Discover the innovation trilogy of Chinese companies

Over the next 5-10 years, Chinese companies will upgrade their value chains and innovate for the world - Shaun Rein in his recently published book, The End of Copycat China: Asian Creativity, Innovation and Innovation This is predicted in The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia.

He is the founder and managing director of Shanghai-based China Market Research Group (CMR).

Two years ago, he published The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World, which won Warm response from Chinese and foreign business circles. As a result, he has become a frequent guest on mainstream Western TV stations and authoritative business media, and has been invited to express his views on China's economy, market trends and manufacturing.

Interactive topic: Do Chinese manufacturers have genuine innovations?

On October 20, he accepted an exclusive interview with this magazine after delivering a keynote speech at the Global Sources "Mobile Electronics Fair" Hong Kong Summit Forum as a guest speaker.

Three Stages of Innovation

CEConline: You published the book "The End of Cheap China" in 2012, why did you publish a new book "The End of Shanzhai China" two years later in 2014 "?

Lei Xiaoshan: The first book is to illustrate that China is no longer a cheap place to do business. The aim is to help companies understand that China is no longer just a place to make cheap products, that rising costs will push you to upgrade your value chain to produce better quality and more expensive products. For manufacturers in other countries such as Indonesia, Cambodia, etc., it is more important to consider China as a market for selling products rather than as a place for OEM manufacturers.

I wrote this new book because I realized that many businessmen in Western countries have not made this transition, while many Chinese companies have. Facing higher costs, Chinese companies must upgrade their value chains and focus on innovation in order to survive.

I wrote this book to let Western businesses know that the competition you face is getting tougher. From the perspective of innovation, Chinese companies such as Huawei, Tencent, and Sany Heavy Industry are not inferior to any company in the United States and Europe.

The second is to let Chinese companies know that you need to hurry up. You can no longer position a product as "cheap and good enough." You need to become a global player and compete based on innovation. This coincides with what Premier Li Keqiang and other Chinese government officials said during recent visits to Germany and Russia. He paid particular attention to acquiring innovative technology from Germany and bringing it back to China for the gradual establishment of an industrial capacity base. So, I am writing this book for both Western and Chinese readers.

CEConline: In your new book, you show the innovation curve of Chinese companies including three stages. So, what are the main characteristics of each stage?

Lei Xiaoshan: The first stage is the "imitation copy" stage. This has been the main practice in China for the past 30 years. China needs to transfer technology from the US and Europe. China was so poor back then that customization was pointless, and trying to build something new was pointless.

The second stage is the "Innovation for China" stage. We are mostly at this stage now. You see companies like Sohu and Sina, they didn't invent Internet technology, but they customized and localized Internet technology for Chinese consumers on a local basis. Another example is JD.com, which did not invent e-commerce, but they are implementing one-day or next-day delivery. This is something Amazon has never done. Most industries in China are now at this stage.

The next step is the third stage, the "Innovation for the World" stage. In a way, this is the exciting part. Regarding this part, I think a lot of people in Europe and America don't understand how good and innovative some Chinese corporate players are, and how aggressive and ambitious they want to be. They have not yet but are about to reach the other side of "innovating for the world". They're Tencent, they're Baidu, they're companies like Huawei, and some startups backed by venture capitalists and private equity firms.

CEConline: In your new book, you identify two major drivers for moving from Phase 1 to Phase 2 and Phase 3. Can you elaborate?

Lei Xiaoshan: The first driving force is consumers. Chinese consumers no longer want the best products in the West, and they also have a sense of pride in China. This is some element of the "Chinese Dream" promoted by President Xi Jinping. So people say "We want what the Chinese make for China, let's see what we can build for China." Chinese consumers are really driving this shift.

If you're not a truly innovative Chinese Internet company, you're going to be stuck. So you see companies like Baidu, still doing something as easy as "low hanging fruit", they're still doing search. But they also invested and hired Andrew Ng from Stanford to lead the AI lab. In this way, they consistently show Chinese consumers that "we are as good as the West".

The second driving force is capital. You can make money now as long as you innovate. Startup VCs will throw money at you, and you can also get money in the equity market. So, if you innovate, you can make more money. People are aware of this. For companies listed and traded in China, innovation makes more money than copying.

CEConline: Apart from capital, what about entrepreneurship?

Lei Xiaoshan: For entrepreneurs, innovation is what makes money. In the past, it was easy to copy or copy, so Chinese Coupon, Chinese Twitter, etc. appeared. But now, startup VCs no longer want to invest in knockoffs. So entrepreneurs have to try to be more innovative, companies like Momo or YY, etc. Entrepreneurs have realized they can make more money. They see truly innovative entrepreneurs earning big bucks. This is especially true of Xiaomi in mobile devices, YY in the mobile services space, and biotech.

Innovation in Different Industries

CEConline: In your new book, you explore innovation in industries such as the Internet, biotech, healthcare, and more. Do your findings about innovation from these industries apply to other industries in China?

Thunder Hill: Not yet applicable. I think part of the reason is that in the mobile industry, you only need 4 people to make a great product in 2 months. In some other industries, it takes 5 or 10 years and requires hundreds of R&D personnel. And, I think intellectual property protection is the main obstacle. In the mobile industry, you can make a product and make money in a short period of time. It was considered too risky to build a product over 10 years because it could be stolen. So I think the applicability of these conclusions is that other industries will eventually reach the other side of innovation, but not in the short term. For some product categories, there will definitely be grey areas in the black market for imitating replica products.

CEConline: Do you see a lot of innovation in the manufacturing sector in China?

Ray Hill: Yes. Many companies have focused on innovation in the production line. They create automated assembly lines in China that are better than anywhere else in the world, speeding up shipping and sales of their products. In my new book, I follow a company that has built state-of-the-art factories in China. They focus on the use of clean water. Their manufacturing activities used to generate a lot of chemicals and pollution, and they invested in this new system to reuse wastewater. In this way, once polluted, the purified water will benefit the health of workers.

The second thing it does is use new recipes that have never been on the market. This allows them to produce more products faster than their competitors. Such products are safer and healthier. So you can see a lot of innovation in production lines and product formulations in Chinese factories.

CEConline: There are many small and medium-sized manufacturers in China that use OEM or ODM business models to expand their business. What do you suggest they should do with innovation?

Lei Xiaoshan: I think a lot of OEM manufacturers in China are going through tough times. Costs are rising, including labor costs, rent, and more. It is very difficult for them to set up factories in countries like South Africa or Cambodia. They do not have the corresponding language ability. To survive, they must do two things. The first is to make more expensive and innovative products, and the second is not only to do export business, but also to consider selling their own products to the Chinese market. Therefore, OEM manufacturers need to upgrade their value chains and use China as a market to sell their products.

CEConlines: what exactly should they do?

Lei Xiaoshan: They need to put a considerable part of their budget into product development. They may need to hire new people, and the company CEO or founder may need to relinquish some power to some of these new people. This is not an easy task. It's very, very difficult to go from an OEM manufacturer to an innovative company.

Why did innovation fail?

CEConline: What are the main reasons for the failure of local Chinese companies to innovate?

Lei Xiaoshan: Chinese companies haven't seen many major innovation failures because they are just getting into innovation. I think the biggest problem within these companies is that there is not enough respect and funding for the innovative sector. Many Chinese companies are still too controlled by CEOs who cannot effectively decentralize. So they need to empower other managers and employees.

CEConline: You predict that in the next 5-10 years, Chinese companies will upgrade their value chains and innovate for the world. What are the key issues Chinese companies should address in order to seize the opportunities presented by this trend?

Lei Xiaoshan: I think the biggest problem they are facing is copyright and intellectual property protection. Therefore, they need to effectively urge the government to better support and enforce the relevant laws. Part of the problem these days is that even if the government fines you in your favor, there is still a difference between sentencing and enforcement. There are grey areas in law enforcement.

Second, even when violations are penalized, the fines in some cases are too small. Many companies will still cheat because they still make more money by breaking the law even after paying the fines. So I think the biggest problem is that domestic companies in China have to do a better job of pushing the government.