What do Chinese companies need to be innovative enough to compete in developed markets?
Just give it some time
Huffington Post: China’s Consumer Tech Remains More Imitation Than Innovation
Amid global fascination with China’s emergence as a world market force, it remains to be seen whether the country’s feverish pursuit of a new era of economic growth — one in which homegrown innovation complements its robust manufacturing base — will pay off. While the Chinese government pours resources into education, sinks billions into research and sets ambitious patent goals, the nation so far has yet to develop a stable of truly global consumer-technology brands.
Just give it some more time.
China's primary comparative advantage over the last three decades has been an inexpensive and increasingly productive labor force. So it is not at all surprising that Chinese entrepreneurs have focused on the labor-intensive component of the value chain in almost every industry sector today. It was the logical thing to do and there is still more to go.
As Chinese society becomes increasingly wealthy, and consumers begin to create large pools of demand, you are seeing pockets of innovation emerge, particularly for products that meet needs that are relatively unique.
For example, Chinese and South Korean online gaming companies pioneered and massively scaled business models built around selling virtual goods. Today, these companies have the highest operating margins in the industry (30-40%+) while US video game companies have struggled to breakeven and are just beginning to adopt these models. This model originated in Asia because of characteristics unique to the region – the prevalence of Internet cafes, lack of console gaming retail distribution and home systems, among others.
In another example, Chinese telecom equipment companies Huawei and ZTE are the fastest-growing and most profitable telecom companies in the world today. In particular, they are taking disproportionate market share in developing regions such as Africa and Southeast Asia.
The reason is not only cost related, but unique products as well. For example, Huawei pioneered the first solar-powered cellular base station. Why Huawei and not Ericsson or Nokia-Siemens? Again, due to circumstances relatively unique to China – villages that are not connected to the power grid demanded cell phone service. So Huawei designed a solar-powered base station that consumes little power that could serve their needs. Since the developing world looks more like those villages in China than the suburbs of the US, it was not surprising that Huawei is taking the lead in those regions.
There are more examples, but my point is that consumer innovation will come when Chinese consumers create pools of relatively unique demand that force Chinese companies to find creative solutions for their needs. And it will be sustained when consumers in other countries realize that they too want those new products.
At first, Chinese innovation is more likely to “trickle down” to the less developed countries (e.g. solar-powered base station), but as time goes by, I would expect to see more examples of Chinese products and business models migrating to developed countries (e.g. virtual goods).
This was originally published on Quora in January 2011. This was my first Quora post.