The Chinese Way of Innovation

The Chinese Way of Innovation:
A learning journey from low-cost imitation to high-tech innovation
by Prof.Dr.Hora Tjitra & Daisy Zheng
Invited Speech
Denpasar, Nov 18 2010

Unlocking the Chinese Innovation Power_v1.0 / 2010-08 2
14 years in Germany
7 years in China
Born and grew up
in Indonesia
Prof. Dr. Hora Tjitra - Cross-cultural and Business Psychology
Dipl.-Psych.,Technical University of Braunschweig
Organizational Psychology and Human Resource Management
Dr.Phil.,University of Regensburg
Intercultural Psychology and Strategic Management
Executive Education,INSEAD
HR Management in Asia

Unlocking the Chinese Innovation Power_v1.0 / 2010-08 3
The People of Republic China - 中华人民共和国
The world largest car’s market
The world largest export country
The world largest Forex reserve
(2.4 Trillion USD,30% of the world)
The fastest growing country in the world
The second largest economy in the world
Four of the top 10 Global Bank
(the first top 3,market value,FAZ 2010)

Unlocking the Chinese Innovation Power_v1.0 / 2010-08
Does (Product made in) China
Innovative?
4

“Apple is the most innovative corporate in the world?”
5
Source: Bloomberg Business Week 2010

Four Great Inventions of Ancient China
6
Compass
• The earliest version of the compass was invented
in China in the year 1044.
• The first concept of a compass was glimpsed in the
use of a needle that was kept in a bowl of water.
• Basically, a compass is used to find the magnetic North
Pole of the Earth. Mariners also used the compass to
calculate the latitude and the longitude as well.
• Today, the basic Chinese invention is modified and one can see
many more advanced versions being used by professions
across the globe.
Gunpowder
• The discovery of gunpowder has been credited to
certain Chinese alchemists around 9th century.
• The first recorded reference of the gunpowder was
found in a passage of Taosism text, which was dated to
the mid 800s.
• Gunpowder was the result of many scientific experiments. There were
various Chinese formulas that were used and these contained different
proportions of nitrate.
• The gunpowder was used not only for fireworks but instances were
found in the Chinese military treatise as well.
Printing
• The method of printing and the invention of Woodblock
printing was seen before the first dated book in 868.
Woodblock printing was first seen in China in 220.
Thereon, it spread to other areas of the world.
• The first example of the movable type method was around
1040 AD.
• Bi Sheng was credited for having invented the ceramic
movable type of method for printing, which proved to be
quite cumbersome at times but was useful when the
number of books to be printed was on the higher side.
Papermaking
• Paper is also one of the Chinese inventions, and the process of
papermaking was also first developed in China.
• In the earlier years, during the Shang and the Zhou dynasty, any
form of documentation was done with the help of bamboo.
• Cai Lun is regarded to have invented the paper and
also the entire process of papermaking, about 105 AD.
Cai Lun is also considered to be the one who played a
major role in the improvisation of the process.

Five possible scenarios of China’s Future
7
By Professor William A.Fischer and Rebecca Chung,(October,2006)
http://imd.ch
Currently “the world’s factory”,
we assume that for the most part, China has acquired sufficient
ability to produce goods and services,
which will improve over time, legitimately becoming “world-class
manufacturing.”

From the Low-Cost Manufacturer to the High-Tech at a Low Cost
8

The Chinese Cost Innovation in Global Competition
9
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

Index
10
1 Does (product made in) China innovative? 3
2 Innovation at Different Levels in China 9
3 Case Study on Chinese Innovation 18
4 What can we learnt from China’s Case 32

How do we measure innovation?
11

What is Innovation and how to measure it?
12
• 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.

G20 - Global Innovation Index
13
- 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 Input and Performance
14

Chinese Innovation Policy at a Glance
15
Financial Policy
• Current S&T programs (grants, loans,
interest subsidiary, etc.)
• Tax preference policy and FDI
• Venture capital and stock market
Business Innovation &
Infrastructure Support
• Science park and incubators
• China high-tech fair
• Productivity promotion centers
Legislative Actions
• IPR and competition legislations
• S&T legislation
• Education legislation
Human Resources Policy
• Education development policy basic
education for 9 years
• “211 project” for higher education
• Ministry of education’s “Human
Resources Programs”
Reform in the Public S&T Institutions

China Poised to Lead World in Patent Filings
16
• Patents are considered a measure of technology
prowess and innovation. Nations that file the largest
number of patents are generally home to innovative
corporations and Nobel prize winners.
• A new study released in early Oct 2010 by Thomson
Reuters says that by 2011 China will most likely pass the
United States and Japan in new patent applications.
• In 2009, China filed about 279,298 patent applications,
ranking third behind Japan, which led the world with
357,338, and the United States, which had 321,741
filings, according to Thomson Reuters.
• Experts acknowledge that it is difficult to measure the
value of China’s patents (many may be for low-end,
incremental technologies), but they say the quality
appears to be improving and that China is on a path to
becoming a more innovative country.
source: http://economix.blogs.nytimes.com/2010/10/06/china-poised-to-lead-world-in-patent-filings/?

Framework of Company Innovation Potential
17
Local demand
& competition
National power of
research & production
Business management:
performance assessment
National Innovations System
Marketplace
Competitiveness
Technological &
Financial potential
Organizational
processes
Qualification of
employees
Networks
Strategic business
management
Intra-Company Skills
Company Innovation Potential

0
2
4
6
8
10
Strategy
Organizational
Learning
Processes Organization
External
Linkages
Comparison of German and Chinese SMEs
18
German SMEs
Chinese SMEs
Ideal score
from Innovation Potential in Chinese and German SMEs, Prof. Werner Fees & Matthias Lankau, 2006

Case Study on
Chinese Innovation
19

The 50 Most Innovative Companies 2010
20
Source: Bloomberg Business Week 2010
No. 8
No. 28
No. 30
No. 44

• BYD was established in 1995 and started with 20 employees.
• Until the end of 2008, BYD’s net assets is more than 13.3 billion CNY, 9 manufactory
fields in China and branches in US, Europe, Japan, Korea, India, etc., and more
than 13 million employees.
BYD: Shining on the World Stage Nowadays
21
Rank 8th in The World’s Most Innovative Company Top 50
Rank 1st in Global “Technology Top 100”
Mr. Wang Chuanfu, founder and CEO of BYD:
Top 1 on The Richest People in China 2010 (wealth of 35 billion CNY)

BYD: Cost Innovation Through Process Flexibility I
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.
Rechargeable batteries
22

BYD: Cost Innovation Through Process Flexibility II
!
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.
Now,
BYD ranks 2nd in global market share and serves for big customers such as:
23

Haier: One of the Brands Chinese People are Most Proud of
24
Medical & Laboratory
Products
Logistic
Home Appliances & IT Travel
Real Estate
• Top 1 in The World’s Write Goods Brands
• Rank 27th in The World’s Most Innovative Company Top 50
• Most Valuable Brands in China
• Rank 13th in The World’s Most Prestigious Enterprise Top 600
• Until 2009, Haier has patent 9,258 in total, of which 2,532 are inventions
• Until 2008, Haier has established 29 manufacturing base and 8 R&D centers globally,
19 overseas trading companies, and more than 6 million employees worldwide.

Haier: Recombinative Innovation I
Creating new, improved models by recombining existing ideas and technologies in novel ways,
rather than by developing additional products internally from scratch.
European ones:
used less water
American ones:
usually faster
Asian ones:
made better use of electronic sensors
Haier decided to
combine the best of all three
25

Haier: Recombinative Innovation II
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.
26

Copy Cat as
Chinese Innovation Factor?
27

Just a COPYCATS? - 5Cs of Chinese Innovation
28
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”?
As the world’s factory, China understands clearly that the higher value in the chain is in
consumer-facing innovative products.
Apple iPhone, HiPhone, HiPod, SciPhone, TiPhone,
GiPhone, iOrgane, Meizu M8, iPhome
Source:

QQ: “Copycats” of ICQ
29
Until 2010, QQ is the only chat tool which has
more than 100 million registered users.
Except for the chat tool, QQ has a number of other relevant products, such as:

How did Chinese Get “Here” So Fast?
30
• Access to low cost talent at all skill level
• Access to state assets and IP at a discount
• Exceptional management autonomy
• Strong incentives to success
Domestic Factors
• Outsourcing open the gates
• Modular product and services
• Concentration and internationalization of retailing
• Globalization of the markets for talent and services
Benefits of Globalization
Extreme Competition
Chinese Customers

Will the Future Favor Cost Innovation?
31
Changing Size of the China Market
Maturing of the Product Life Cycles
Increasing Modularization
Ming Zeng & Peter Williamson, 2007

Thank You
contact us at hora_t@mac.com
visit us at http://sinau.me
follow us at twitter@htjitra
Invited Speech
Denpasar, Nov 18 2010

The Chinese Way of Innovation

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The Chinese Way of Innovation