Few would argue that China has become the world’s leader in manufacturing, due largely to its lower labor wages and enormous pool of workers. That’s only one side of the manufacturing dominance equation, however. Due in part to a corporate culture steeped in tradition and hierarchy, China has been sorely lacking in innovation. This, however, might be changing, according to a recent McKinsey & Company report, “A CEO’s guide to innovation in China.”
Evidence of increased innovation includes a doubling of the global percentage of patents granted to Chinese inventors since 2005 and the growing role of Chinese companies in emerging wind-and solar-power industries. China is now also the world’s second-largest venture capital (VC) market, rising to $7.6 billion from $2.2 billion in 2005, while the American VC market has remained largely stagnant, according to Rebecca A. Fannin, author of “Startup Asia.”
The Chinese have traditionally focused on innovation through commercialization, being more comfortable than many of their Western counterparts to put out a new product or service quickly, then improving its performance through subsequent iterations. In China, it’s common for products to come to market in a fraction of the time it requires manufacturers in more developed markets. Though the quality of these initial releases is variable, subsequent ones improve quickly.
Chinese companies have greatly benefitted from their government’s emphasis on indigenous innovation, which it views as critical, both to the domestic economy’s long-term health and to the global competitiveness of Chinese companies. China has created innovation hubs to spur development in key growth industries such as life sciences, biotech, and semiconductors. Similar strides are being made in the communications and pharmaceutical industries.
China tackles emerging energy markets
China has made big gains in the business-to-business (B2B) sectors, such as communications equipment and pharmaceuticals. Other emerging markets are alternative energy, both solar and wind power. China will become the world’s largest market forrenewable-energy technology, and it already has some of the sector’s biggest companies, providing critical components for the industry globally. Not only does the country enjoy scale advantages, but also uses new homegrown manufacturing techniques that improve the efficiency of solar panels.
Success in B2B innovation is due in part to government policies, such as establishing market access barriers; influencing the nature of cross-border collaborations by setting IP requirements for electric vehicles, high-speed trains, and other segments; and creating domestic-purchasing policies that favor Chinese-made goods and services. The Chinese government, after all, owns most of the companies in China.
Corporate culture still risk-adverse
One of the challenges that remain is the fact that the traditional Chinese corporate culture does not support risk taking, an essential part of innovation. Internal collaboration and brainstorming—essential to developing new ideas—are all but absent from their corporate culture. Also lacking are advanced techniques for understanding what customers really want.
Let’s tackle the first one. Failure is a required element in innovation, but one shunned in China where a culture of obedience and adherence to rules prevails at most companies. One exception is a leading solar company that now transfers risk from individual innovators to teams. Shared accountability and community support made increased risk taking and experimentation safer. The company has used these “innovation work groups” to develop everything from more efficient battery technology to new manufacturing processes.
Fostering collaboration
Chinese companies are also lagging in promoting a culture of collaboration and the internal generation of ideas, which can develop into new insights, innovative new products, and business opportunities. In most Chinese companies, traditional organizational and cultural barriers prevent such exchanges of ideas.
The emphasis continues to be on competence in delivering products in large volumes rapidly. The country’s rigorous, linear processes for bringing products to market ensure rapid commercialization but create too many hand-offs where insights are lost and trade-offs for efficiency are promoted.
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