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Innovative China: a debate

Articles analyzing why there's no Chinese innovation are all over the place. Meanwhile, the situation is changing at a rapid pace. How do Chinese entrepreneurs move from imitators to innovators? To better understand these issues, our Chinese edition invited a number of pioneers and observers at the front-line of domestic and international innovations.

July 2015
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Articles analyzing why there's no Chinese innovation are all over the place. Meanwhile, the situation is changing at a rapid pace. How do Chinese entrepreneurs move from imitators to innovators? To better understand these issues, our Chinese edition invited a number of pioneers and observers at the front-line of domestic and international innovations.

Just as the “Asia Four Tigers,” China gave its low cost labor a full play and became the “world factory” by focusing on developing the lower end of the manufacturing chain to accumulate wealth at primary stage. Agricultural population shrunk dramatically as people moved to cities and became workers. By taking advantage of the export manufacturing and trading mechanism, China acquired product technologies and experiences advanced countries learned in the past century within only 30 years.

This massively shortened learning process led to another consequence: China became known as the “imitator”, a latecomer in lack of innovation power. The word “shanzhai” emerged as a representative of low-quality Chinese products, with no respect to brand, origins or IP. Articles analyzing why there’s no Chinese innovation are all over the place. For example, in March 2014 Harvard Business Review published an article titled “Why China Can’t Innovate” and took a deep look into innovation hurdles faced by China including policies, industrial pattern, corporate management and education.

However, we are hearing different opinions from around the world. Articles like “China’s Innovation Has Outstripped Its ‘Follow Fast’ Reputation” (Wired) and “It’s official: China Is Becoming a New Innovation Powerhouse” (Foreign Policy) are gradually reshaping people’s understanding and anticipation of innovation in China. This reaction is triggered by numerous well-known business cases: the huge funding size of China’s high speed railway project, unprecedentedly successful IPO of Alibaba, remarkable global sales of Xiaomi phones… Nevertheless, it is hard to correlate these achievements with the real innovative power Chinese enterprises possess due to various metrics for gauging. It is also a hard task to anticipate what is changing about Chinese innovation in 5-10 years from now.

To better understand these issues, we invited a number of pioneers and observers at the front-line of domestic and international innovations.

Cédric Denis-Rémis is the French Dean of  ParisTech-Shanghai Jiao TongPascal Marmier, CEO of  swissnex China, Vice Consul General of SwitzerlandJason Wong is the Founding partner of Platform 88, which helps Kickstarter or Indiegogo funded campaigns bring their products to life in Chinese manufactures and marketBo Chen, General Manager of Corporate Communications of Fosun Group (established 23 years ago, valued more than 5.5 billion US dollars)Edouard de Pirey, President of Valeo China – Valeo is one of the biggest automotive suppliers in the world – a 90 year old company that invests 10% of its Original Equipment sales in R&D and over 1,100 patents are produced every year.Wayne Wang, Founder, Chairman & CEO of CDP Group, which is now managing namely half million employees with different nationalities from multinationals across different sectors.

Question 1 - Does China need something equivalent to Nobel Prize or a world-class product like iPhone to overcome the perception that China is NOT an innovative country?

Pascal Marmier – I don’t think so. China shouldn’t be worried. This is a very old way of thinking about innovation. Looking at things happening outside of Silicon Valley, we are much more grateful and able to learn from many other countries with amazing innovations.

Jason Wong – My answer is no. I’ve been in China for the past 10 years and seen a lot of innovation happening here. If you visit the factories in the second tier or third tier cities of China, you will realize that it is just how you define innovation. People have come up with various genial ways to make things or fix things, but they are not published on any paper or even the media to be noticed and recognized.

Bo Chen – I agree the answer should be no. China doesn’t need to improve itself as somebody in the international community with Nobel Prize or something like iPhone. We have different things like Xiaomi. It is true that China used to produce low cost and cheap products with unsatisfactory quality, but today it is gaining attention as an international power in terms of consumption. According to Bloomberg, 174 million Chinese tourists are tipped to spend $264 billion by 2019, “It’s about the size of Finland’s economy and bigger than Greece’s,” meanwhile, The Chinese are the world’s biggest consumers of luxury goods, with half of that spending done overseas. That means China no longer need to manufacture low cost products to attract the world, but rather, we have a very strong domestic demand to meet. It used to be an issue of price, but right now it is about consumption power.

Edouard de Pirey – I said no. I think China is innovative. Here are two examples. First comes the mobile app Wechat provided by Tencent, which I think is an amazingly innovative company. Many innovations in China are not built outside of country since they are built mainly for Chinese market, in Chinese language, serving to Chinese culture. Products as such may not be known outside, but actually are innovative.

The second example is from our own company, Valeo. When some people say that Chinese employees are always better at IMPROVING than CREATING things, I don’t believe so. In China, we have 2,000 employees working on innovation in R&D centers, among them there are real innovators thinking differently with great ideas. It is particularly true when it comes to reducing costs. Not anyone in the world knows Israel is as or even more innovative than Silicon Valley, but it is the truth. In this wise, I think China is also very innovative today.

Wayne Wang – I voted no. China never lacks innovation historically, people are so proud of the “The Four Great Inventions”—paper making, gunpowder, printing and compass–of ancient China. Innovations and creations never stop in this country. The only thing is some innovations are very noticeable like iPhone due to its commercial success, while other innovations might not be that popular to be appreciated by public. You shouldn’t identify innovation with one pattern.

Furthermore, innovation has a correlation with economic development and globalization process. In the past, for example, if you did e-commerce, you’d to be Amazon-like or Ebay-like; but more and more, we are seeing Alibaba-like or Xiaomi-like start-ups. Chinese companies with business model innovations are becoming more noticeable. Even in San Francisco today, people are crazy with Wechat.

Inputs from the audience:

- I voted yes, because I think it is important to give recognition to innovation. We have innovations indeed, but we need to be recognized, and Nobel Prizes or being on top of the market is very important for China to be known in the world.

- I said yes, because you were asking about perception, not reality. I agree that in fact China is innovative today, but if you look at the way people see innovative countries, of course it would be those with fabulous new products or lots of Nobel Prizes, that’s the perception.

Question 2 – Is it possible for China to get rid of the hat of “imitator” in less than 5 years?

Wayne Wang – Yes. As I said in my previous statement, there is correlation between public recognition of a country and its economic development level. China now is the world No. 2 economy and investing more capital outbound to the rest of the world. Along with this convincing economic progress, China will quickly move up the chain as an innovative country, it does not have to be a copycat any longer.

Edouard de Pirey – Yes. Let me first give you a picture. Two advertising slogans I’ve seen recently which actually pushed against each other. One is from Samsung: “What’s next”; the other is from Huawei: “Next is here.” Back to the question, there is still a gap between China and the world, but China is accelerating.

Only 30 years ago, Japan was considered also as just copying the intellectual property of the US and Europe. Now who will say Japan is not an innovative country? 15 years ago, Hyundai, the Korean car maker was competing against second hand cars in the US market, but now if you enter an Equus which is the premier brand of Hyundai, you compare it to Daimler Benz, to Lexus, to all the top cars in the world. We just can’t deny the possibility that one of the Chinese car makers will become another Hyundai of 21 century, and this may happen right in the next 5 years.

Bo Chen – I voted yes as well. The expression “mass entrepreneurship and innovation” given by the Chinese Premier Li Keqiang at the World Economic Forum annual meeting this year has released a strong signal that the government encourages people to innovate and create their own business. In every coffee shop of Zhong Guancun in Beijing, you will find most people there are talking about startups.

Situations are changing as well as Chinese people’s mind. Wechat may had been inspired by some American products, but the quality or capacity it has shown is far better than any other product it got inspirations from.

The same thing happens on Xiaomi. The design of Xiaomi mobile phone was not 100% provided by designers or technicians. Most of the ideas come from its online clients; that’s something very creative. Fosun today has funded plenty of creative projects in software business in China, based upon which I believe in 5 years or even shorter, China will get a brand new name card.

Jason Wong – I select saying no. I work with startups from San Francisco, New York, Australia… people called us to help them get products manufactured in China. The first big question usually they will ask is “Are we gonna get copied?” To this question, we say, there is possibility.

When you post a product on Kickstarter for funding, probably the product will be seen on Taobao in 6 months before you actually launch it. I’ve seen it happening again and again. I’m not saying there is no innovation in China, or people copy, but out of a hundred, 10 people today in China may be still imitating others, simply.

The situation is getting better; the government is responding to patent registration. The only thing is while people always did trademark and patent registration in United States or Europe, they just don’t know how to do it in China, and how cheap it is to do it in China! China does have tools to protect innovation ideas in place now.

Pascal Marmier – When I talk to entrepreneurs, none of them can do business without China, as one way or another, you will have something to do with China. But there were people telling me three years ago that you shouldn’t even talking about Swiss innovations in China because they will get copied, I think this is changing here and among the general public, the notion of intellectual property (IP) rights has been popularized through the tools of media.

Inputs from the audience:

- No, for two reasons. First, innovation is a cultural concept cultivated by education, this is something China needs to develop in long term. Second, as a developing country, China is still in the process of catching up the developed world, and copy is always a part of this kind of process. So it is a long way to go.

- The hat of “imitator” is not contradictory with the hat of “innovator.” In China, emulation and innovation always happen together. Companies collaborate freely, people move quickly from one company to another, communication happens in very quick way, when there is a good idea, everybody emulate it. Companies know very well in protecting the key knowledge they have and using the way that things are going in China.

Question 3 – Will Xiaomi eventually replace Apple as the biggest and most innovative mobile company in the world?

Pascal Marmier – I’m a big fan of Xiaomi. As a single product, mobile phone gets out of date very quickly. But Xiaomi is extremely well placed to take advantage of world’s mobile eco-system. It’s going to be in your car, house and family. It will grow through this innovation circle very fast, and move from imitation to the leading position in innovation.

Jason Wong – I think Apple is still a leader of innovation and competition in technology, user and connectivity… everything around mobile products. But Xiaomi will not focus only on mobile in future. It is trying to be connected in every space of modern life, residing itself in wearables, smart phones and home devices, collecting data about you as a person. So the innovation of Xiaomi will not be about technology, but the use of technology.

Bo Chen – I voted no. Xiaomi is very innovative in concept and significantly different from Apple in design—from my point of view, Apple succeeded in online business largely by accident while Xiaomi created its business with the idea to be online. However, regarding the product quality, my personal using experience tells me that Xiaomi may not be able to overtake Apple in the near future.

Edouard de Pirey – Don’t forget Xiaomi is only 1/3 in terms of price of iPhone. Come back to the question, I would have said YES if it is a few months ago, until I bought a Xiaomi phone. Actually I was very happy with the product; the only thing is I could not use Gmail on it. But only for this reason had I said no.

Take a look at the global mobile market. Samsung from Korea really has provided amazing products and doing very well in the business, but Samsung is all in its country. Whereas in China, there are Xiaomi, Huawei, HTC even Letv… a number of companies here which may each of them alone, or eventually together bring something very powerful to compete with Apple.

Wayne Wang –  I said no because I don’t have a clear answer to this question. China has become the biggest mobile phone market in the world, so when we are talking about hardware shipments, it is possible for Xiaomi to overtake Apple. However, if Xiaomi intends to transform itself to a software company or a lifestyle company, I don’t think it is going to be as innovative or capable as Apple, at least in short term.

Inputs from the audience:

- Nothing is impossible: from this point of few, I will say yes. When iPhone just came about a few years ago, nobody would have imagined that Nokia would be knocked out one day. So you can never imagine what will happen in 10 years or 15 years from now.

Question 4 – Do we have too many incubators in China now?

Wayne Wang – I voted yes, for I believe we don’t have adequate incubators. I have been meeting with Chinese authorities now and then, who are trying to stimulate incubations. The intention is good. But I think the most important is to create a healthy market environment rather than bottle feeding the startups by giving them subsidies. We need to support fair competition and equalize opportunities between SOEs and private sector. The best way to stimulate is to let them grow by themselves in an open market.

Edouard de Pirey – I said no for two reasons. First, there is no famous incubator in China yet. Second, doing in incubator business, you have 10,000 clients, you work on 1,000, you really consider 100, only 10 are achieving something and one is really a blockbuster. So the more you are working on, the more chances you will get something.

Bo Chen – My answer is no. The first famous incubator created in China was by the famous entrepreneur Li Kaifu, but I’m not clear with its following up or any successful case from the incubator. To succeed as an incubator you need to provide many services to the incubated projects, that means very large investment financially. With one successful case you may probably have to invest in 50 or even more. So I think the government should create favorable policies to help incubators.

Jason Wong – I said yes. I was at a dinner with some local officials from a city of China recently; they are building incubators by sections of the city, literally mandating incubators happening in every section of the city! They’re just approaching people saying don’t get a job, come to the incubators. Even the world outside China today, there are too many incubators. An excellent incubator is doing electric vehicles, 5 other are trying to attract other startups to do electric vehicles, too. They just copy each other. That’s not a healthy system at all.

Incubator is supposed to be a place where you can find your mission and passion rather than startups. The purpose is not startups. Doing startups are hard and painful; but many people are probably rushing into incubators thinking it’s easy and they are going to raise more money.

Interestingly, another trend is startups are jumping from incubators to incubators. They started from incubator A for 6 months, and next 6 months in incubator B. They’re just joining to get more contacts and networking.

Pascal Marmier – My view is from Boston, which is only second innovative area to the Silicon Valley in the U.S. I would like to look at it from a policy perspective. There, you have publicly funded spaces like MassChallenge that accelerate many startups every year. The fact is that this environment creates a collective learning experience so that if someone spent months learning entrepreneurship in the incubator, this provides a very valuable professional experience, much better than providing unemployment benefits. Some professional and innovative incubators such as Cambridge Innovation Center provide professional services to startups. They found a unique business model (disrupting the traditional commercial real estate market) and created a very fertile environment for entrepreneurs at the same time. Both publicly and privately funded models seem to work well. Soon, you will see a startup providing co-working spaces go public!

Inputs from the audience:

- I voted yes. I have been to many incubators in China. Though the government advocates and puts lots of effort to incubators to encourage mass innovation, but the main problem is the quality of the incubators and not the numbers. So I think there are too many incubators now.

Question 5 – Is it a good time to become a founder in China?

Wayne Wang – Yes, I think it is probably the best timing to be an entrepreneurial people in China, and I view it as once-in-a-lifetime opportunity. A VC friend told me that he’s met more Silicon Valley people in Shanghai than in Silicon Valley. Access to capital in China is much easier nowadays. There are numerous stories about startups going on their Series I, Series II financing… People are here not for clean air or quality food, but the opportunities. Big capital and smart people; favorable regulations, policies and facilities; all these have created an overall environment which is very attractive to entrepreneurs.

Edouard de Pirey – Environment and opportunities are equally important. 10-15 years ago, it’s easy to access Chinese market because you only need to copy the system and import things that do not exist here yet. Today, aside from even easier market accessibility—you open your Tmall on line and have access to the whole China market in 2 hours– 2 things are supportive to startups: a bull market and a strong united market. First, investors are eager to find opportunities in China and it is with no surprise that the IPO of Alibaba was such a success. Second, there is no such united market in Europe as there is in China; the US market is united but with much less people than here. Furthermore, Chinese consumers are very open to innovation. They are ready and eager to try something new. That’s why we believe this market is ready for all kinds of new things.

Bo Chen – My answer is yes. It’s obvious. Compared to 23 years ago, when Fosun was founded, the environment today in China is much easier for private companies to succeed for 3 reasons: encouraging policy, capital and a huge demand of consumer. A good idea that well meets some demand of customers is right the good starting point to start your business. Creative people now can succeed not only by establishing personal businesses, but also by platforms provided by big companies.

Jason Wong – The answer is obviously yes. However, when it is easier to start a business, it is getting harder to succeed on the other hand. The expectation to become a successful startup is to get a “hockey’s growth,” that means the investors want to see your users increase, your revenue grows along with a sharply rising curve and it will be measured from week to week, month to month. So, for anyone wants to have a startup, my suggestion is, make sure you create a team right from the start. It’s hard to find talents in China today. People are joining Xiaomi or Huawei. I had to find my partners back in San Francisco and spent all kinds of resources there.

Pascal Marmier – I’ll speak more on the policy side. Switzerland itself may not be an innovative country, but we have innovative talents from all over the world. China has this fantastic environment for startups like in cities of Shenzhen and Shanghai. We really hope there will be more favorable policies and stimulus to come. It will be like a magnet to great ideas from foreigners, and that is really the secret to success for the future.

Inputs of audience:

- I think access to the Chinese market is not always easy. It depends on the size of your company, the connection you have and innovation of the products. For some foreigners, the market can be very competitive and selective.

- I think the answer of this question depends on the field you are working in. Compared to what happen in IT industry, it is another thing in pharma biotech which is much more complicated and regulated. It is also related to the purpose of your startup, are you looking for organic growth here or partnership, even licensing? Has the market already been full of competitors with strong local connections? But having said that, I think any time is the best time for real innovations and good business models.

Comments from editorial board of SJTU ParisTech Review:

Guan Hao (Managing Director of VSL China): First, I think China is innovative because people are moving globally, so typically, I am not only Chinese, I am European, more precisely French; innovation is now a global issue rather than national; technology too is now something global. Second, imitation is not always negative. In my industry, if you fail to copy the other guys, you have to innovate constantly. Good copy is not easy! Last, I think China is offering a lot of opportunities.

Ni Jingang (Principal scientist, AVIC commercial aircraft engine Co. ltd): We should think about the platform. It is time to make product better and better, even for copy. We need to respect high quality. Japan did it this way 30-50 years ago. Innovation need a platform and products both. We should not only talk about innovation, but we also need to talk about better or best product.

---Note from the editors. This article was originally published in our Chinese edition, developed with Shanghai Jiao Tong University, SJTU ParisTech Review.

Chuàngkàn Bālí
Paris Innovation Review's Chinese Edition