The China story has kept us enthralled for the past 14 years and as the Sino watchers predicted years ago, the Chinese have moved past industrialization and started to develop a services based economy.
It was supposed to be a gradual transition but the speed of change has taken some by surprise particularly in tech-based sectors.
Shaun Rein is the Shanghai based Managing Director of China Market Research Group and also the author of "The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia". This is his second book on the subject of China, and companion to his book " The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World".
In his latest book he argues that China is about to evolve from it's manufacturing and industrial past into a new innovation-focused future that will have enormous ramifications for global businesses trying stay competitive throughout the Asian region. Recently we have witnessed the listing of China's behemoth tech firm Alibaba and although there were many critics that passed the company off as a collection of services copied from global tech companies, Apple's recent proclamations of wanting to cooperate with Alipay indicates that the world's largest corporations are taking China very seriously.
We had an opportunity to catch up with Shaun and discuss his book, "The End of Copycat China" and what it means for the global economy.
IBR: Is there a link between wealth (per capita income) and innovation? Is it opportunity to innovate or the need to innovate that drives innovation?
Shaun Rein: Over the past 5 years margins in China have been squeezed by rising labor and real estate costs. Thousands of factories shut and relocated to other markets like Indonesia or Cambodia. Combined with President Xi's crackdown on corruption, which has ended many cushy, economically inefficient government purchasing, this has forced companies to look to innovation to generate profits. In other words, the low hanging fruit in many sectors is starting to disappear and companies have turned to innovation. We have seen this especially in sectors like construction equipment where companies like Sany have made technology acquisitions abroad and which now compete at the same quality level as foreign players.
IBR: China’s transition to from investment heavy manufacturing to services and innovation followed the pattern of many countries over the past century or is there something unique about what's happening in China today?
Shaun Rein: There are some similarities for China's path up the value chain to what Japan and South Korea did in the 1970s-2000s. The initial moves came in industrial manufacturing, like a Sony or Samsung and started to accelerate when per capita GDP hits around $6000 a year and when companies have been focused for 15 years or so on lower hanging manufacturing. But there is a difference as well -- in those markets the larger conglomerates dominate the economy and innovation. In China, you see many more start-ups backed by venture capitalists that are leading innovation -- especially in the mobile device, Internet and biotech sectors.
In my book, I interview the founders of e-commerce players JD.com, online video site Tudou.com and one of the angel investors in China's handset maker Xiaomi. These firms started independent of the large companies, received venture capital money and are more similar in ethos to Silicon Valley players.
IBR: has for several years now been the worlds largest applicant of patents, but is this another big “China by the numbers” story? for example on a per GDP basis South Korea applies for almost 2.5 times the patents China does.
Shaun Rein: I pay very little attention to the number of patents and more to the quality of them. Patents, number of engineers graduating from Chinese universities is all another "China by the Numbers" story as you point out. The quality of the engineers for instance is getting better in China but still inadequate. The education system needs to be reformed greatly and brought into the modern era. Similarly the total (number)# of patents is a relatively meaningless data point, except that it indicates the government and companies are starting to focus on innovation and intellectual property protection which is good and a key barrier to continued innovation here.
IBR: Korea's enormous international success owes a lot to its Government backing its local Chaebol, is China's government ready to back its corporate giants to push innovate and push into international markets?
Shaun Rein: In general, I believe in free markets and that most great innovation will come in the private sector. It is definitely true that the Chinese government is becoming more supportive of innovation, especially in biotech, which is less politically sensitive, but I am wary of all the innovation parks local governments are setting up. I think they might end up like some of the IT parks set up in the 1990s and 2000s, great for brochures but not great for true technological innovation. The difference between South Korea Chaebol and government relations and China's is that China already is quite involved with state-owned enterprises so I am not sure they have the time to focus on encouraging the true, private Chinese firms. We have seen how poorly China's telecom sector is under state control -- access speeds are slower here than generally any other developed nation.
IBR: You spend a lot of time with leaders in many different industries, are these leaders in step with China’s university students and young entrepreneurs in their vision of a future China?
Shaun Rein: I think business leaders often miss what younger Chinese want and their hopes and aspirations and need to understand the Chinese consumer better. Another part of the impetus towards innovation in China is actually younger Chinese -- they no longer want copycat business models transferred from America into China but want to play with authentic, homegrown Chinese internet players for instance like a Tencent or what Baidu is becoming. There is a shift in China towards pride in being Chinese.
If anything, it is governments that are woefully lacking in understanding what is happening in China. American President Joe Biden has gone on record several times challenging anyone to name one innovation out of China. Statements like that don't prepare America for what will become a more competitive business environment with China in the future.
IBR: In broader terms we witnessed a transition of sorts in Japan almost a decade ago where they moved from a manufacturing based economy to a services based, value add economy but oddly instead of building dominance, the local Japanese consumer brands such as Sony, Panasonic, Toshiba and Hitachi found it difficult to compete against US and Korean companies at almost every level. Do you think China is better placed than Japan was when it embarked on the transition?
Shaun Rein: China is better placed that the large Japanese firms -- the difference is that the Chinese firms are run by younger, more aggressive and ambitious entrepreneurs like Robin Li at Baidu or Jack Ma at Alibaba than the Japanese conglomerates that often have roots dating back generations. There is also a lot of VC money flowing into China, unlike in Japan which has remained relatively closed off to foreign investment. And importantly, there aren't a small cabal of families like there are in South Korea or Hong Kong that dominate the economy -- despite being a Communist country, power and money is far more diffused.
IBR: What is the hottest area of innovation in China at present? What is grabbing the attention of the investment community?
Shaun Rein: The two sectors seeing the most innovation, as I outline in the book, is mobile services and biotech. Many of the tech start-ups in China are building up with the mobile device in mind from the very beginning. The underlying architecture and the user experience of say WeChat is far superior to Twitter's mobile system which was just a port over from their CPU set up. Even today, I have all kinds of problems using mobile Twitter (and that is when I am outside of China's firewall.). Biotech is getting huge support as I mentioned from the government. While President Obama is cutting back funding, the opposite is happening in China.
IBR: What is the opportunity for foreign business?
Shaun Rein: China's rise in innovation creates huge opportunities yet also challenges for western businesses. For example, companies like 3M have faced fierce competition from Chinese upstarts in some of their sectors like adhesives yet they have remained dominant by moving into new sectors like air and water purifiers. Not all companies have that same culture of innovation as 3M does. If you do not, you will ultimately run into problems as Nokia or Ericson did. Western companies needs to understand that Chinese firms are no longer competing at cheap but good enough. They are starting to compete in terms of innovation and quality.
Publications
The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia (2014)
The End of Cheap China, Revised and Updated: Economic and Cultural Trends That Will Disrupt the World (2012)
Links
Comentários