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A CEO’s guide to innovation in China

A CEO’s guide to innovation in China

In a recent McKinsey Quarterly article, “A CEO’s guide to innovation in China”, authors Gordon Orr and Erik Roth discuss the state of innovation in China. They find that presently, the process is more of incremental innovation rather than one of breakthrough innovations. However, given China’s 10,000 new PhDs every year, how long will it be before the Dragon catches up with the rest of the developed world?

There is no doubt that China is innovating. The numbers of patents granted to Chinese companies have doubled since 2005 and Chinese companies have become global players in the wind and solar power industries.

Traditionally, China has had a tendency to innovate incrementally by first bringing its products to market and then improving them through newer versions. As a result, products come to the market much faster.

The Chinese government clearly understands the importance of innovation to long term health of the economy and has taken steps to start 22 Silicon Valley type innovation clusters in life sciences, biotech and semiconductors. However, there are three problems areas that need to be rectified. These are a lack of advanced analysis of customer needs, a poor attitude to risk taking and a lack of internal collaboration that helps develop ideas.

The patent process, in the meanwhile, has improved considerably in China. Patent applications are increasing in technical sectors and Huawei and ZTE were ranked in the top five globally in terms of patent registrations. This type of growth is leading to improvement in intellectual property protection which has traditionally been a week area. China recognizes patents in invention, utility and design sectors and grants protection for 20, 10 and 10 years to each respectively. Raising the bar for what can be registered and carrying out patent reform would send a positive signal about intellectual property protection.

While many carry an image of China as a toy maker, the fact is that many Chinese innovations are not visible to the external world. Many electronic products are now at par with the best products of South Korean origin. Similarly, Tencent’s QQ instant messaging service and Sina Corporation’s microblog, Weibo are generating great value and revenues in China. Many Chinese innovations stay confined here because of satisfaction with the large Chinese market itself and hurdles and cultural barriers encountered in doing business outside China.

Success in Business to Business Activities

Chinese companies have had good success in B2B field. There are several good examples – communication equipment, pharmaceuticals and renewable energy are prime examples.

In communication equipment, Chinese hardware has been successful in both emerging markets as well as with sophisticated European multinationals. In pharmaceuticals, Chinese researchers have more than 20 newly discovered chemical compounds under clinical trials and the country is already an acknowledged leader in the renewable energy marketplace.

Much of this success is due to friendly government policies that have helped the industry innovate and develop. Many foreign companies feel that Chinese companies have an unfair home advantage, but that advantage will stay. Another government initiative is using technology transfer in return for market access. This is best visible in the high speed train program.

Chinese scientific and technical talent is growing rapidly and that too is having a beneficial effect on the B2B success. Examples of innovation due to this can be found in the development of new 3G telecommunication standards and a China specific Internet security protocol.

Many multinationals have been bringing advanced technology to China and have introduced this to the market with China specific modifications. In these industries, multinationals with a 40 – 50 years head start in research in fields such as internal combustion engines have a formidable advantage that China has not been able to overcome. While there are similar challenges in electric vehicles, the government has made it a priority sector and is attempting to encourage innovation by (a) extensive subsidies, (b) tax incentives for local companies and (c) regulating market access for foreign companies.

Four Priorities for Innovators in China

The four key areas that innovators must address are –

A deep understanding of Chinese customers – example is given of Alibaba’s web based trading platform Taobao. This has an ebay like interface but is very different because it reflects a deep understanding of Chinese banking and of Chinese customers.

Retaining local Talent – 91 % of foreign firms regard retention of talent as their top challenge. This is a cultural issue as well since the best Chinese firms create a community like environment. Foreign firms have yet to master this capability.

Instilling Risk Taking – failure is traditionally frowned upon in China. Companies have to work to instill a culture where initiative is better rewarded.

Promoting Collaboration – multinationals are better at this than traditional Chinese firms.

Note: The preceding is a summary of an article found though our research, and is provided here with editorial comment for members only. Please see the full article at the following link for full original content. http://www.mckinseyquarterly.com

The New Asia Innovation Team

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