Re-inventing Innovation: China’s ‘future’ changes over time

Formerly a diplomat, Gabor Holch moved to China in 2002 and switched to management consulting. He is the founder and director of Shanghai-based Campanile Management Consulting and specialises in leadership and nurturing personal talent. In addition to Campanile, he is a member of consulting firms in the EU and the US.

China continues to be a puzzle. Few foreigners understand an investment environment where a state-controlled flow of resources and ideas (which is bad, right?) leads to economic growth, massive modernisation and, most recently, undeniable splashes of innovation (which is good, it seems).

But whether they get it or not, investors cannot ignore China. As Shaun Rein, author of The War for China’s Wallet points out, a China strategy isn’t optional any more. And since investment is essentially betting on future scenarios, what could be more exciting than trying to predict how this new, confident kid on the global block will approach innovation, the primary value creator of our time?

In January 2011, I spoke at the China Renewable Energy Association’s annual conference in Beijing. My topic wasn’t energy (I have no expertise in that field) but the prospect of Chinese and European companies becoming a shared community during a landslide market shift. A heavily export-driven China at the time needed the European market as much as cheap Chinese production was essential to meet the EU’s energy modernisation targets. Although Asia lagged behind in several essential requirements, the two sides were on a Life of Pi-style ‘sink-or-swim’ journey together.

China is no longer as cheap as before, nor is it as dependent on European markets as it was then. But investing across its borders can still feel like a blind leap into the unknown. Reports about generic medicine and adorably awkward copycat cars are in sharp contrast to China’s awesome next-generation drones and ubiquitous mobile payment systems. The market entry barriers perpetuated by China’s single-party system hasn’t prevented China from seemingly breaking a record a week, whether it be patents registrations, R&D spending, the number of Chinese firms on the Fortune 500 list or the quantities of industrial robots.

Since I arrived in 2002, China’s Communist Party has explicitly prioritised innovation, but its expression in consecutive five-year plans has undergone two major metamorphoses. Firstly, the ambition was simply to narrow the gap with the West. Incoming President Hu Jintao introduced the Scientific Outlook on Development (unfortunately acronymed SOD) programme, under which thousands of government officials were sent to Canada, France, Germany, Japan, Singapore and the USA to learn and forge policies.

State-owned enterprises (SOEs), which dominated all the leading industrial sectors including energy, finance, telecom and transportation, were groomed for global dominance through top-down initiatives that included technology transfer and patents registration targets. At the same time, non-state success stories – such as Lenovo’s 2005 acquisition of IBM’s PC business and ThinkPad brand – were praised by analysts in China and abroad.

By the time of my Beijing speech, this model had begun to drag. China had failed to improve its copycat image, while resentment over the slow progress it was making in delivering reforms under commitments made to the World Trade Organisation (WTO) created resistance to foreign acquisitions – the proposed takeover of US server technology company 3Leaf by China’s largest telecommunications equipment maker, Huawei, for example.

Sure, GDP and patent registration figures were impressive. But, as leading Chinese analysts warned, beating indicators is what Chinese people learn at school. Some even claimed that the scientific method was alien to Chinese culture. Meanwhile, business tycoons such as Jack Ma forced the government rhetoric to change from learning Western methods to disrupting global business models. Ma’s Alibaba was, after all, an underdog rather than a party-commissioned champion. Yet, by responding to local market needs, it knocked out eBay faster than you could say “Open, sesame”. Beanbags-to-billions start-ups like drone-maker DJI added fuel to the fire that consumed investors.

This narrative could have prevailed, had it not unnerved China‘s Communist Party of (CPC), the founding and ruling political party of the People’s Republic. As non-state business gained clout, central control over funds, information and people slipped. Sensing opportunities, many Party cadre families turned entrepreneurial, adding to the already endemic corruption.

Since Xi Jinping assumed power in 2013, he has systematically restored the status of SOEs as incubators of innovation, while demanding the China-friendly re-definition of economic terms such as ‘market economy’. He has paved the way for selected state and private firms through mammoth initiatives like the Belt and Road (BAR) programme. This new vision involves curbing any outward investment that is deemed inappropriate, including acquisitions by private firms like Dalian Wanda and Fosun. However, state-sanctioned priorities have provided innovators with easy money. The proliferation of R&D centres in Silicon Valley, London, Berlin and Singapore includes private firms like Huawei and Haier, but also state behemoths such as China Telecom.

Some of the resulting advantages in fields such as robotics and artificial intelligence have fuelled globally competitive solutions. Others (like facial recognition technology) enhance Party control. Nobody knows where this ‘Einstein meets Frankenstein’ scenario leads, says China watcher James McGregor, but investors need to formulate strategies either way.

Fortunately, capitalism is still the nimblest economic model and, whichever way China has turned, global businesses have repeatedly found opportunities. In its ‘learner phase’, the IBM merger itself provided the evidence, as did similar deals with carmaker Volvo and others. The ‘disruptive phase’ has since created cooperation between Chinese and global tech companies in artificial intelligence and self-driving vehicles. DJI is the world’s leader in the civilian drone and aerial imaging technology industry, accounting for 85% of the global consumer drone market. It recently succeeded where Huawei had failed and has started supplying the US defence industry.

The 19th Party conference last October implied more control and supervision, constraining most innovation in state-sanctioned super-programmes. But, as anyone from China will point out, its population has practiced dodging regulations for millennia. From beggars accepting alms through QR codes to cyber technology, China’s entrepreneurial spirit is bursting at the seams. In an article soon to follow, we will point out four milestones that help foreign investors navigate their way through this exciting terrain.

If you are interested in increasing your understanding of the China market and the potential opportunities for your brand, online or offline, please contact ark Ray at Sovereign’s Shanghai office.

Contact Mark Ray for more details


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