beyondbrics

Is China innovating? As China’s size has come to dominate the world in so many areas and the country seeks to match that weight and transform from a low-cost manufacturer to a creator of things, that question has often been asked.

McKinsey has come up with an interesting new report that jumps beyond this question. Under the headline “How China is innovating”, the consultancy postulates that innovation is happening – it’s just different from what multinationals might be used to from back home.

In the report which will be published later on Thursday, Gordon Orr and Erik Roth, a director and a principal in McKinsey’s Shanghai office, find that there Chinese and multinational companies in China are good at different things when it comes to innovating.

“[For the typical Chinese enterprise,] pain points include an absence of advanced techniques for understanding – analytically, not just intuitively – what customers really want, corporate cultures that don’t support risk taking, and a scarcity of the sort of internal collaboration that’s essential for developing new ideas”

Multinationals, they argue, are far stronger in these areas but face other challenges including high attrition among Chinese talent or paying attention to the real needs of the local market.

One interesting area is Chinese companies’ preference for trying out things in the market rather through a lengthy systematic theoretical approach. “What China does better than any place else in the world is to innovate by commercialisation, as opposed to constant research and perfecting the theory, like the West,” says Kevin Wale, president of GM China, in a case study on the automotive sector included in McKinsey’s study. The report says:

“The contrasting capabilities of domestic and multinational players, along with the still-unsettled state of intellectual-property protection, create the potential for topsy-turvy competition, and rapid change.”

But the situation can vary widely between industries. McKinsey argues that Chinese companies have come up with a lot of cutting-edge ideas for consumers – such as the innovative flat-rate pricing models Tencent, China’s largest internet company by revenue, uses for the services based on its QQ instant messenger – but that those often remain invisible to foreigners.

“Much product innovation in China stays there. In general, its market is so large that domestic companies have little incentive to adapt successful products for sale abroad.”

While that may matter little to foreign firms, the situation is radically different in some other industries. The consultancy warns that the Chinese semiconductor industry, which has long been struggling, may be on the verge of a game change.

“Barriers that once held back local chip makers now appear to be eroding. This means global players will face some tough trade-offs in the years ahead.”

First, they believe Beijing has learned from its past mistake of scattering chip plants all over the country, and its efforts to consolidate the industry in the three centres of Chengdu, Shanghai and Dalian will help.

Second, they argue that the growth of China’s end-consumer demand for electronic gadgets and the emergence of Chinese brands such as Lenovo, ZTE and Huawei will give domestic companies much more clout in designing chip platforms locally.

And last but not least, the fact that an ever smaller percentage of all electronics products need the most advanced chips will make China’s chipmakers less vulnerable to export controls which bar them from producing cutting-edge semiconductors.

No doubt foreign companies are aware of many of these things – it is why on the one hand, they continue complaining loudly about China’s attempts to force technology transfer, while at the same time they are busy building local innovation bases.

Related reading:
Innovation: Autocratic directives fail to spark creativity, FT
Steve Jobs: soul-searching in China, beyondbrics
Consumers: How to find favour down at the shops, FT
China’s talent war: SOEs top multinationals, beyondbrics