DAVID WOLF, WRITING on Silicon Hutong, address the hoary question of whether China is innovative. Conventional answers tend to be wrong, he says, because
We tend to view innovation in China through the lenses of two fallacies. The first lens is based on our view of China, and the second on our view of innovation (via Silicon Hutong).
Chinese companies do not innovate in the way Western companies understand it, which is in terms of big breakthroughs. But, Wolf says, define innovation as producing something that is novel, useful, and relevant to a given audience, and you end up with a different landscape of innovation: “the process innovations, the incremental breakthroughs that turn out advances that are novel, useful, and relevant” — and that still have the potential to be disruptive.
Wolf cites three examples:
- Huawei’s investments in R&D following the telecom bust in 2002 that have yielded industry-leading innovation for three years in its networks business;
- BYD’s use of old battery technology in an innovative way; and
- Yuneec being on the verge of doing for general aviation aircraft what Tesla has done for the family sedan.
Chinese companies’ increasingly outdated global reputation for being imitative not innovative is because much product innovation in China stays there, and so escapes the notice of those not on the ground.
Improving the technological capabilities of China’s manufacturers is a policy priority. R&D spending is being focused on the biotech, green energy, new materials, information technology and high-end equipment manufacturing industries. Measured by how much a country spends on R&D as a percentage of its gross domestic product, a measure known as GERD, China now ranks third after the U.S. and Japan.
Beijing’s long-term target is to raise its GERD number to 2.5% by 2020, up from 1.84% in 2011 and 0.57% in 1995. That would likely put it on a par with the U.S. by then. (America’s 2011 number was 2.77%, down from 2.91% in 2009, according to the World Bank.)
The implications for Western multinationals is that small-step innovation will let Chinese companies pick off niches where consumers are prepared to accept a small drop in quality in return for the large cut in price that is enabled by the redesign of entire business processes to do things better and faster than rivals. The commercial battleground will become not so much at the top end of the market in many industries, but in the middle.