Are Chinese companies Innovators or mere Copiers?

I have recently come from a trek to China. As part of an amazing week long course called “Building Business in China”, a bunch of us visited companies in Shanghai and Beijing. We were amazed by how China is literally changing the World on a day to day basis. Though a lifetime is not enough the understand a country as diverse and complicated as China, this course provided an interesting snippet into what doing business in China meant. My goal for the trek was to understand the Chinese business landscape, especially the technology space. I wanted to find out what drives companies to innovate at the cutting edge. What structures (public and /or private) are in place to facilitate that. I came back with more questions than answers – are Chinese companies innovators or mere copiers?

Throughout the trek, innovation in the Chinese ecosystem was a persistent topic that was discussed. We saw numerous examples of innovation, not only in the companies that we visited but also in the day to day examples all around us. However, there was always a question in the back of our minds. Could we classify all these examples as “innovation”, or what we were seeing was simply the Chinese copying the West?

What we saw and learned?

We visited a number of companies – Chinese and International – where we learned what these companies are doing to navigate the Chinese business landscape, the challenges they face and the opportunities they have. I noted that there were slight differences in how international companies see the innovation ecosystem versus their Chinese counterparts. In some instances, I felt the Chinese companies were more honest about the true innovation coming out of the country. However, they all agreed on one issue – that the definition of innovation might not be the same for everyone.

At the Shanghai offices of AT Kearney, an international management consultancy, we heard from a Senior Partner how over the past two decades, the local companies have embraced international business practices. A recurring theme was how in China the innovation is not focused on product innovation but rather on business innovation. They stressed that the local companies are adept at taking an idea and adapt it to the Chinese market.

We heard the same theme at Frog Design, a product design company headquartered in San Fransisco, USA. They insisted that change is in the air. However, Chinese designers are still basing their products on the design formats pioneered by Western companies. Hearst Magazines though highlighted something different. They showed us how severe media restrictions, has given rise to innovative content that targets the sensitivities of the Chinese audience and generates business for the media house.

The administrator at Tsinghua accelerator was brutally honest while talking about the start-ups in her facility. She was very clear that the work that the people there are doing still leveraged ideas invented elsewhere. However, she was also quick to point out that the products are heavily geared towards the local population. The most important insights, however, came from Baidu, a search engine. The technologies that we saw at Baidu closely resembled those from Google. They were doing everything the search giant was doing – search engine, the AI powered cars, the cloud services etc. But they kept stressing the localisation aspect of their products. The visit was particularly interesting as it generated the most controversy within our group. People were torn in their perceptions of what the company was doing.

Are Chinese companies innovators or mere copiers?

There are conflicting views on this. In my opinion, what the Chinese are doing is definitely innovation. Innovation doesn’t just need to be the creation of new products or ideas, it could also be new ways of implementing existing ideas. The World is built on such adaptive innovation. Be it the light bulb or electric vehicles or the mighty rockets that took humans to the Moon. The Chinese are adept at such adaptive innovation. What we saw at Baidu indeed resembles what Google is doing, but Google’s products don’t work as well in Chinese as Baidu’s do.

Moreover, the path that a company takes also merits a mention. The technology that underpins Baidu’s products were developed independently and are innovations that the company came up with. Similarly, though WeChat started off as a copy of WhatsApp, it is so much more than that. Mobile users can manage their money, order taxis, and invest in money market funds, all from their mobiles. We visited Wanhu Health, a health startup in Beijing. At first glance, it seemed to replicate in China what is a routine business in the US – Pharmacy Benefit management. However, delving deeper into their business model highlights the domestic hurdles that they have had to overcome to localise the business.

Why is Innovation so complicated?

One reason why innovation is complicated in China is the way in which the ecosystem has evolved. Instead of going through the usual technology evolution that the West has gone through, the Chinese have aggressively moved into the mobile platform. With an estimated 730 million potential users, any and every new idea is stress tested mercilessly. When a new cycle-sharing app pops up, thousands follow and the only the best survives2. This forces companies to be nimble, which sometimes might not be conducive to sustained innovation but lends very well to adaptive innovation.

However, China is changing fast. The central planners want to triple the number of patents to 14 per 1000 people by 2020. With the goal of increasing the total R&D spending to 2.8% of GDP, China is hoping to become the Innovation capital of the World. And the goal is closer than it seems. China has moved way past its knock-off phase. Chinese companies are creating and defining global standards in products and business models. They operate in and are successful in areas as diverse as supercomputers, transportation, digital payments and artificial intelligence2.

Conclusion

So, in a nutshell, I would reiterate the obvious. In spite of what the common perceptions are, intense technological disruptions, interesting business-model innovations and the world’s largest customer base are mingling in the Middle Kingdom to create the most innovative and agile companies. Chinese companies that survive the intense domestic market will be a force to reckon with. When these companies take the learning from their domestic market into the international arena, the West will be the one most likely copying to survive.

Sources:

  1. Adaptive Innovation: Adam Malofsky
  2. Wired: China’s Innovation Has Outstripped Its ‘Follow Fast’ Reputation
  3. Bloomberg: Former tech copycat turns tables on Innovation
  4. Economist: What China can learn from the Pearl river delta
  5. Economist: Out of the Master’s shadow

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