On Can China Innovate?; How an Artery Heals!

From: aditya rana <aditya>
Date: Sat, Nov 14, 2015 at 1:59 PM

Hi!,

As China moves through a challenging transition from an investment and labour-force expansion driven to a consumption based economy, the key challenge it faces to keep growing at a relatively robust annual pace of around 6% is its ability to innovate. The McKinsey Global Institute has recently come out with research which analyses this key issue for China going forward. To summarize:

(http://www.mckinsey.com/Insights/Innovation/Gauging_the_strength_of_Chinese_innovation?cid=other-eml-alt-mgi-mck-oth-1510)

-For China to achieve a 5.5-6.5% GDP growth rate over the next decade it needs to generate two to three percentage points from innovation which equates to about $1.0 to $ 2.2trillion added to GDP per annum by 2025. China has the potential to evolve from an “innovation-sponge” to a global leader in innovation.

-Until now, China’s record has been mixed in terms of commercializing new ideas to raise market share and profits, and using them to compete on a global basis. In industries like consumer electronics and construction equipment it become a innovation leader, while in other areas like creating new drugs or designing automobile engines it has yet to become globally competitive. This is despite China spending $200 BN (second only to the US) in research, annually producing close to 30,000 PhDs in science and engineering and being a global leader in patents (820,000 in 2013).

-There are a large number of opportunities for innovation in China – ranging from a continuing transformation of the manufacturing sector through digitization, to rising connectivity and Internet enablement in the service sector.

-By identifying four innovation archetypes: customer focused, efficiency driven, engineering based, and science based, then calculating global revenues of specific industries and China’s share, comparisons can be made against a benchmark based China’s share of world GDP (12% in 2013).

-As the chart below illustrates, Chinese companies that rely on customer-focused and efficiency driven innovation (i.e. household appliances, Internet software and services, solar panels, and construction machinery) have performed well. However, in science and engineering based industries, China’s record has been mixed – for example, it has done well in high speed trains but poorly in auto manufacturing.

1)Customer-focused innovation:

-The sheer size of the Chinese consumer market helps companies to commercialize new ideas quickly on a large scale. The first wave was dominated by manufacturers of household appliances such as TV sets and refrigerators. The second wave is dominated by smartphone manufacturers like Xiaomi, who are responding to the growing consumer demand with products comparable to global brands but priced for the Chinese market. Like other customer-focused innovators in China, Xiaomi uses the massive consumer market as a collaborator and quickly adapts its product range based on online feedback. Internet service providers like Alibaba, Baidu, and Tencent are now global leaders in online services based on their success in the large domestic market.

-Customer-focused innovation has the potential to reshape China’s service sector, where productivity lags compared to developed markets. The government is providing support through its Internet Plus initiative ( 2015) and areas like improving access to services (in rural areas), quality of offerings (financial and educational products), and optimizing operations offer numerous opportunities.

2) Efficiency-driven innovation:

-China’s large ecosystem has provided a favourable environment for efficiency-driven innovation. China has the world’s largest and most highly concentrated supplier base, a large manufacturing workforce, and a modern logistics infrastructure, providing it with a huge advantage in knowledge-based industries such as electrical equipment, construction equipment and solar panels.

-While Chinese companies continue to improve their efficiency through agile manufacturing, modular design and flexible automation, with rising wages it has become less competitive in labour-intensive work. In addition, the world is moving towards a new kind of manufacturing called Industry 4.0, which is based on a digital linkage between component manufacturing, processes and logistics. Going forward, the success of Chinese companies will depend on how well they capitalize on digitally linked networks.

-Some signs of success are emerging with companies in Guangdong province setting-up joint platforms to share benefits of R&D and operations, and use of robots to make China’s huge pool of semiskilled workers more efficient. In Shenzen, a vibrant ecosystem has developed comprising component suppliers, design services, business incubators and outsourced assembly production which allows start-ups to prototype products and achieve scale quickly.

3)Engineering-based innovation:

-China has had mixed success in this area with industries supported by the government like high-speed rail (where China has a 41% share of global railroad equipment revenues and has captured 86% of the industry’s growth since 2008), wind power and telecommunications equipment being success stories. However, in the automotive area Chinese automakers have relied on foreign partners to bring products to the market quickly to meet burgeoning demand, and the high profits have lessened the need to innovate.

-A combination of deregulation, increase in engineering talent and government support should drive the next phase of growth in this area. For example, state support for sectors like nuclear power is critical, and the government has an ambitious plan to increase capacity to meet its goal of meeting 20 percent of its energy requirements from non-fossil sources by 2030. In other areas like medical equipment, the private sector will lead innovation with companies taking market share from foreign suppliers, aided by government subsidies to hospitals to make purchases from Chinese-made suppliers.

4)Science-based innovation:

-Despite a massive drive by the government to raise R&D spending, train more scientists and file more patents, China has yet to emerge as a leader in this area. This is due to several reasons, like the long lead time required for a pay-off and effective protection of intellectual property rights. In addition, huge investments are required to move projects from the lab to the production line, and despite the large number of scientists and technicians, companies struggle to find suitable talent.

-Progress is being made in this area, with the government launching reforms to reduce the time to get new drugs to patients by two or more years. And efforts like the Thousand Talents program to bring overseas talent back to launch companies and work in science-related fields are likely to have a positive impact over time.

-Private companies are also leveraging the country’s enormous market size and large pool of low-cost researchers to industrialize and speed up experimentation and data collection. Biotech companies like BeiGene and BGI are leaders in this approach.

Conclusion:

-Innovation will drive the Chinese economy going forward, providing jobs, products and services for consumers. It will also have a big impact on multinationals (competing at home and abroad with Chinese companies) , some of which are using China as an R&D centre for global products. A more innovative China can be a new source of growth for the global economy.

Fascinating research which points forward to a world becoming increasingly influenced by Chinese innovation and which is likely to be highly disruptive for multinationals which are not able to produce innovative products tailored for consumers in emerging markets (in particular China and India) at affordable prices. Chinese (and Indian) companies will continue to have a huge advantage by honing their skills and expertise in their large domestic markets with a low cost base. It will be interesting to see how this all plays out in the coming decade. Stay tuned!

How an Artery Heals:

Came across an interesting editorial from the American Heart Association which shows that the single

most factor in reducing heart disease risk is Low Density Cholesterol (“LDL”) – plain and simple. LDL causes

heart disease, while smoking and diabetes increase the risk but do not cause heart disease. Also,

lowering LDL seems to reverse coronary damage. So whether you reduce LDL through statins, non-statins

drugs, or better still , through diet and lifestyle, it is critical to your heart health.

http://circres.ahajournals.org/content/117/11/909.extract?etoc

Here’s to following a primarily plant based diet to reduce LDL and the risk of heart disease.

Regards,

Aditya

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