Posted by “China is the world’s second largest investor in R&D with a forecast spending of $396.3 billion for 2016.” It will spend 20.4% of the world’s R&D budget in 2016, compared with the U.S.’s 26.4%. There should be no doubt that China believes in S&T, R&D and innovation! But, how disruptive have China’s investments in innovation been, and what can we expect for the future?
For some industries in the West, this question will appear somewhat ridiculous. The American textile and apparel industries, for example, will tell you that the evidence is found in the blood on the floor – their blood, on what used to be their floor. Similarly, American and European metals industries and wind-turbine and solar panel producers will echo that. But despite all the pain that they have experienced, they are wrong. Far from being disruptive, in these industries, Chinese players have done little that has been different from the practices that they found when they entered them. What the Chinese competitors did was merely to lower costs and lower prices, benefitting from the so-called “China price.” They were “displacers”, not “disrupters.” Is it realistic to assume that this will continue to be the pattern for the future?
The difference between displacement – outperforming existing market incumbents at their own game, and disruption – changing the game, is a strategically important one, no matter that the pain felt might be similar. There is good reason to believe that, to date, China has been more of a displacer than a disrupter. That should be good news for Western interests because displacement can be combatted in various well-known ways including process improvements and government trade actions. Moreover, cost advantages tend to be temporary sources of competitiveness. Actual disruption, on the other hand, is a much more profound challenge, and one that calls for a real transformation of the challenged incumbent firms; something, as the Chinese and we have found out, that is considerably harder to achieve.
The catch is that most of our ideas of innovation are technology based, but what if we rethought these impressions by broadening our definition of “innovation” to that of “offerings”, or, better yet “customer experience”? Then, China’s innovative potential shifts significantly. Xiaomi’s phones, which are technically not disruptive, suddenly become vehicles for changing the cadence of relating to customers, as they come to appreciate Xiaomi’s weekly updating of its OS; this type of sustained behavior can be highly disruptive! Haier’s organizational reinventions allowed it to accelerate the time to market for its Tianzun advanced household heater/air conditioner/air purifier; again, a potentially disruptive advantage in what is otherwise a slow-moving industry. All of these are real innovations, despite not being technical, and all of them speak to disrupting business as usual, rather than a mere lower cost model. In fact, it is possible to interpret the departure of BMW’s core electric-vehicle design team, along with that of two Tesla executives, to Future Mobility Company, as talent looking for a chance ignite a critical disruption in the EV industry. Such is the attraction of the sort of business model disruption we are sensing in China today.
What is so ironic about the current situation regarding China’s innovation trajectory is that we in the West have for so long prided ourselves on our business acumen and customer centricity, while stereotyping Chinese competition as being simply “low cost.” As a result, our technology focus when we speak about innovation consigns China to the less intimidating role of displacer rather than a disruptor. But, if we recognize innovation as being more about things such as customer experience and less about technology, then China’s challenge becomes considerably more disruptive than we have previously given it credit for, making China a much more formidable competitor in the future.
At a recent conference on “China’s Role in the Global Innovation System,” at Duke Kunshan University, we saw some early glances at China’s disruptive possibility, punctuated by BGI’s [formerly Bejing Genomics Institute] President Mr Wang Jian, who claimed that the genomic research powerhouse is truly a “rule-breaker,”. Similarly, sophisticated M&A and incubator activities by established players from both the public and private sectors all attest to a quickening of the pace of China’s innovation.
However, disruption may not yet be the norm, and innovation may not be the break-out source of economic growth that many envision for China in the immediate future. The major barrier to be overcome is more likely entrepreneurial rather than technical. Chinese entrepreneurs, whom we spoke with, presented a picture of their innovation scene that appeared to be anything but disruptive. Was entrepreneurial innovation happening in China? Yes! Without a doubt, there was tremendous innovative activity taking place! But, Chinese entrepreneurs, we were told, were too short-term oriented to create truly disruptive change; and the country’s cumbersome state-owned enterprises were too slow. Some even stated that China’s insistence on domestic standards was resulting in less ambitious innovation; the education system was not supporting appropriate talent development, and there was a general lack of trust throughout the innovation ecosphere. All in all, the impression was far less disruptive than the popular press, Western or Chinese, has been portraying. China was still accelerating through innovation most often along an existing S-curve in nearly every case, not creating new ones.
What we also heard were sentiments such as “China’s core innovation strength remains dependent upon manufacturing-based activities, or where the quest for short-term profits prevailed there was no meaningful innovation.” It was admitted that “made for China,” rather than “made for the world,” was often easier, cheaper & more profitable than pursuing truly disruptive changes. We were told that returning young Chinese scientists also avoided new challenges, preferring, instead, to “continue their advisor’s work.”
In fact, despite the really disruptive accomplishments of BGI, the overarching message from most experiences were best captured by entrepreneurial drone-maker Ehang’s Derick Xiong, who sheepishly admitted that: “I worry that most Chinese firms are not doing real R&D. They are only doing application. It is possible that in 10-15 years, China could once again be well behind.”
There is no surprise here. In almost every industry, China’s innovation has been along existing S-curves rather than creating new ones; displacement much more than disruption, as long as the S-curves are seen as technology trajectories, as is traditionally the case. Nonetheless, there are enough suggestions of business model disruption appearing on the China scene that it is highly conceivable that we soon might be entering a period of two-speed change: continued displacement by ever more competitive Chinese firms, and occasional disruptive business model innovation appearing in less familiar sectors of the Chinese economy, powered by emerging entrepreneurs. These emerging formulas for disruptive success are not easily identifiable, though it is evident they will more likely be the product of significant firm-level behavioral discontinuities than evolving out of the prevailing status quo in the bulk of China’s industries.
[This is a longer version of the blog that appeared in HBR]
About the authors:
Bill Fischer is Professor of Innovation Management at IMD, Lausanne, Switzerland. He is the former Executive President and Dean of the China-Europe International Business School (CEIBS) in Shanghai, and a co-author of Reinventing Giants, a study of business model and organizational culture reinvention at Haier.
Denis Simon is Executive Vice Chancellor of Duke Kunshan University. He is the co-author (with Cong CAO）of China’s Emerging Technological Edge, which looks at the supply, demand and utilization of high end talent in China
An interesting read, but I have my doubts about your starting points. I think there has been very deep and ongoing disruption at foundational levels.
China’s (and therefore Asia’s) disruption over the last few decades has stemmed from an inability of established economies to enter and dominate the market place, bringing their own culture and rules to the business game and changing the foundations of successful business in various local regions to suit themselves. This was standard operating procedure and worked for some time in smaller Asian regions.
China is strong enough globally and economically to resist this, which is highly disruptive as traditional business models have not been adaptive or dynamic.The impact may have mainly been seen in displacement, but the whole foundation of economic and business success has been disrupted by the new cultural approaches and consequent different rules that China and Asia are now bringing into the world. Established economy business has never been able to grasp or handle the fundamentally different culture and ground rules that apply, and have always analysed the major impact in their own terms, such as “low cost” or “cheap labour” – and they have limited answers because they can only work within their own established rules – the only way to beat cheap is to be cheaper, an terrible approach..
The Global Peter Drucker Forum has been examining the urgent need to change traditional business models, bring adaptive and dynamic models to the fore. To a large extent, this has been driven by the success of the Asian approach to business which has changed the ground rules, with a focus on values, trust and relationships.
So I have no doubt that China has been enormously disruptive, and it may be your frameworks that have been defining the outcomes as displacement.