Will China 2.0 Out-Innovate Your Company?

After thirty years as a “workshop for the world”, China is steadily and resolutely moving up the value chain. And this transition – from low-cost manufacturing to world-class innovation, design and marketing – will change the rules of competition everywhere on earth, including inside China. So take a good look at your company’s strategic priorities for 2013 and ask yourself if this question is on the list:

“Are we gearing up for China 2.0?”

On a recent trip to Beijing, I was struck by how radically the focus of everyday business conversations has changed. And this has nothing to do with the global recession, which temporarily took some of the wind out of China’s sails. It has much more to do with the realization that China is entering a new and quite different era in its economic development, and that companies (both local and foreign) will have to act quickly and decisively if they are going to carve out a place in it.

Until now, there were certain words that seemed to dominate all business conversations in China. Obviously, one of them was “growth”, which is understandable considering that China’s economy has doubled in size three times over in just the last thirty years! Another dominant word was “cost”, as in low-cost, cheap, cheapest – which is a concept no nation has mastered quite like the Chinese. And still another was “export”, since China’s white-hot growth has been driven primarily by exploding overseas demand.

But now the game – and the conversation – is changing. There’s a new set of words and phrases that I’m hearing more often in business circles in China. Like “world-class”, “high performance”, “global”, “better” and “best”. Company leaders – whether they are from local Chinese firms or foreign multinationals – are talking a lot less these days about “manufacturing in China” (been there, done that) and a lot more about “marketing, design and innovation in China” (you ain’t seen nothing yet!). This shift in rhetoric has incredible implications for the shape of future competition, both globally and in China’s own massive home market.

However, you might argue that China still has a long way to go before the rhetoric becomes reality. And you’d be right. Take innovation, for example. In the Global Innovation Index, China has been slipping down the ranks for the past three years, from number 27 in 2009 to number 34 in 2012, putting it right behind countries like Latvia, Hungary, Malaysia and Qatar. To put this in context, some of China’s regional neighbors are at the very top end of the scale: Singapore is usually ranked in the top three, Hong Kong in the top ten, (ahead of the United States). The typical view is that China excels at producing huge volumes of low-cost products, while other countries in the region, including Japan and South Korea, are better at innovation and high-tech goods.

It definitely won’t stay that way. Consider some data that support this conclusion. For a start, China is now the world’s most prolific filer of international patents. The number of patent applications from Chinese companies has increased ten-fold over the last decade, and the annual growth rate is currently over 30 per cent.

In his brilliantly researched book China Inc., journalist Ted Fishman says, “China has yet to introduce the kind of world-changing technology or consumer products that are the hallmark of advanced economies. But it will.” And he continues, “The genius that has so far poured into creating great factories will soon be evident in great products and great brands that will offer the world unsurpassed quality and refinement.”

That process is well underway. It’s notable that in 1995 there were just three Chinese companies on the Fortune 500 list. By 2000, it was ten. By 2005, the number had jumped to eighteen, and in 2008 – a mere three years later – it had leapt to 35. In 2011 China boasted 61 companies on the list, and last year, 2012, it grew to 73!

Companies all over China are rising to the challenge of becoming high-performance business players, many on a global scale. Huawei, for example, is already giving Cisco a run for its money in the networking business. In 2007 the company reported annual revenues of $16 billion. Today it’s over $35 billion. And 66 percent of those revenues are generated outside China. Another Chinese champion, Haier Group, is already the number one major appliance manufacturer in the world, with global revenues in 2011 of over $23 billion. Sales outside China are rising by about 10% year-on-year, and the company has grabbed a significant share of the U.S. market by focusing on neglected product niches like compact refrigerators and electric wine cellars. Haier has already surpassed rival Whirlpool as the world’s top refrigerator producer in terms of sales.

Gong Li, chairman of Accenture in Greater China, has a catchy way of describing the challenge of moving up the value chain. He calls it “Jumping Over The Dragon Gate”, which refers to an old Chinese legend in which carps had to swim against the current and jump over a tall gate to transform themselves into dragons. As more and more Chinese companies close the performance gap with their global counterparts, Li believes they will be able to “make the jump”. And Anil Gupta, co-author of the excellent book Getting China and India Right, absolutely agrees. He warns that China will produce “fearsome global competitors at a speed that the world has not seen before”. So what exactly is your own organization doing about the rise of China 2.0? And, for that matter, what are you doing about it in your personal career? Isn’t it time you started learning Mandarin?

image credit: news.xinhuanet.com

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Rowan Gibson is widely recognized as one of the world’s leading experts on enterprise innovation. He is co-author of the bestseller Innovation to the Core and a much in-demand public speaker around the globe. On Twitter he is @RowanGibson.