The Changing Face of Innovation in China

Foreign companies must retool their R&D strategies to keep pace with newly innovative Chinese enterprises.

The art of bian lian — or “face changing” — is integral to Sichuan opera: A main character changes masks to avoid capture by foes. The transformation is quick and surprising, the new face clearly different. In the theater of business, Chinese performers are undergoing a rapid transformation of their own as they seek to evolve from backroom producers to the world’s leading face of innovation.

Over the past five years, domestic Chinese companies have been innovating unlike ever before. In 2016, the National Supercomputing Center in Wuxi, China, unveiled the Sunway TaihuLight, the world’s fastest supercomputer, with 10.65 million CPU cores. Meanwhile, Chinese company Ehang Inc., based in Guangzhou, launched the world’s first aerial passenger drone, the Ehang 184, capable of autonomously transporting a person in the air for 23 minutes. These feats of Chinese ingenuity join many other recent innovations in a range of industries. Western companies beware: This is not the China you are accustomed to, and the ramifications for your research and development strategies may be profound.

For much of the last two decades, foreign innovation in China has been driven by competition among foreign companies and by imitative threats from local Chinese companies.1 R&D has generally been managed according to the following paradigm: Foreign R&D competes against other foreign R&D in higher-end market segments, while Chinese companies operate in lower-end market segments, often competing only indirectly with foreign R&D.2

Moreover, many have long been skeptical about the ability of China’s ecosystem, especially its political, cultural, educational, and financial institutions, to foster genuine indigenous innovation. Many foreign companies we have spoken to over the years have admitted to contributing to this narrative, in part hoping that it would become a self-fulfilling prophecy.

However, the face of the Chinese competitor has visibly changed in the past five years due to a variety of factors. Years of foreign investments have allowed China to develop into a manufacturing powerhouse rich in technological learning opportunities for local companies. Leaders among these companies have moved up the capabilities ladder from producers to creators. Chinese innovation is visible in internet business models, telecommunications, software, artificial intelligence, fintech (financial technology), new materials, consumer products, high-end equipment, and green technologies.3 Innovative Chinese companies such as Huawei, ZTE, Alibaba, and Baidu are becoming household names outside China.

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