8 Reasons Why Chinnovation Will Persist

Continuing our series on Chinese innovation Yinglan Tan looks at 8 reasons why Chinese innovation will continue to be a major talking point in everyone’s career. If you thought today’s turbulence would soon be over, think again.

Why will Chinnovation influence your business, career, and life? Don’t take my word for it. But let me share a few key observations with you:

1. Resources – Domestic demand in China will only increase.

China and India—already boast some 500 million Internet users, and McKinsey forecasts nearly 700 million more will be added by 2015. Over the next five years, nearly 700 million more Asians will start using the Internet. Internet opportunities in emerging Asia could reach approximately $80 in value billion by 2015.

China has the latent resources for domestically driven economic growth. Exports in China have been a major driver, but there are clear signs that a shift toward domestically driven economic growth is well under way.

There is still latent demand in the second tier cities yet to be unleased. For example, when outside observers hear that China is the world’s largest beer market, they often assume the top selling beer is Tsingtao. Most find it surprising that the top beer in China is not Tsingtao, but Snow beer. CR Snow is a joint venture between China Resources Enterprise Ltd and South Africa’s SABMiller. However, the key to CR Snow’s success has been its focus on lower tiered cities in China’s regionalized beer market. CR Snow implemented a Greenfield expansion program in 2006 through successive acquisitions of breweries in Dongguan, Lanzhou, Harbin, Yanjiao, Nanjing, Anhui, Liaoning and other locations.

2. Remix – grassroots innovation in China will be increasingly dominant globally.

There is increasing evidence that advantages in China will be essential to future business. Shenzhen-based Yosion has unveiled a product called the Apple Peel 520, a hack which can turn any iPod Touch into a cell phone. The Apple Peel attaches to an iPod Touch like any protective case, but functions as a dock, an extended battery and most intriguingly, a SIM card slot.

With Chinese comparative advantage in battery technology (BYD – which stands for “Build Your Dreams”[1]), we have seen Chinese-made batteries (Coda automotive battery in Tianjin, China) and complex American-system electronics – all finally assembled in Oakland (price:US$37,000). We will see more future partnerships of this variety.

Chinese consumers perceive foreign elements to be synomous with quality, which presents an opportunity for exporters. Chinese consumers believe that Western products elevate their social status.

This is extremely important to them because the Chinese are very status-conscious people. Many Chinese companies even try to position their products to have Western appeal.  Metersbonwe, a Chinese casual-wear fashion company, uses Western models to showcase their apparel. According to a survey by McKinsey, 90% of respondents believe that Metersbonwe is a foreign company. So, here is a million-dollar secret for multinationals that want to capture Chinese consumers’ hearts, minds, and wallets: promote your flagship brands but remix them to Chinese consumers’ tastes.

3. Restrictions (the removal of) – there is top-down mandate from the Chinese government to innovate.

China is adopting the right innovation strategy by taking a top-down, bottom-up approach. Chinese Commerce Minister Chen Deming said in an interview with the official Xinhua News Agency that China will improve some of the innovation and government procurement policies to allow for innovation. China has also put in place the right measures:

a) Thinking long term and ambitious. China has 4 ‘moon shots’ – multi-billion dollar, 25 year horizon, game changing investments on the go in infrastructure, Genomics, electric vehicles and stem cell engineering. The financial commitment and long term planning involved is a test for the public private capability of the Chinese.

b) Investment in infrastructure. These four moonshots include building a network of ultra modern airports and web of high-speed trains connecting major cities. These will unlock the latent demand of Chinese consumers and most importantly, create jobs.

c) Emphasizing science and technology. In the area of  life sciences and clean energy, the focus is very much on biosciences – i.e. Beijing Genomics institute ordered 128 DNA sequencers to launch China stem cell and genetic engineering industry. China also hired a dream team of 16 SOEs to work on electric cars. I do foresee that a Chinese Tesla will emerge soon.

The remaining restrictions in China also present new opportunities. With Twitter blocked in China (along with other popular American websites like Facebook and Youtube), entrepreneurs have capitalised on this painpoint. AnchorFree, a start-up based in Sunnyvale, Calif., has built a profitable business by providing free, advertising-supported software called Hotspot Shield that tunnels about 7.5 million people around the world into the Internet by encrypting Internet users’ data and cloaking their identities.

4. Raw Materials –  Immeasurable depth of talent from China.

Innovation Works is a Beijing business incubator which former China Google Chief Lee Kai Fu founded a year ago.  Lee is betting that young Chinese entrepreneurs will flourish. “There are so many good people, good engineers tackling interesting problems. We are providing what is much needed to create value and interest and excitement and help out people.”

d) Bottom up innovation still pervasive –   China abound with stories of innovative creative savvy entrepreneurs which are the driving force of innovation.

e) Grandma chilli sauce was started by an illiterate grandma who had only primary school education. She only figured out her business model and comparative advantage when other noodle owners came to ask for her sauce and sold the noodle for a higher premium. It is now a multimillion dollar business.

f) The author met an entrepreneur who saw the market opportunity for a customised mousepad. She mitigated risk by designing the mousepad, went to Alibaba to find a larger buyer, then found a manufacturer subsequently.

g) The author met another entrepreneur who lost his fortune due to gambling in mahjong. He started a hotpot chain which allowed its diners to gamble mahjong, the waiters had mahjong-styled hairstyle and he held regular mahjong contests.

h) Another lady who found that her boyfriend likes prints of her lipstick mark now sells lipstick mark of her kisses on keychain, purse and china knots.

5. Requirements – there remains a large untapped potential for customised user requirements.

Lenovo is increasingly focusing on what user’s require in China’s ‘emerging markets.’ Since early 2009, desktop sales in the emerging markets cluster has increased from 45 percent to 70 percent of Lenovo’s total desktop sales. Li Ning’s strength in customising products to requirements in China’s smaller cities is propelling it forward much faster than competitors in tier one cities which are not seeing the same rate of growth which led to their initial success in China.

6. Reduce –  cost innovation will remain a comparative advantage of China.  Combined with innovation, this is a potent combination.

An early indicator of the China momentum is that a TCL 40-inch television can be bought from Amazon for $499, and the television has a two-year warranty. Forty-inch televisions a few years ago were $2,000. The Japanese, South Korean and Taiwanese television vendors cannot be profitable at this price. The new product challenges of China, however, will not be limited to televisions but will include automobiles, pharmaceuticals, etc. China is also developing its own 737 type of aircraft and is also considering a 747 type.

Despite the large potential and opportunity, there are red flags for Chinnovation to have a positive impact on your business, career and life.

7. Reproduction – How can you capitalise on the opportunity without being “Shanzai” (copied)?

Being famous can cause you to be be Shanzai (copied). One can buy Fake Tsingtao beer at the Hangzhou railway station. The culprit, called Quanmai (All wheat?) Beer, was found in Hangzhou South Railway Station and cost an exorbitant 5RMB. It was being sold alongside a shanzhai Budweiser brand called “Blue Diamond.”

8. Rivals –  It is tough to penetrate the Chinese market without understand your rivals.

When eBay entered China, Jack Ma, founder of Alibaba, launched a new Web site named Taobao—meaning “digging for treasure”— free of charge for individuals buying and selling virtually any consumer goods, from cosmetics to electronic parts. Knowing that most small business people would rather watch TV than log on to the Internet, Ma secured advertisements for Taobao on major TV channels. In 2004, one could easily feel the heat of fierce competition between eBay EachNet and Taobao. Since its name means “digging for treasure” in Chinese, it attracted a lot of attention by a smart play on words.

Next week we’ll conclude the services. In the meantime take a look at Yinglan Tan’s website and book.

By Yinglan Tan

Footnotes

[1] Warren Buffett owns a 10 percent stake in BYD, a $230 million investment that is now worth more than $1.5 billion.

About the author

Yinglan Tan is the author of Chinnovation – How Chinese Innovators are Changing the World (Wiley, 2011) and The Way Of the VC: Having Top Venture Capitalists On Your Board (Wiley, 2010). He is a Kauffman Fellow and an Adjunct Assistant Professor at Nanyang Technological University.

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