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China Can Innovate Big Time

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*The following is an excerpt from our new One Hour China Contrarian Book (which is available here.).

“Jonathan Woetzel (McKinsey & Co, Peking University) and I have written three speed-read China books together. In this latest one, we have put together a collection of our essays that basically make four main contrarian points. These are:

Point 1: China needs smarter, not faster growth.

Point 2: Yes, Chinese consumers are rising. But they are changing even faster. And they are disrupting everything.

Point 3: China can innovate big time.

Point 4: At home and abroad, Chinese companies can beat you fair and square.

On Point 3 (China can innovate big time), the “China can’t innovate” and “Chinese can only copy” stereotypes have never really been true. After all, China invented gunpowder, printing, paper-making and the compass among other things. But at the beginning of China’s forced march into the global markets in the 1980s, its technology was sadly way behind. Decades of isolation with no one but the Soviet Union to rely on (before you kick them out) will do that to you.

So what has been happening is China has been playing catch-up with regards to technology. Importing foreign technology has been a major part of this. For example, Foreign Direct Investment has been running at about $70 billion per annum for decades. In automotive, telecom equipment, chemicals, and many other sectors foreign investors have been the cornerstone for technological development. This importing phenomenon has tended to reinforce the “China can’t innovate” stereotype.

However, our experience has been that Chinese companies are exceedingly clever. And they innovate like crazy. For example, Chinese patents grew by 46% in 2016 according to the World Intellectual Property Organization putting it on track to overtake the US and Japan. While these patent numbers can be a bit suspect (and quality varies), the domestic patent office still handles over 1 million applications a year, making it by far the busiest in the world. Also, China now spends more on R&D than any other country in the world except the US (over $200 billion in 2015). And China has more than 29,000 PhDs graduating each and every year. Across the board, the pure volume of innovation-type activity in China is staggering.

One issue is that a lot of this innovation-type activity has been focused on industries where cost innovation and customer-facing innovation are key. This tends to not be considered the same as innovation in science and engineering. But in industries like video gaming, consumer electronics, machine tools and polyester fibre, China achieves more than its fair share of global value-added.

In science and engineering, the record is more mixed. For example, China still doesn’t really have its own car company. But on the other hand, China already makes more than 80 percent of the world’s high speed rail, over 30 percent of its wind turbines, and has the only strong smart grid in the world.

And this is not even the really cool part. The cool part is that China is not just starting to create insanely great products and services, it is also changing how innovation happens globally. Prototypes can be developed 5 times as fast in Shenzhen as in Silicon Valley. Research and manufacturing talent in China is available at 10 to 30 percent of global cost. And in Chinese cities you can now find every MNC in the world doing research. For example, in Shanghai 7 out of 10 of the world’s largest pharma MNCs now have R&D centers. So yes, China can innovate big time. In fact, China is making innovation itself cheaper, faster and more global.”

The above is from our book – the One Hour China Contrarian Book. It is available here (for $3.99).

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I write (and speak) about how rising Chinese consumers are disrupting global markets. (#ConsumerChina). This also includes work on:

  • China 2025″ – what a region transformed by Chinese consumers, companies and capital is going to look like. (#China2025)

photo by Steve Webel, Creative Commons license with link here.

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