Their study showed the following results.

Differences innovation strategies MNC’s & Local Chinese companies 2013
Innovation strategy Chinese companies  MNC’s
Need seekers 44% 24%
Market readers 25% 34%
Technology drivers 32% 37%

As the results show, Chinese companies are mainly need seekers; they determine new innovations by surfacing unarticulated needs. On the contrary, MNC’s in China tend to mainly leverage technology in order to innovate. However, the ‘technology driver’ strategy is also the least proactive of the three strategies in directly contacting customers. Which brings us to our next point.

MNC’s are lagging behind in understanding their consumers

Chinese companies are very proactive in trying to understand their customers. They mainly use direct observation and direct consumer contact to gain new insights and information and consequently use that to better their products and services. MNC’s tend to take a different route and mainly rely on feedback from their sales and customer service departments. The disadvantage of relying on retrieving information through one’s own departments is that it takes more time, and potential new products/solutions as a result of the feedback might be already outdated before they hit the market. Chinese companies prefer direct contact and as a result develop stronger relationships with their customer base and are able to adapt their services and products more rapidly to present market needs.

What we can learn from this: MNC’s should put more effort in engaging with their customers to understand the market better.

Chinese firms adapt easier to local marketing conditions

Chinese are well known to be able to adapt to new environments comparatively easy, both in life and in business. This is also in line with findings in the study, which has shown that Chinese companies tend to adapt more easily and quicker to new business environments and challenges than MNC’s. The majority of the MNC’s interviewed appear to employ global strategies wherever they go, Chinese companies on the other hand adapt their strategies more to the local business climate.

What we can learn from this: MNC’s should adopt their strategies more to the local business climate. I.e. don’t assume what works at home will work abroad.

Attracting and retaining talent is one of the biggest challenges

One point both MNC’s and local firms agreed on was the difficulty of finding and retaining talent. Many believe the problem lays in China’s lacking educational system and the fact that many talented young graduates opt for jobs with state-owned firms that provide stability and safety. Whereas regular businesses cannot provide the same job security and secondary benefits. This hinders innovation and makes it difficult for non state-owned firms and MNC’s to find local talent.

Conclusion & Thoughts

China is becoming more innovative and Chinese companies are now competing with global brands at home and abroad. They have a keen sense of what the consumer is looking for and adapt easily to new market conditions.

Innovation in China is mainly driven by private companies investing into R&D and less so because of government support. The Chinese government is currently only allocating a relatively small percentage of its GDP (0,45%) to boosting innovation. Also, how does one define innovation? Many MNC’s agree that even though Chinese companies are becoming more innovative, they are still mainly making simple incremental changes to existing products.

Local companies are faster to adapt to new market conditions, experiment more often than MNC’s and are fearless in their pursuit of a bigger market share. On the other hand, as Dr. Bruce McKern from the CEIBS Centre of innovation in Shanghai pointed out, local companies are still over-relying on cost advantages and are lacking an integrated innovation process. The question therefore is: how will the rising labor costs in China influence innovation within Chinese companies?  One thing is sure: China is picking up its game and is now becoming a serious threat to foreign companies.

The information in this article was collected during one of Bencham (Benelux chamber of commerce) events in Shanghai, for more news on Bencham events in China please visit www.bencham.org. The official report by booze&co will be published in September of this year. To read their 2012 China Innovation Survey, visit their website on www.booz.com.

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This article was written by Duco van Breemen, strategy manager at Launch Factory 88. For more information on doing business in China, follow us on LinkedIn & Twitter, or send an email to duco@launchfactory88.com

Duco van Breemen

Duco van Breemen

Duco is project & marketing manager at Launch Factory 88. He has lived in China since 2008 and has worked with both state-owned and private Chinese and foreign enterprises.
Duco van Breemen