Investments for the future

Chinese Companies are making a big impact domestically and globally through persistent innovation

Chinese companies are becoming increasingly innovative, creating a significant impact on the structure of the Chinese economy as well as on new competition in the global knowledge economy, experts say.

This model of innovation, which is o be explored in detail at the 10th Asia Business Forum on Jan 30 organized by London Business School, is one characterized by imitation, localization and step by step innovation.

Peter Batey, chairman of Vermilion Partners Ltd, a China-focused advisory and investment firm, says innovation is important for the future of the Chinese economy.

He says it is encouraging to see Chinese leaders making big commitments to invest in innovation. It also is important to ensure that this capital is targeted toward the most needed channels and industries, and to make sure that Chinese innovation meets international standards and systems.

Florian Leonhard, CEO of Leonhard Fine Violins LLP, a violin restoration and dealership firm keen to attract Chinese customers, says he feels innovation has always been a two-way street between the East and West. "We have never felt that innovation has traveled in one particular direction or another," he says.

Wu Xiaobo, a professor of innovation and strategic management at Zhejiang University, says Chinese innovation is largely characterized by secondary innovation, which is the process of learning the best of technology from mature markets and adapting it to local markets' needs and production realities.

Wu says the first phase of Chinese innovation is normally relating to crafts innovation, where the Chinese firm changes some small elements of the technology they learn in advanced markets, and the second step is to make more improvements according to local market needs.

This method has given rise to many successful Chinese companies in the information technology and telecommunications industries, he says.

Wu says Chinese companies are currently catching up with their Western counterparts through post-secondary innovation. Companies like Huawei, for example, have been evolving from being a follower of 2G technology, to a participant in 3G technology, to a strong competitor in 4G technology and pioneer in 5G technology, with strong learning dynamics in building capabilities.

"Chinese companies are very dynamic when it comes to innovation. They have great learning capability and their growth fits well into the Chinese economy's overall structural change," says Wu.

One helpful outcome of China's rapid change and internationalization is the ease with which companies can successfully predict and understand consumer taste, because they already know which functions are desired by consumers by looking at the first-tier Western products already popular among Chinese consumers.

"This avoids a lot of uncertainty when it comes to designing new products," Wu says.

In addition, China's rapid growth has helped to produce a large population of young talented workers who are highly entrepreneurial and capable, who are the driving force behind China's innovation. This also links to Chinese companies' ability and willingness to learn new technology and ideas, even beyond catch-up, Wu says.

Wu's words are echoed by Paris de L'Etraz, a professor of entrepreneurship at IE Business School, a graduate school in Madrid, Spain, who adds that innovation is very much about the impact of the product or technology. Today the East leads in many areas of innovation, including social media, online business models, affordable smartphones, and renewable energy technology.

China has a clear advantage against many of its Asian competitors because its young people are not afraid of failure and making mistakes. In too many Asian countries like South Korea and Japan, the fear of failure and the "saving face" culture stifles entrepreneurship and innovation, De L'Etraz says.

This Asian innovation, driven in particular by China, is changing the way people do business in Asia. No longer are Western models the norm and Asians are developing their own ways of creating impact, De L'Etraz says.

"In the next decade, Asia will export innovation at an increasing pace as the mentality of its young people starts to become more like the American mentality of risk-taking and seeing failure as learning," De L'Etraz says.

One innovative Chinese company that has made a name for itself in the West is the telecommunications giant Huawei, founded in Shenzhen, Guangdong province, in 1987.

Chen Jingxin, network solutions and product manager, Huawei UK, says that Huawei invests 10 percent of its annual revenue into research and development, and in 2013 this equated to $5.4 billion. Over the past 10 years, Huawei has invested more than $20 billion in R&D.

"We have more than 70,000 employees directly engaged in R&D worldwide. We have an international R&D system with 45 training centers, 16 R&D centers and 28 joint innovation centers globally," says Chen.

The technology industry is a competitive market, and compared with Western information and communications technology companies, Chinese organizations are still incredibly young, Chen says. "We need to constantly innovate in order to keep our edge."

Chen says that China is one of the driving forces in the global technology industry but the future of that industry relies upon international collaboration.

"As a company, we are proud of our heritage and, due to the skill and expertise of our workforce, some of our best work comes from our Shenzhen campus. It will always be our global hub, driving innovation within our business and our industry.

"However, Huawei is a global business with local HQs across the globe, ensuring we are delivering the best possible service to our growing customer base across Asia, Africa, North America, South America and Europe. It is the skill of people working across the entire, global ICT industry that makes Huawei so innovative," Chen says.

Another innovative Chinese company that has experienced rapid growth both domestically and internationally is TP-Link, a Shenzhen-headquartered networking products supplier.

Founded in 1996, TP-Link has grown into an industry leader in China, selling a wide range of networking products from routers to Internet-protocol cameras.

TP-Link started the process of internationalization in 2005, when it began selling in overseas markets through distributors. This was then followed by the establishment of overseas subsidiaries in various European countries, and today its products are sold in 15 Western European markets, with total sales revenue of around $260 million in 2014.

Eric Wang, head of TP-Link's Western Europe division, says that internationalization has been a big push behind TP-Link's innovation, because it broadened the company's vision to best industry practices globally.

"We were already a leader in the Chinese market, so there was not a pressing need to innovate. But growing in the international market has made us realize that innovation relating to improving the user experience is very important," Wang says.

He says that IT products in China often compete on price, or value for money, which is very different from Western markets. For example, a Chinese customer may think it is reasonable to wait an hour to have a broken router fixed, but a Western customer would immediately become angry to see the router broken.

"They would think why should they waste precious time to have the router fixed, and that the router should be of better quality right from the start," he says.

As a part of TP-Link's global expansion, the company established many research and development centers globally, including in the United States and other Asian countries.

These research innovations have changed all aspects of TP-Link's products, ranging from extra functions to suit customer demand to how functions are set and controlled, and from product appearance to packaging and marketing strategy.

Wang says all these innovations are minor and help the products to improve step by step. In terms of hardware - core technology for IT industry products such as chipsets - Chinese firms still must catch up with leading Western tech giants.

For example, one popular product TP-Link has developed is a wireless nano router, which can perform many functions including transferring wired Internet access to wireless and reinforcing the existing wireless signal. That made the product different from most other routers available on the British market.

Another customer service-related innovation is TP-Link's 24/7 after-sales customer service, which was previously not available from any company in the industry.

This type of small innovation also holds true of many Chinese companies in other sectors, Wang says.

"In the smartphone industry, China's Xiaomi, Oppo and Huawei smartphones are doing well because they focus heavily on user experience, including features like music effects, user interface and photo quality. While these are not core technologies, they affect user experience on a day to day scale," he says.

cecily.liu@chinadaily.com.cn

(China Daily European Weekly 01/30/2015 page20)