Tag Archives: Gordon Orr

Twelve McKinsey Predictions For China In 2012

Gordon Orr, a director in the Shanghai office of McKinsey, a firm of management consultants, has made 12 predictions for China in 2012:

  1. Government policies will spur consumption and investment.
  2. Dominant models will emerge for reforming rural land ownership.
  3. Real estate will stagnate.
  4. The fundamentals will cause further inflation in food prices.
  5. Chinese investment in green tech will spike upward.
  6. Accounting scandals will continue.
  7. Private-equity and venture capital funds may go ‘walkabout.’
  8. Chinese acquirers will be bolder.
  9. The automobile segment will be slow.
  10. Hospital reform will accelerate.

This Bystander likes (in the sense of agrees with) 6, 7, 8 and 9 and is intrigued by 10. 2 is a bold call. Necessary as land reform is, it will be difficult to push through in a year of political leadership transition. That will also blunt the impact of any efforts towards 1. 5 is this year’s bit-of-a-cheat, given what is outlined in the new five-year plan. 3 and 4 are the least convincing, not because Orr’s logic is wrong, but because the social disharmony they imply won’t likely be tolerated in what is looking to be a bumpy year. What do you think?

By the way, how did Orr do with his six predictions for China in 2011?

  1. Inflation in food prices will take longer than expected to control.
  2. Middle-class bankruptcies will expand dramatically.
  3. Minimum wages will rise, but productivity gains will outstrip labor costs.
  4. China’s economic growth will be lower than expected.
  5. China will step up its “invest out” program in the new five-year plan.
  6. The state will again try to reduce its ownership role in business.

1 and 3 came good. 2 and 4 not so much, though ‘dramatically’ and ‘lower than expected’ give him a lot of wiggle room to claim vindication. 5 was a bit of a cheat in the first place. 6 was wide of the mark, at least in the sense that SEOs increased their dominance in the economy.

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The Next Stage Of Innovation In China

The McKinsey Quarterly has a newly published package of pieces on innovation in China. As the authors of the overview, Gordon Orr, a director of McKinsey’s Shanghai office, and his colleague Erik Roth, note:

Considerable innovation is occurring in China in both the business- to-consumer and business-to-business sectors. Although breakthroughs in either space generally go unrecognized by the broader global public, many multinational B2B competitors are acutely aware of the innovative strides the Chinese are making in sectors such as communications equipment and alternative energy.

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. That is as true of advances by local companies in domestically oriented consumer electronics as it is in tech media such as instant messaging and online gaming.

Orr and Roth acknowledge the importance of government support, clearly already evident in the development of industries, from high-speed rail to pharmaceuticals to green energy technologies, that Beijing considers strategically important. There will be more of that to come. The current five-year plan calls for a large increase in R&D spending. Up to 10 trillion yuan ($1.5 trillion) is a figure being bandied about. The anointed industries are biotech, post-fossil-fuels energy, energy conservation and environmental protection, clean-energy vehicles, new materials, and next-generation information technology and high-end equipment manufacturing.

But government support for R&D is far from the only reason for China’s increasing innovation. The quantity and quality of the country’s scientific and technical talent is growing. China’s universities graduate more than 10,000 science PhDs each year. That is enabling a potent blend of technology transfers from multinationals and indigenous R&D.

The formula isn’t infallible. Again, as Orr and Roth note:

Some notable examples [of flops] include attempts to develop an indigenous 3G telecommunications protocol called TDS-CDMA and to replace the global Wi-Fi standard with a China-only Internet security protocol, WAPI.

As we noted yesterday about some Harvard Business School research on the management of Chinese companies, the heavy preponderance of state-owned companies acts as a counterweight to developing the internal corporate cultures of risk taking, learning and collaboration that are necessary to nurture innovation. Chinese companies have traditionally preferred what Orr and Roth call “innovation through commercialization”—putting a new product or service into the market quickly, however rough its initial quality might be, but improving its performance rapidly through subsequent generations.

What also needs not to be lost sight of is that this is a different stripe of innovation, not so much yet leading-edge technological innovation, as process innovation; the use of China’s labor quality, including its intellectual capital, supply chain integrity and infrastructure to reduce cost. As S.D. Shibulal, chief operating officer of Infosys Technologies, noted in an INSEAD article on innovation in emerging markets, Chinese companies “are redesigning products to reduce costs; they are redesigning entire business processes to do things better and faster than their rivals.” He dubs this “frugal innovation”.

This lets Chinese companies pick off niches where consumers are prepared to accept a small drop in quality in return for a large cut in price. The real challenge for foreign firms is going to be not so much at the top end of the market in many given industries, but in the middle market. No doubt China will eventually be making breakthrough innovations; Orr and Roth say it will only be a matter of time before China evolves “from a country of incremental innovation based on technology transfers to one where breakthrough innovation is common”. But before that happens, Western multinationals are going to have to learn to compete in the middle market as well as the top-end one, as that is where the next battles for world market share will be fought.

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Six McKinsey Predictions For China In 2011

Gordon Orr, a director in the Shanghai office of McKinsey, a firm of management consultants, makes six predictions for China in 2011.

  1. Inflation in food prices will take longer than expected to control.
  2. Middle-class bankruptcies will expand dramatically.
  3. Minimum wages will rise, but productivity gains will outstrip labor costs.
  4. China’s economic growth will be lower than expected.
  5. China will step up its “invest out” program in the new five-year plan.
  6. The state will again try to reduce its ownership role in business.

This Bystander likes (in the sense of agrees with) 1, 3 and 5 (though this one is a bit of a cheat for 2011), but is less convinced by 2, 4 and 6. The short-term social disharmony they imply wouldn’t be tolerated in what is looking to be a critical and not always easy year for China’s development. What do you think?

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China’s New R&D Path

Moving from imitation to innovation is a main pillar of China’s effort to develop its economy. The five-year plan just ended had targeted 2% of GDP to be spent on research and development. It probably fell short of that; 1.5% of GDP in 2008 is the most recent number available. But still that accounts 12% of global R&D spending.

More significantly, says management consultancy McKinsey’s Gordon Orr in a newly published article in the McKinsey Quarterly, China’s R&D spending is shifting from government-controlled research institutes to large and medium-sized enterprises, which now account for 60% of it (though given the dominance of state-owned enterprises in the economy that may represent less of shift than it first appears). However, one-thirteenth of the non-government R&D is accounted for by companies with foreign investors. China is now home to nearly 1,500 R&D centers set up by multinationals.

Orr also says that beyond industrial innovation, “much of the best innovation in China today is built around developing creative business models”.  Examples:

Broad Air Conditioning developed a way to commercialize gas-powered air conditioning systems for large buildings. Alibaba built a new business around an online platform to connect smaller Chinese producers with buyers abroad.

Chinese policy makers have learned some important lessons from earlier innovation failures, Orr says, “the biggest being that it’s hard to impose innovation from the top down”. So Beijing is focusing on identifying opportunities earlier and creating incentives for companies to innovate. Electric vehicles are his case in point, with government underwriting future demand through promises to buy for official fleets and incentives to consumers.

Undoubtedly, China’s innovation record is mixed. It is easy to spot areas such as financial services and consumer electronics where the record is poor, just as there are areas such as pharmaceuticals and telecoms where it is much better. And for many of China’s emerging multinationals, expanding market share through lower-cost rather than innovative new products is still their business model.

For all the shifts in R&D that Orr identifies, China’s policymakers won’t be getting out of the business of picking winners anytime soon, even if they want companies to do more of the donkey work of actual innovation. How good they prove to be at winner-picking, and how deftly they manage to let the market drive more innovation while still encouraging it to go broadly where they want it to for national policy reasons, will shape how fast and successfully China moves to the next phase of its development — two challenges that apply more broadly to the economy as a whole, too.

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