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High Tech At Low Cost: Unlocking the Chinese Innovation Power

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In the recent years China moves gradually from the factory of the world - famous for its very low-cost manufacturing ability, into making more and more high-tech available for every consumer at a very …

In the recent years China moves gradually from the factory of the world - famous for its very low-cost manufacturing ability, into making more and more high-tech available for every consumer at a very low cost. Cost-Innovation is the power behind this new trend

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  • 1. High-Tech at a Low-Cost Unlocking the Chinese Innovation Power Prof. Dr. Hora Tjitra & Daisy ZHENG, Tjitra Management Consulting www.SinauOnline.com
  • 2. China goes High-Tech? Innovation in China vers. 1.1 /2010-07
  • 3. From the low-cost manufacturer to the high-tech at a low cost Innovation in China vers. 1.0 /2009-11
  • 4. Chinese Innovation Policy • At the Danfos 2009 summit' s opening ceremony, China' s Premier Wen Jiabao hailed the scientific and technological innovation, calling it "an improvement pillar." "We will make China a country of innovation. We will seek breakthroughs in key technologies that are vital to industrial transformation and upgrading, ..." • For government officials like Wan Gang, China' s Minister of Science and Technology, how to turn the technological innovation into real economic growth is their concerns. "Government should be a driving force in the process, especially when the new technology first appears in the market,... " • One of the targets set in the National Guidelines for the Medium- and Long-term Plan for Science and Technology Development (2006-20) is to raise the ratio of R&D to GDP to 2% by 2010 and to 2.5% or more by 2020. This is an extremely ambitious target, as it implies the need for R&D expenditure to increase by at least 10-15% annually. Innovation in China vers. 1.0 /2009-11
  • 5. The Rise of Chinese Scientific (and Engineering) Publications • A total of 78,200 Chinese papers were included in the international Engineering Index (EI) — an indicator of papers in engineering fields — rising by 16.2 per cent from 2006 at the first rank. Chinese EI papers accounted for 19.6 per cent of worldwide output in the field. • Meanwhile, in the Science Citation Index (SCI) — the indicator for science publications — Chinese papers rose from a ranking of fifth to third in the world, after the United States and the United Kingdom, and surpassing Germany and Japan. China had 94,800 papers in the SCI, accounting for 7.5 per cent of the world's total. • The number of citations for Chinese papers is also increasing, although less than the growth in the number of publications. Between 1998 and 2008, the 570,000 Chinese papers indexed by SCI were cited 2.65 million times, putting China tenth globally — an increase from thirteenth last year. Innovation in China vers. 1.0 /2009-11 5
  • 6. What is Innovation and how to measure it? • Following Schumpeter (1934), contributors to the scholarly literature on innovation typically distinguish between invention, an idea made manifest, and innovation, ideas applied successfully in practice. • In many fields, something new must be substantially different to be innovative, not an insignificant change, e.g., in the arts, economics, business and government policy. In economics the change must increase value; customer value, or producer value. An innovation is a new way of doing something. It may refer to incremental and emergent or radical and revolutionary changes in thinking, products, processes, or organizations. Innovation in China vers. 1.0 /2009-11 6
  • 7. Key indicators in the Chinese Science &Technology (OECD, 2009) DSTI/DOC(2009)1 Figure 1. Key indicators in the Chinese S&T indicator system LINKAGE & INTERACTION Financial & capital inputs S&T outputs (Section 3) (Section 2) Input-output linkage ! High-tech products ! R&D funding & expenditure (Section 3) ! High-tech exports ! Technology adoption ! Venture capital ! Technology market ! New products ! Science parks & incubators ! New production processes I Human capital inputs O ! Product Innovation ! Publications & citations N (Section 2) ! Process Innovation U ! Patents P T U ! R&D personnel P Key performers and T ! Human Resources for Science Other socio- economic outputs U their interactions S and Technology (HRST) (Section 1) (Discussion in the summary) T ! Students and graduates S ! R&D funding ! Job creation ! Co-operation in R&D projects ! Productivity improvement ! Joint participation in national ! Spill-over within & between sectors and local S&T programmes ! Outsourcing ! Co-patenting & co-publications Policy & market environment General purpose technologies Infrastructure (Section 4) ! S&T policy ! ICT ! ICT development ! Regulatory/legal framework ! Biotechnology ! Educational system ! Transformation of the NIS ! Nanotechnology ! Financial system ! Research system CRITICAL INFRASTRUCTURE AND ENVIRONMENT Innovation in China vers. 1.0 /2009-11
  • 8. G20 - Global Innovation Index - Innovation Inputs: Included government and fiscal policy, education policy and the innovation environment. - Innovation Outputs: Included patents, technology transfer and other R&D result; business performance such as labor productivity and total shareholder returns; the impact of innovation on business migration and economic growth. March 2009, produced jointly by BCG, NAM & MI Innovation in China vers. 1.0 /2009-11 8
  • 9. a small expected decline in US performance, the region will make little progress in closing the innovation gap with Japan and the US over the next five years. The rise and rise of China China is the biggest gainer among all economies, developed and emerging. Its innovation The Rise and Rise of China - Unlocking Innovation in China performance will improve by 11% and it will rise from 54th to 46th place between 2004-08 and 2009- 13. India will move up four places, whereas the rankings for the two other BRIC countries, Brazil and Russia, remain unchanged. China leaps forward, Russia falls back 2009-13 Rank of innovation index 2004-08 2002-06 China 46 54 59 India 54 56 58 Brazil 49 49 48 Russia 39 39 37 Source: Economist Intelligence Unit. 8 • China is the biggest gainer among all economies, developed and emerging. • Its innovation performance will improve by 11% and it will rise from 54th to 46th place between 2004-08 and 2009- 13. • India will move up four places, whereas the rankings for the two other BRIC countries, Brazil and Russia, remain unchanged. Innovation in China vers. 1.0 /2009-11 9
  • 10. The Chinese Cost Innovation in Global Competition High Technology at LOW COST Product variety and customization at LOW COST Specialty product at LOW COST and High Volume Ming Zeng & Peter Williamson, 2007 Innovation in China vers. 1.0 /2009-11 10
  • 11. Just a COPYCATS? - 5Cs of Chinese Innovation 1C : Copy The line between copy and “inspiration” “benchmark” “best practice” “proven , , , model” is thin, and is often in the eye of the beholder. 2C : Competition Would a company innovate as much without competition? Think about government-run monopolies and you might get a hint. China has a handful of local copycats, those unable to innovate on top of what they copy do not stay long after they burn the initial investment money. 3C : Combination People looking at “Chinese iPhone” for the first time are generally underwhelmed by its looks and functionality. 4C : Constraints Compare “write a romantic message” and “write a romantic message in 140 characters” Do you feel more creative with the latter? Constraints support . creativity. 5C : China So far, none of the above criteria was specific to China. Some are shared by all countries and some mostly by developing economies. Where could be the “China factor”? Apple iPhone, HiPhone, HiPod, SciPhone, TiPhone, GiPhone, iOrgane, Meizu M8, iPhome As the world’s factory, China understands clearly that the higher value in the chain is in consumer-facing innovative products. Source: Innovation in China vers. 1.0 /2009-11 11
  • 12. Cost Innovation Through Process Flexibility Rechargeable batteries Situation at the very beginning (in 1995) • The estimated cost of establishing a NiCad production line using industry-standard processes was $1 million. • The international market leader was planning to replace NiCad batteries with Li-Ion technology, which costs much more than NiCad. ? But BYD had only $300,000 in start-up capital. How to solve the problem of capital shortage? Broke the automated production processes down and replaced expensive machines with manual procedures that could be completed by ordinary workers. Now, ! Amazing business result! • BYD could produce a NiCad battery for a total cost of $1, compared with costs of $5 to $6 incurred by rivals in Japan. • BYD could introduce new products simply by adjusting key equipment and retraining workers. BYD ranks 2nd in global market share and serves for big customers such as: Innovation in China vers. 1.1 /2010-07
  • 13. Recombinative Innovation Creating new, improved models by recombining existing ideas and technologies in novel ways, rather than by developing additional products internally from scratch. Asian ones generally made better use of electronic sensors European ones used less water American ones were usually faster Haier decided to combine the best of all three: The result was a washing machine that used only half the water of conventional machines, achieved close to 50% improvement in cleaning power at twice the speed, and also reduced the wear and tear on garments by 60%. Haier Washing Machine ranks 1st in global market share in 2009. Innovation in China vers. 1.1 /2010-07
  • 14. Betting on Low-Cost, Disruptive Technologies DDR system is to transform an X-Ray scan into a digital signal capable, which could be processed by a computer. There are two types of DDR system: Line scan Market leader Flat-panel imaging • Works well for standard X-Ray • Can be used for real-time procedures such as chest scans applications and medical examinations Decided to discard the line scan technology, and • Cannot be used for real-time • Higher cost application, such as a beating concentrate on developing more advanced flat- heart imaging panel machines for high-end users • Mainly for high-end users • The machine cost around $150,000 to $200,000 to build. • Planned to sell a single machine at the price between $300,000 and $400,000 The China Aerospace Science and Technology Corporation (CASC) acquired line-scanning technology from Russia in 1998 when Russia was having economic difficulties. A group of CASC engineers used this technology, initiatively targeted for other applications, to develop a DDR X-Ray machine. A disruptive innovation was born: a product better fit for mass-market purposes, at a fraction of the cost! • More importantly, the machine cost around $20,000 to build, which was especially attractive to many second- and third-tier hospital with limited budgets. • Meanwhile, GE and Philips had to cut between $100,000 and $150,000 off the price of their machine. • The Chinese took over 50% market share in the DDR segment. Innovation in China vers. 1.1 /2010-07
  • 15. How did they get “here” so fast? Domestic factors: Benefits of Globalization: • Access to low cost talent at all • Outsourcing open the gates skill level • Modular product and services • Access to state assets and IP • Concentration and at a discount Internationalization of Retailing • Exceptional management • Globalization of the markets for autonomy talent and services • Strong incentives to success Innovation in China vers. 1.0 /2009-11 15
  • 16. DSTI/DOC(2009)1 Chinese R&D Investment comparing with others - OECD Figure 6. Higher education R&D expenditure by field of science (%) ; <,4=>,?/8@35.@58 A.B3.55>3.B C563@,?/8@35.@58 DB>3@=?4=>,?/8@35.@58 7E@3,?/8@35.@58/,.6/:=F,.34358 "!! *! )! (! '! &! %! $! #! "! R&D Spending in DSTI/DOC(2009)1 the business ! in 2007 +,-,./0#!!&1 2.3456/74,458/0#!!"1 9:3.,/0#!!!1 Figure 9. Business R&D expenditure by selected industry (%) Source: MSTI database, March 2008. < =4>?7,+@4 8A4@3>?-2@7 BCC2@4.D+@;2-4>E.+-5.@?D,F34>7 G;+>D+@4F32@+A7 H-73>FD4-37 64>I2@47 Important andSpending in science and technology diffusion R&D active role in the higher )! education in 2007 The higher education sector plays an important(! in establishing academia-industry linkages, taking role advantage of its research capacity in key subjects with a strong applied orientation, its S&T human '! resources, as well as its R&D infrastructure and &!facilities. There are various channels through which technology diffusion and commercialisation of R&D results take place: %! ! $! Direct participation in the technology market: the share of the higher education sector in total contract value in the technology market was almost 8% in 2005. #! "! ! Co-operation with the business sector: the business sector is outsourcing an increasing share of ! R&D activities to the higher education sector. In 2006, business-funded R&D expenditure was RMB 10.1 billon, accounting for 36.6% of total R&D expenditure in the1-2345.63+347./#!!$0 sector. 819"&./#!!$0 *+,+-./#!!$0 higher education :;2-+./#!!!0 This share was 4.2 percentage points higher than in 2000. At the same time, higher education institutions and industrial enterprisesSource: jointly participated in a broad range of national S&T have MSTI 2007/2 (OECD, 2007b). Innovation in China vers. 1.0 /2009-11 supported by the government, such as the 863 programme, the Torch programme, programmes 16
  • 17. R&D intensity, measured as R&D expenditure as a percentage of gross domestic product (GDP) has also increased since 1995, as shown in Figure 22. In an international comparison with OECD countries, the R&D intensity in China is still low. This gap is even larger if comparing the high-tech industries only, which is discussed in more detail in Section 3. Taking the rapid growth of the Chinese economy into account, increasing R&D intensity is a serious challenge. In the National Guidelines for S&T Development, the target was set to raise the R&D to GDP ratio from the level of 1.23% in the year 2004 to 2% by 2010 and to 2.5% or more by 2020. This is an extremely ambitious target, particularly taking the R&D Investment and its type of activities growth rate of GDP into account. Implicitly, this means R&D expenditure needs to increase at least 10-15% annually, if not more, in order to hit the target. Consequently, this will need a large number of DSTI/DOC(2009)1 R&D personnel to carry out the corresponding large-scale increase in R&D activities. Figure 22. R&D expenditure as a percentage of GDP R&D expenditure can be broken down by type of activity into basic research, applied research and experimental development. In the comparison between 1995 and 2006, the increase in R&D expenditure is ! ,-.-/ 0/1234562-237 driven by an increase in experimental development (see Table 12). It reflects, to some extent, the level of 809%) :;1/- &"# technological sophistication of R&D activities as well as the structural shift, in which the business sector is an increasingly important performer of R&D in China. The share of basic research and applied research &"! combined is much lower in China, standing at 22% in 2006, compared to the OECD countries with an average level of 50%. It may imply another challenge ahead for China, namely to obtain a better balance %"# between market-driven/market oriented S&T and long-term S&T capacity building. %"! Table 12. R&D expenditure by type of activity, as a percentage of total GERD $"# Basic research Applied research Experimental development $"! 1995 5.2 26.4 68.4 2006 5.2 16.8 78.0 !"# Source: MSTI database, December 2007. !"! $''# $''( $'') $''* $''' %!!! %!!$ %!!% Figure 25 contrasts the picture for China with that for Japan and the United States, where a much %!!& %!!+ %!!# %!!( larger share of R&D is devoted to basic research. Note: The R&D ratios for China were calculated using the adjusted GDP based on the National Economic Census in 2004. Source: MSTI 2007/2 (OECD, 2007b). Figure 25. R&D expenditure by type of activity, 2005 (%) 6)3-718/3/)875 9**:-/018/3/)875 Figure 23 shows the breakdown by sector of performance of R&D expenditure in Japan, the United ;<*/8-=/+.):10/>/:?*=/+. @?.1/:3/A5/8/17:)33-B-/0 States, the EU and China. It shows that the business sector in China accounts for a similar percentage of '!!" total R&D expenditure as in the OECD countries, unlike what is found in most developing countries. &!" %!" $!" #!" !" ()*)+ ,+-./012.)./3 45-+) Note: For the United States and China: as a % of current cost; for Japan: as a % of total R&D expenditure. Innovation in China vers. 1.0 /2009-11 Source: MSTI database, March 2008. 17
  • 18. DSTI/DOC(2009)1 50%.6 Intypes years, as a expenditures living standards and the development of various forms of The recent of R&D result of improved incentive policies, the Chinese share of labour cost has increased from 17.1% in 1987 to 23% in 2006, substantially lower than in OECD countries (see Figure 26). Figure 26. R&D expenditure by type of cost, 2005/2006 >375) 2?>@.A"B '! &! %! $! #! "! ! ()*+,-./+01 2134-./,--451./+010. ()56.)56.*,7867590 :501-,;4510.)56. 4<,7=;451 Note: (1) Average for 21 OECD countries for the year 2005 or the nearest year available. Data for China are for 2006. Source: MSTI database, December 2007. On the other hand, operational expenses account for a large share of total R&D expenditure, and have experienced a relatively large increase in recent years. Taking into account the large supply of S&T and Innovation in China vers. 1.0 /2009-11 18
  • 19. Will the Future favor Cost Innovation? Changing Size of the China Market Maturing of the Product Life Cycles Increasing Modularization Ming Zeng & Peter Williamson, 2007 Innovation in China vers. 1.0 /2009-11 19
  • 20. Thanks You A n y c o m m e n ts & q u e sti o n s are welcome Contact me at hora_t@sinauonline.com www.SinauOnline.com paper presented at the seminar national in Feb 2010 at the universitas widyatama, Bandung - Indonesia @ Tjitra, 2010 20