China has made great strides as an innovator, which is not fully recognized globally. Over the next decade, China could not only become the central hub for international companies conducting research and launching new products, but also the source of a low-cost and nimble approach to product development that will affect competition worldwide.

Despite China’s growing middle class, Chinese companies have thrived in industries focused on customers because their goods have been tailored to address the requirements of their country’s growing consumer class. Companies in China used to focus on making products that were “good enough” – not quite meeting Western standards, but cost-effective – but are now striving to make products that are cheaper and more efficient. Moreover, because China has a vast, mainstream consumer market with more than 100 million households, companies are able to commercialize new ideas rapidly and on a large scale.

As a global factory with 150 million factory workers, five times the supply base of Japan, and modern infrastructure, China is the leader in efficiency-based industries. Its widespread manufacturing ecosystem enables process innovations that lower costs, raise quality, and enhance the speed of market entry. As China moves up the value chain, it is making more “knowledge-intensive” products (such as communications equipment) and adopting flexible ways to automate that blend labor with machines to maintain responsiveness while reducing costs.

There is a long horizon for Chinese science-based industries to perfect and commercialize their new discoveries. Therefore, Chinese companies have developed unique approaches to innovative technology. China’s pharmaceutical companies, for example, are using industrial-style approaches to speed up the 15-year process of bringing drugs from the lab to market. China is poised to become a true innovator in the next ten years instead of simply absorbing technology from abroad. Those worried about a prolonged slowdown that hampers global growth will be put to rest if the deal is successful.

By 2025, innovation in China’s service industries could generate 500 billion to 1.4 trillion dollars of value in economic value every year, a far greater amount than in developed economies. Innovative manufacturing in China can add $450-$780 billion in value each year using its vast resources, allowing it to lead the world in a digitized manufacturing era. Increasing productivity in this way would be a great help in addressing challenges like population aging.

With China’s digitalized Economy, Open Innovation is flourishing in China.

A few of the key factors that are driving China’s digital economy development are the robust young market that enables rapid commercialization, the well-capitalized tech giants creating rich digital ecosystems, and a relaxed regulatory environment that promotes innovation.

While U.S. tech infrastructures (software and platform solutions) are difficult to customize, Chinese tech solutions can be easily adapted to meet a diverse range of customer needs. As a result, Chinese platforms are also far more scalable, open, customizable, and flexible than their multinational counterparts. This is when the two sides must work together, as foreign firms will be able to tap into China’s open innovation market. 

Yet, Chinese firms have benefitted from China’s open innovation strategy because they receive favorable treatment from the government. Furthermore, simply by being domestic and home-grown, they gain significant policy benefits. Another factor to consider for foreign companies engaging in OI in China is the quality of their local resources.

Riding the Digital Transformation Wave in China through Open Innovation

Businesses are becoming more connected as a result of digitalization, connecting organizations, machines, and people alike. In order to manage business complexity, the combination of physical and digital interconnectivity is essential. Due to digital technologies, business ecosystems are becoming increasingly important for modern and globally adaptable enterprises. Business ecosystems are dynamic networks of entities (people, businesses, and things) creating and exchanging value. The business ecosystem affords firms unprecedented access to resources and talent around the world. 

This has fueled open innovation as enterprises can implement new products, services, and experiences by improving their business models. A shift in the paradigm of an enterprise model will be necessary for organizations to leverage business ecosystems. By replacing a traditional supply-demand economic perspective with a more ecosystem-centric approach, the organization can see itself as one component in a wider network of entities.

These strategies are therefore essential for firms wishing to take advantage of the innovative Chinese market or to strengthen their position in the future. Business ecosystem interactions, academic (knowledge) collaborations, application and platform innovations through 3rd parties, user interaction, and collaboration with start-ups are the primary OI strategies used by global and Chinese corporates in the Chinese market to reach the top of their league.

Integrating External Resources in Chinese Open Innovation Ecosystems

As an increasing number of firms want to commercialize their innovations and penetrate the Chinese market, they base their entire operations in China. Consequently, China has emerged as the largest operational center within the business ecosystem, from which companies expand their firm innovations to other emerging markets in Asia and elsewhere in China. 

In addition to benefiting geographically, they will also be closer to their target market. The initiative is also helpful in terms of being able to access specific technology clusters and development zones where they can take full advantage of Chinese local talent and suppliers who can help accelerate innovation.

In order to drive innovation, organizations are increasingly exploring their network and continuously expanding their business ecosystems externally. CIOs should develop proactive innovation strategies to take advantage of these opportunities and select the right mix of technology and business tools that will enable them to do so. 

As a result of a business ecosystem, various players can leverage one another’s capabilities to offer new services, products, and customer experiences. The fact that organizations are able to run or participate in power ecosystems gives rise to a new class of structures and interactions. Alibaba, Tencent, Baidu, Amazon, and Google are all excellent examples of this open innovation framework.

Innovating and Researching through Open Collaboration in China

It is impossible for one organization or individual to solve complex problems on their own, whether it is creating an innovative new service or solving a firm-wide problem. In order for this to happen, actors must come together with complementary resources and capabilities and be in close proximity to prestigious knowledge hubs. A business actor who engages with external technology providers in order to solve an industry problem gains exposure to previously closed knowledge sources, allowing them to implement innovative solutions.

Creating an Open Innovation Culture through User Interaction

As connectivity continues to grow, the number and density of connections between people, organizations, and things are increasing rapidly. The ability of every organization to connect to multiple customers, partners, and even machines can be used to drive open innovation in China. Now, bandwidth and storage aren’t limiting factors.

The increase in access, processing, and analysis of vast amounts of data is a result of new insights provided by information and analytics. Analysis reveals new patterns and insights, enabling the creation and management of complex business ecosystems. Information about an organization is becoming its most valuable asset. For companies to reach China-caliber speeds, testing, learning, and refine cycles need to be accelerated in order to compress the time it takes to develop new features or products.

Also, user interaction provides a direct way to reach out directly to Chinese consumers.  This is in regard to API-based business models and channels, where data is exchanged between the users of an app and a developer ecosystem. As a result, the internet has made it possible for consumers around the world to express their opinions instantly, and Chinese consumers are especially enthusiastic about sharing their opinions. Chinese online forums and social media sites feature discussions regarding products, sharing advice, and discussing features, pricing, and policies. In China, many consumer-facing companies have websites for communicating with customers and social media pages where customers can research and discuss a product or service.

 5 Major Lessons Learnt From China & Implement as Strategies

The following are the 5 major lessons learned from China and to implement them as strategies:

 

1. Rapid Iteration and Bold Experiments

Identification and creation of innovation opportunities and ensuring agility. The Chinese business community, in particular private enterprises not owned by the government, is generally quite fearless. They do not view imitation as a form of competition but rather as a means of learning from others.  Due to low growth rates and heavy regulation in their home countries, many, perhaps most, largely Western and Japanese companies seem to have forgotten what it was like to be fearless.

 

2. Adaptation to Innovation Through Creativity 

Identify and address the needs of local markets when innovating. Several innovative successes from China’s players have emerged from incorporating a nuanced understanding of local culture into creative adaptations for new product categories or consumer needs. Founders are often able to gain insights into local organizations based on the strong intuition of key individuals in the organization.

 

3. Creation of a New Category  

Develop the ability to identify and exploit new opportunities for new categories. A number of products and services are constantly being introduced in China’s market. Chinese beverage company Wahaha launched a line of juices and milk called Nutri-Express to create a completely new market segment that is attracting many consumers. Coca-Cola copied Wahaha’s Nutri-Express milk smoothie drink by launching Minute Maid Pulpy Super Milky and got a huge success.

There are some of the new China market categories that can be exported elsewhere, such as Nestlé’s peelable banana ice cream and GE’s low-cost ultrasound machines. These experiences demonstrate the importance of introducing the novelty-seeking mindset derived from China to other countries.

 

4. Focus on ‘Lean value’  

Provide simple products that target a very specific need, avoiding extraneous features and focusing on what is crucial. Multinationals from developed countries often suffer from “feature inflation” due to their constant desire for differentiation in their home markets, resulting in both price inflation and value deflation. Consumers in China do not want to pay for overpriced products. 

Considering China’s strong needs for lean value, this is a unique opportunity for MNCs to learn and perfect lean value thinking in a place where their efforts will be strongly challenged. The Chinese are excellent proving grounds for concepts like design thinking and lean manufacturing, and many multinational corporations have adopted them.  Air purifiers for cars, garment steamers, low-intensity book lights, formaldehyde-absorbing paint, and low-cost cardiac monitors are all examples of how multinational companies are meeting the needs of low-income consumers in China.

 

5. Teamwork and Global Leaders Development  

China’s current business environment includes its willingness to accept foreign managers, which provides companies with a great setting for managing diverse teams and cultivating global leaders. In Sinatra’s words, if you can manage there, then you can manage anywhere.

It is crucial for leaders of companies in China, and those that do not, to look beyond the current focus in order to learn how to innovate in China, for China, and for the world as a whole.

A big part of the world’s knowledge came from China centuries ago. Although China has been slowly learning from the world for the last century, it has been patient in doing so. The tides have turned now; China has once again something to teach the rest of the world.

 

References:

https://daxueconsulting.com/digital-strategy-in-china/

https://www.emerald.com/insight/content/doi/10.1108/PAP-12-2020-0055/full/html#sec001

https://www.mckinsey.com/cn/our-insights/perspectives-on-china-blog/8-reasons-why-china-is-the-most-exciting-healthcare-story-in-the-world-right-now