For many ears Chinahas been seen as place which is capable of reproducing western products andalso as a place with the reputation for copying ideas.
Historically Chinahas been responsible for some amazing innovation. A look through Robert Temples“The Genius of China” shows that over a millennia China has been responsiblefor bringing thousands of ideas that are now considered mainstream but in theirday were amazing. As China developed in the latter part of the 20thCentury much of this innovation appears to have been stifled which has led toChina getting poor press and also leading to many western suppliers beingreluctant to sell products into the market. We regularly still hear majorconcerns from Western companies about the perceived threat to their IP fromChinese companies.
But things arechanging. China is suddenly not the place to buy the cheapest products andcompanies have suddenly had to face the fact that in an internationalenvironment you need more than “the cheapest” price to win profitable business.
In his first bestselling book “The End of Cheap China” Shaun Rein discussed how the changingeconomy in China has resulted in increased costs pretty well across the boardand shows that we have probably seen the end of low cost products from China’swarehouse of the world.
In his new book“The End of Copycat China” Shaun discusses how Chinese companies are reignitingtheir innovative skills enabling them to once again compete on a world stage.This will be in a different way and will certainly be challenging in the firstplace but will be the stimulus needed to really make China’s economy grow intoa real sustainable powerhouse.
We recentlyinterviewed Shaun on the subject matter of his new book and got the expectedinsightful answers
AGA - Inhistory China has been responsible for so many innovative ideas but morerecently Chinese companies have been viewed as a nation of copy cats offeringlow cost alternatives to established international brands or as OEM manufacturerswho can produce products that others have designed and created. Now that thelow cost base has moved to other developing countries such as Vietnam,Indonesia and Bangladesh, has this been the driver for more innovation or wasinnovation always there
SR: One of the mainmotivations of writing “The End of Copycat China” The Endof Copy Cat China was to dispel the myth (that I findslightly racist frankly) that there is a cultural element within China thatprevents innovation in China. Joseph Needham in his series of books ontechnology and science in China clearly shows innovation and invention was amainstay in China historically so that begs the question why there has beenrelatively little innovation coming out of the country in the past few decades.
As Istarted to interview entrepreneurs and financiers, it become obvious thatinnovation has lagged in China is recent years not because of a culturalimpediment but because there has been so much low-hanging fruit in thepost-1978 reform era. There simply have been so many opportunities to makemoney through copycatting technologies from Western Europe and America orthrough connections, such as putting up a building that it did not make senseto invest in innovation as the returns can take years if not decades to seefinancial windfalls.
Why takethe risk when there are sure returns everywhere. However, now that China islosing its low-cost advantage to other nations like Vietnam and Indonesia andas the country’s economy slows, Chinese entrepreneurs are seeking ways to pumpup profits through innovation. It would be a mistake for MNCs to underestimatethe ability of Chinese firms to move up the value stream.
AGA - What do yousee as the challenges for the vast majority of Chinese companies who havesurvived on low cost products or OEM to become more innovative
SR - Overthe next several years, I expect to see scores of OEM, low cost manufacturersand even real estate developers to go bust. Many firms based on profits onsqueezing costs or relying on connections – many of the executive teams do nothave the capability and know how to manage in a global environment whereinnovation rather than low cost will differentiate who wins and loses.
It isvery difficult for companies to get the staff necessary trained up to the levelneeded to compete globally. For instance, a Chinese firm that might have mademoney by manufacturing cheap widgets might not know how or have the capital toopen manufacturing facilities in Cambodia or to build a brand. These companieswill go bust in the coming years.
However,the shake-up will create great opportunities for Chinese firms that are able toconsolidate market share by focusing on moving up the value chain and buildingbrands. Take for instance telecom company Huawei that is taking market sharefrom Cisco and Ericcson. Many analysts believe Huawei is winning because it ischeap than western competitors – but that is not true anymore. My researchsuggests they are winning because they are as good if not better than foreignplayers.
AGA - China hasbeen seen as the “warehouse of the world” but there is an impression that manycompanies are not really international in their approach to competing in theworld where quality and innovation provide a commercial edge. Do you see thatChinese companies will need to make big improvements in their internationalmarketing and can you see CEO’s appreciating that the “Chinese Way” may notalways be the most effective
SR - Itwill not be easy frankly for Chinese firms to become global players, just as itwas not easy for Japanese and South Korean companies in the 1960s-1990s. Companieslike Toyota and Samsung were famous (perhaps infamous) for selling cheapcopycats before they became respected as global players competing on innovationand branding. Chinese firms like Lenovo are taking a similar path, maybe evenexpediting it as they are growing through acquisition to get technologicalknow-how more than Japanese or Korean firms ever did.
Thebiggest barrier I see for Chinese firms to become global players mainly ishuman resource related. Many Chinese firms are still largely controlled by thefounding entrepreneur who controls much of the decision-making. It will bedifficult for these firms to staff people at the country head level who isqualified and trusted by HQ enough to make key decisions.
AGA- Do you thinkthat the Chinese education system of rote learning has been a barrier toinnovation and what changes do you see happening that could alter this
SR - Generally,I support the direction the central government is taking the country. One ofthe areas I have been most critical, aside from weak pollution initiatives, isthe slow speed of reform in China’s education system. The state sanctionedarena focuses too much on rote memorization and not enough on creativity – thiscertainly hurts analytical thought.
My firm,CMR, has been doing a lot of work with for profit and non profit educationcenters in recent years that have emerged to fill in the gap. For instance wehave helped Duke and Juilliard build campuses in China, and have helpedtraining companies expand because companies and inviduals recognize theweakness of the state system and thus are willing to pay for more enrichmentand learning.
Despitethe problems in the education system, I was surprised that many entrepreneurs Iinterviewed for the book did not point to the weak education system as themajor barrier for innovation in the country. Many said so many Chinese are nowgoing to the US and United Kingdom for education and returning to China thatthe weakness of the Chinese system is being overcome by western institutions interms of innovation. The education system is hampering more everydayfunctioning of companies because the greatest strides in innovation isconducted by a relatively small handful of people in an organization.
AGA – Thanks Shaun.
We can stronglyrecommend Shaun’s new book for those interested in the economic development ofChina
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