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Can China’s Billions Spur the Next Big Idea?

Can China’s Billions Spur the Next Big Idea?

Innovation can be of two types: first, the bold and new ideas that lead to products that did not exist before, and second, the redesigning of these products and addition of additional features. Chinese companies have mastered the second. China continues to be an imitator instead of a creator of intellectual property and its focus remains on incremental or second-generation innovation, where one researches an existing design and improves upon it through cost-cutting and redesigning. With the focus on churning out fine and cheap versions of existing products fast and sending them to the market, most of the Chinese companies do not feel the need to take risks and innovate.

Chinese Innovation: Focuses on Increment, Development & Sustainability

China’s rise as the top manufacturing and engineering hub, expenditure worth billions on R&D activities and incentives by the government, and prospects of overtaking the United States and Japan as the biggest issuer of patents by the end of 2011 make many expect big innovations coming from that country. However, Chinese manufacturers focus on providing 80 percent of global products at 50 percent of the original cost and do not see any reason to invest in high-risk innovations, as they are making money in that business.

Baidu, the No.1 search engine in China imitated Google’s ad strategy and improvised by adding new features for local users to achieve success in a short span. Hi Simo’s Guangdong East Power, a major supplier of power equipment in China, buys products of competitors. Its engineers pull apart and imitate the design to make equipment that are 30-40 percent cheaper than merchandise of patent holders. Simo admits that Chinese companies are nowhere when compared to innovation of new products by their Western counterparts, but they find it easy to emulate and improve those products.

According to Dong Defu, owner of Nasdaq-listed TechFaith Wireless Technology, stiff competition and market pressure to keep prices low deter Chinese companies from investing in new R&D activities, though they are capable of matching with foreign multinationals. His company provides mobile phone designs and software to many telecom multinationals and makes its own handsets. However, many of his handsets are not original in design and copy of products from established players. But his business thrives due to the low cost of handsets and innovative features, such as Disney-marked phones with GPS devices to track children and shock-proof phones for policemen.

Similarly, pirated iPhones and iPads not only are cheap, but also have extra and innovative features, such as dual SIM card and ultraviolet lights to identify counterfeit currencies. The Chinese prodigy and resourcefulness in imitating, improving, and designing low-cost products has not gone unnoticed by multinationals. GM has forged successful partnership with Chinese auto manufacturer SAIC Motor to make cheaper versions of its cars suitable for local market.

Is Government Push for Innovation in China Going Right Way?

The Chinese Government has spent billions of dollars, including grants, tax subsidies, and loans at discounted rates, in the last five years to rush up quality of R&D activities in state-owned enterprises and research institutes. Over the next five years, another $1.5 trillion will be spent to encourage major breakthroughs and new technologies in the strategic, alternative energy, and manufacturing sectors. However, the effort to make the country a leader in technology has not been a success, and private companies continue to imitate and redesign.

While large-scale spending has produced some benefits, China is yet to become the springboard for world-leading technologies. A lot of money was spent on state-backed big players that do not invest to innovate due to lack of competition. In 2006, the government pushed for the use of home-made TD-SCDMA to save Chinese companies from paying millions in licensing fees to foreign patent holders during 3G network rollout in China. However, the home-grown system failed to give the desired results because of delays, speed and compatibility issues, and 40 percent less capacity than existing technologies. Finally, the government allowed major telecom operators to buy standard 3G licenses.

Though the government intends to create innovations, its policies are driving enterprises to create huge industrial machines by borrowing technology from global players. Domestic private sector prefers to build money-making businesses on the resourcefulness of bettering the existing technologies at cheaper prices against the government strategy to usher in innovations.

Can China’s Innovation Push Deliver To Global Expectations?

It is a big question now whether China is ready for big innovations. There is hardly any area where Chinese entrepreneurs have achieved any breakthrough. Political constraints, absence of intellectual property right enforcement, and lack of organizations to evaluate scientific projects, coupled with flawed government policies, have reinforced the inclination to imitate, tinker, and improve the existing products. The Chinese thrust remains on incremental innovation centered on the gospel of developing the existing products and capturing the current market, a sharp contrast to push for bold and new things in the West. While flawed state central planning and intellectual property policies have augmented China’s innovation shortcomings, political restrictions and unchecked plagiarism have promoted it over the years.

Most of the patients applied for in the country are “utility patients.” The government push for big, state-directed projects undermines privately-held smaller companies that adopt incremental innovation to sustain. Entrepreneurs find it tough to get loans at discounted interest to invest in innovative ventures and give shape to bright ideas. Starved of cash, they focus on fine churning of exiting products and make profit by producing cheaper versions.

China’s policies require foreign businesses to transfer technology to their Chinese partners to access state procurement market. The protective mentality and state-led innovation push is also creating discontent among western multinationals and investors, which is going to impact innovation in China in the coming years.

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The New Asia Innovation Team