In a previous article, we spoke about how China was rapidly becoming one of the world’s leading innovators, filing more international patents than any other country in 2010. Now, questions remain as to the value of quantity over the quality of innovation and just how that reflects on China’s move up the value chain. This also begs the question: what is China doing to “out-innovate” traditional innovation strongholds like the U.S., EU and Japan, even if that innovation is not matched in technological prowess?
There are several factors that have led to China’s rise up the value chain, beginning with the disruption of traditional supply chains; whereby companies began outsourcing their manufacturing capabilities to China to decrease the assets on their books while increasing productivity and margins; mandated technology transfers, where foreign companies, intent on bidding on government tenders in China were required to contribute their proprietary technology to secure the tender, the chance to get access to China’s growing middle class and the fear that not doing so, would result in significant long-term disadvantages, and finally, China’s nascent engines of innovation, companies that have at first built their businesses as Original Equipment Manufacturers that have since added research and development to their business models in order to compete with competitors, both domestically and abroad in increasingly commoditized industries.
As brands began to outsource their manufacturing capabilities to Chinese manufacturers in the ‘80s and those OEMs became increasingly adept at producing low-end components, the win-win arrangement progressed, with many manufacturers rising up the value chain to take on an increasingly large portion of their partner brand’s manufacturing capabilities. This trend is by no means China specific, but had it not occurred, as with other Asian manufacturing hubs, further steps would have been impossible.
Now armed with a more technically skilled workforce and rapidly improving industrial capabilities, China was set to come of age and invest in what is now some of the world’s most impressive infrastructure, specifically the world’s largest high-speed rail network. Determined to win government tenders, company’s like Kawasaki were encouraged to partner with local Chinese companies, with proprietary technology being part of their contribution to those Joint Ventures. While this won companies like Kawasaki market share in the short term, their Chinese partners would ultimately become their competitors, producing their own trains using Kawasaki’s technology ready for export. This, once more, is not a China-only trend, but akin to the vast majority of developing countries, whereby emerging economies “disrupt” traditional industries with what is often a cheaper labor force, allowing developed countries to adapt and further innovate new products and industries.
While technology transfers are no longer required to bid on Chinese tenders, many companies choose to partner with Chinese companies in order to improve their chances at access to the Chinese market, reasoning perhaps, that the lost opportunity is not worth the technology parted with to secure that access.
An exciting trend is now emerging that is seeing domestic Chinese companies truly out-innovating global competitors. While their numbers remain small, the government has incentivized companies that invest in innovation, ensuring that, while the quality of the gross number of patents filed to date may not yet stand up to global competitors, the future is truly bright for innovation in general, as well as for China.