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The Challenge of Innovation in China

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One of the more interesting case studies we covered in Bruce McKern’s Strategy and Innovation lecture was a case study regarding a little known Security company in China called FourD or (FDIC). What was of particular interest for me was the method that a Dr Yan Wang CEO took to create innovation in the CIT sector of the Chinese market. While his methods were not ground breaking it says a lot about the Chinese culture and their approach to innovation.

Dr Yan Wang’s partnered with a more technologically advanced innovative company called Johnson’s security outside of China enabling FDIC to differentiate their product offering in a competitive market segment. He leveraged Johnson’s design excellence and quality production techniques and targeted the luxury niche area of this market. This enabled him to create more innovative products in China and overlay FDIC expertise in manufacturing to eventually create a scalable cost effective solution for the wider market sector. Of course this was not without it’s challenges along the way but hopefully you get the idea.Innovation in China is alive and well however it’s just a little different and commercial from what the Western world view as innovation.

This is not to say that China can not be original and inventive it’s just that it seems to have been a while! In 1089 A.D. Su Song invented to the first clock known as the Cosmic Engine or Astronomical Clock!

The Astronomical Clock

It’s just that there is a certain thoroughness and pragmatism to how China creates innovation. Seeking new Knowledge is a great start and China does this extremely well as shown in the 4D case study and also some of their purchases in the past few years including Lenovo, Volvo and now Motorola.

Building upon my previous statement ( As my friend Christian Behrendt is fond of saying ) the Chinese people have no qualms at all about having a good hard look at themselves and this same pragmatic approach is seen in the investment currently being put into the creative and R&D industries. Well in excess of 20% increase in R&D spending each year and is well on the way to surpassing even the US R&D spend per capita (424bn).

RnD investment Chart

But does throwing a bunch of money at R&D and creative fields create innovation? No you need direction, intelligent allocation of this money into the right area’s and clear understanding of what type of infrastructure you need to create and maintain innovation. In short China needs to understand what type of innovation it is already good at and evolve into this area.

However they really need to innovate and invest money into their biggest problems such as Clean energy, housing and education. Solve these issues and already you are paving the way for a truly innovation and culturally aligned society (a by product of solving these endemic issues*). For example China is graduating around 900,000 engineering graduates every year while the US is only graduating 80,000 however the quality of these graduates at this stage is questionable. If China turns it’s all seeing eye on this area and innovates in their education sector then they will be producing 900,000 engineering graduates of equal quality or better that the USA! As a country China must transition from an economy heavily reliant on manufacturing and government investment to one fuelled by innovation and high-tech industry.

*See previous article on the Hukou System

China’s path to innovation

China has been following a specific path in terms of it’s innovation strategy which is now maturing into Stage 3 and 4 areas. By focusing on their specific strengths they will have a lot of advantages to their approach over more Western companies. Many of China’s strengths lie around incremental innovation and great listening skills and adoption of consumer benefit models, i.e products are made and adapted as people ask for them and quickly. Also they have been very good at innovating in the area of business models specifically for the Chinese market and in particular in creating efficiencies along the value chain and are now working out how to apply this to other international markets and acquisitions.

Advantages of China’s innovators

  • Fast
  • Fearless
  • Willing to experiment, fail fast, learn, adapt
  • Forgiving customers – Chinese people accept failure as long as you are moving forwards.
  • Cost advantages in engineers, scientists
  • Very good understanding of customer micro-segments
  • Fierce pressure to survive, which forces innovation
  • Smaller companies are highly entrepreneurial
  • Experience in incremental innovation provides base for breakthrough

innovation

STAGE 1: FIT FOR PURPOSE

Became part of a global supply chain – learned – State of the art practices for China.

Initial Competitive advantage – low cost.

Deep understanding of customers – incremental innovation (TaoBao, Baidu, Tencent)

Some innovative processes:

Xiaomi – They have a great customer responsiveness to feedback via Active customer ecosystem which suggest improvements

Haier – Washing machine which also now washes potatoes due to customer feedback…they listen and adapt!.

 

STAGE 2: FROM FOLLOWERS TO WORLD CLASS

Rising labour costs & increased competition has lead to needing to create new strategies – Push customer focused competition.

Mindray – (US approved for kudos)

Goodbaby – (Sells as an Original Design Manufacturer – Has localized design studios in various markets and then feedback on this info and respond quickly by return),

Neusoft – Innovation in Software platforms and learning systems. (Business process)

Technology based startups

Suzhou Nano-Micro – Leader in manufactur of NanoTech particles (Microspheres). Nano – particles for bio-pharmaceutical purification. LED emission and diffusion

SVG Optronics – (Nano Scale printed films) High Resolution mask less lithography. Have now created touchscreens with Nanotech metal mesh allowing them the screens to be flexible.

Haier – Developed CASARTE 8 Brand Design centres, developed 3 draw freezer which has different levels of freezing. You can put your icecream on the middle draw and it comes out soft.

28 Cooperative R&D institutes. 300 International designers worldwide.

Bruce McKern’s Strategy

YuWell – Medical devices for Home use.

 

STAGE 3: FROM RESOURCES TO MARKETS

• “Go global” push for Outward Foreign Direct Investment (OFDI), initially in resources

• Slow shift to finance, real estate, transport from tech.

• Search for markets and brands in EU, US

 

STAGE 4: SEEKING NEW KNOWLEDGE

China is 20 years behind Korea which is 20 years behind Japan! However this is changing and fast!

Global companies are being acquired for market share, brand and organizational knowledge.

• LENOVO

• VOLVO

• MOTOROLA

• Creation of Foreign RnD centres – Haier, Goodbaby

  • Looking closely at the EU for technology & manufacturing skills – Mittelstand model. Highly focused, achieving unprecedented efficiencies by designing a business model with a razor-thin focus and learning to do the one thing really well” then to “compensate for their razor-thin focus… they diversify internationally and enjoy great economies of scale”.
  • US for basic science & technology which can be incrementally innovated.

More Chinese Brands are investing in R & D

However the marketplace is much more crowded than ever before.

In Summary
As already stated in previous posts China’s path to innovation is not without it’s challenges however there are a number of differences that Chinese companies have that already set them apart many of which surround some key cultural characteristics including a group mentality and circular active communication within the wider Chinese communities.

1.Greater focus on local needs and customers

2.Acceptance of good enough standards

3.Push for incremental not radical innovations

4.Learning from global supply chains

5.Willingness to supply special needs

6.Use large numbers of staff to solve the problem

7.Work their staff harder

8.Fast trial and error – fail fast

9.Less formal, faster processes

10.More intervention by the leader

11.No need to refer back to distant HQ

12.Closer to government

13.Closer to community/ecosystem

 

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