Danai Pathomvanich
Dec 4, 2015
Although China is often viewed as a country that copies western innovations, it’s future growth will be depend on how it optimizes its innovative strengths.
A recent McKinsey Quarterly article “Gauging the strength of Chinese innovation” by Jeongmin Seong and Jonathan Woetzel outlines how China must be use innovation to realize annual growth of between 5.5 to 6.5 per cent per year during the next decade.
China must generate two to three percentage points of annual GDP growth through innovation.
“If it does, innovation could contribute much of the $3 trillion to $5 trillion a year to GDP by 2025.”
By 2025, China will have evolved from an “innovation sponge,” absorbing and adapting existing technology and knowledge from around the world, into a global innovation leader.
Mixed reviews
Until today, Chinese companies have had mixed reviews successfully commercializing new ideas to raise market share and compete globally.
Although it is a strong innovator in areas such as consumer electronics and construction equipment, China still isn’t globally competitive in creating new drugs or designing new automotive engines, even though its spends more than $200 billion on research, has 30,000 PhDs in science and engineering and leads the world in patent applications.
Digitization and service sector transformation
To optimize its innovative potential, the authors said China must continue transforming its manufacturing sector, particularly through digitization, and nurturing the service sector, through rising connectivity and Internet enablement.
“Additional productivity gains would come from progress in science- and engineering-based innovation and improvements in the operations of companies as they adopt modern business methods.”
Four innovation archetypes
McKinsey identified four innovation archetypes where China must excel: customer focused, efficiency driven, engineering based, and science based.
1. Customer-focused innovation:
China’s immense consumer markets allow its companies to commercialize new ideas quickly on a large scale. For instance, China’s “small market” online gaming industry is bigger than Turkey or Thailand’s auto industries.
Chinese companies adapt quickly to their rapidly urbanizing environments and efficiently scale up new products and services.
Appliance and other household goods manufacturers dominated the first wave of customer-focused innovators in China. “Their innovations were “good enough” products such as refrigerators and TV sets.”
Today, China’s smartphone manufacturers such as Xiaomi have gained gaining global market share by competing with with cheaper and better products priced initially and designed for the Chinese market.
Xiaomei has successfully collaborated with China’s massive consumer market to refine its offerings through online feedback.
Alibaba, Baidu, and Tencent have also become global leaders in online services, largely because of success in the enormous Chinese market.
2. Efficiency driven innovation
China’s extensive manufacturing ecosystem is providing an unmatched environment for efficiency-driven innovation.
The country has the world’s largest and most highly concentrated supplier base, a massive manufacturing workforce, and a modern logistics infrastructure.
It currently leads in several knowledge-based manufacturing categories, such as electrical equipment, construction equipment, and solar panels.
It’s companies improve their efficiency with cutting-edge approaches, including agile manufacturing, modular design, and flexible automation.
McKinsey said apparel manufacturer Everstar uses automated equipment and online design and e-commerce systems that help consumers customize clothing designs and receive finished goods within 72 hours.
3. Engineering-based innovation in ‘learning industries’
China has had mixed success with engineering-based innovation.
McKinsey said the best performers are domestic industries that are nurtured by national and local companies that initially create local demand, push for innovation and transfer foreign knowledge.
China has used this formula successfully in high-speed rail. wind power and telecommunications equipment industries.
Today, Chinese companies have 41 per cent market share of global railroad-equipment revenues.
4. Science-based innovations
Despite massive government efforts to raise R&D spending, train more scientists, and file more patents, China still does not lead in global science-based innovation.
However, in areas such as genome research BGI is successully deploying massive scale (2,000 PhDs and more than 200 gene-sequencing machines) to power its way through biotech problems.
“The extent and speed of China’s advances in innovation will have significant implications for the country’s growth and competitiveness and for the types of jobs, products, and services available to the Chinese people.”
