Monday, 6 July 2015

Mighty China’s Tenacity: Entre the Dragonomics (Part-III)

It is no surprise that much of Chinese innovation and manufacture stay within Chinese shores. Walk around any Chinese electrical store, and you will find consumer technologies and gadgets with performance and design comparable to Japanese and South Koran competitors. Which are all home grown Brands. Unicorn Smartphone, Huawei MedicPad 10FHD, not to mention Huawei’s TVs with internet browsers, are all home made. The thing you will notice is price, coming from a direct benefit of low cost manufacture (42’’ HDTV for $100).

A recent McKinsey Quarterly by Gordon Orr and Erik Roth ‘CEO’s guide to innovation in China!’ points out this situation:

‘What’s keeping innovative products and business models confined to China? In general, its market is so large that domestic companies have little incentive to adapt successful products for sale abroad. In many cases, the skills and capabilities of these companies are oriented toward the domestic market, so even if they want to expand globally, they face high hurdles. Many senior executives, for example, are uncomfortable doing business outside their own geography and language. Furthermore, the success of many Chinese models depends on local resources—for example, lower-cost labor, inexpensive land, and access to capital or intellectual property—that are difficult to replicate elsewhere. Take the case of mobile handsets: most Chinese manufacturers would be subject to significant intellectual property–driven licensing fees if they sold their products outside China.’

China’s trajectory with regard to high-tech innovation is set. Expertise in innovation will not only become an increasingly vital competitive advantage within China, but will, in time, also produce products and services that become serious contenders on the global stage.

China already has over 20 innovation city-hubs (not unlike Silicone Valley, CA) focusing on biotech, informatics and life-science. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence: communications equipment and alternative energy, pharmaceuticals, solar-power, consumer electronics, instant messaging, and online gaming. But none as yet are game changing innovations; only time will tell.

In particular, the future is on for the super-state to be the world’s largest market for renewable-energy technology. Chinese companies not only enjoy scale advantages, but also, in the case of solar technologies, use new manufacturing techniques to improve the efficiency of photo-voltaic panels. The government’s plan to have five million plug-in hybrid and battery electric vehicles on the road by 2020, is heavily supported by a mix of extensive subsidies, tax incentives for local companies and on road re-charge infrastructure.

Another area of improvement recognised by the FYP, is that few Chinese companies have the systematic ability to develop a deep understanding of customer needs and expectations. The Chinese are more often than not Manufacturing focused, rather than customer focused, in both culture and methodology. Hence a culture on internal focus remains a push model which only makes it increasingly hard to unlock pockets of profitable growth. In turn, shifting from delivery to creation requires more local research and development, as well as the nurturing of more market-driven organizations

But it is not all one way here, foreign corporations making inroads to China often let themselves down in this area as well. MacKinsey report again:

‘Many multinationals have these capabilities, but unless they have been operating in China for some years, they may well lack the domestic-market knowledge or relationships needed to apply them effectively. The solution—building a true domestic Chinese presence rather than an outpost—sounds obvious, but it’s difficult to carry out without commitment from the top. Too many companies fail by using “fly over” management. But some multinationals appear to be investing the necessary resources; for example, we recently met (separately) with top executives of two big industrial companies who were being transferred from the West to run global R&D organizations from Shanghai. The idea is to be closer to Chinese customers and the network of institutions and universities from which multinationals source talent.’

The idea is to be closer to Chinese customers and create networks of institutions and universities from which multinationals source talent.

And so, according to Hu Angang, dean of the Institute for Contemporary China Studies, China's economy may just become twice as big as the United States by 2017, and in time, larger than both the US and the EU combined by 2030. A bold and most optimistic prediction at a time when there are concerns about China's short-term prospects with GDP growth slowing. China still has a hurdle to jump just to pass the US, with $15.68 trillion in 2012.

China's workforce of 780 million is five times larger than the US' 153 million and that it now devotes 3 million person-years to R&D, twice the deployment of the US. Challenges loom large, however, including rising labour costs, pollution, a potential real estate bubble and rapid ageing arising from the government's one child policy. He believes the Chinese economy faces significant future headwinds, particularly with its labour force shrinking by 11 percent from 798 million in 2013 to 718 million in 2030.

By the trends, through to 2030, the three largest economies in the world could be (1) China, (2) India and (3) Brazil, and the United States (4). China is set to be at the top in next to no time.

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