China the Innovator

A myth that continues to persist about China is that the country’s economy is predominantly built on low-value export manufacturing. Seen by many as the ‘workshop of the world’, it remains a commonly held view that China offers little more than a cheap source of textiles and toys for the rest of the world. While clearly low-cost exports will remain important to the Chinese economy for some time to come, China is also now being recognised as an important centre for innovation in products and services. A recent Mckinsey article highlights some of the major steps have been made in the innovative capabilities of Chinese companies, while recognising that a number of factors still prevent Chinese companies from innovation on scale that truly threatens their international rivals.

Contrary to many popular views on China, a growing number of innovations are indeed emerging from the China market. Surprisingly, over half the world’s patent applications in 2011 were made in China, and the country has become a world leader in specific product areas, such as communications equipment, nanotechnology, alternative energy and pharmaceuticals. Partly driven by preferential government policies and investment in these industries, many Chinese enterprises are on the cutting edge of product innovation in these fields, representing a real threat to the international competition.

However, Chinese firms have been much less successful innovating in other markets, such as the automotive sector, where the brand position, product reliability and engineering excellence of multinational competitors has made it difficult for Chinese companies to develop brands that can compete on a global stage. Equally, Chinese innovation has typically been incremental in nature, with relatively few radical jumps in innovation.

The article points out that Chinese companies’ innovative capabilities are hampered by a cultural environment that tends to discourage risk taking and a failure to develop a deep understanding of customer’s problems. Having developed as organisations with a manufacturing-led focus, many Chinese firms don’t have the market-oriented approach that helps Western multinationals to develop differentiated product offerings based on real customer insights. On the other hand, while Western multinationals often have these capabilities, they sometimes lack the domestic market knowledge or relationships to apply these insights effectively.

There is a growing need among Chinese companies to establish a deeper understanding of their customers so as to fuel innovation and enable these companies to compete more effectively both in China and on a global stage. As Chinese companies begin to learn these research techniques, and develop the personnel and skills to implement these insights, the country will continue its gradual shift from low-value manufacturing base to crucible of innovation.

For more information, please see: A CEO guide to innovation in China

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