Will We Ever See Another Four Great Inventions from China? Examining Chinese innovation from the consumers’ point-of-view

Will We Ever See Another Four Great Inventions from China?

Examining Chinese innovation from the consumers’ point-of-view.

By Brandon Berry Edwards 艾顿, Lilian Tse 谢丽欣, and Vivian Weng 翁维蔬


China’s Four Great Inventions—papermaking, the compass, gunpowder, and printing—were innovations from bygone eras. When looking at China’s history over the past 50 years, it’s very difficult to find a single innovation that has made a significant impact on the world. Instead, the “Chinese version of something Western” phenomenon has characterized much of China’s recent product launches. For example, there is Taobao.com, which is essentially the Chinese version of eBay. Whether China can shed its copycat reputation and become a source of global innovation has become a constant source of debate. While the country’s economy has been growing at an astonishing rate, with an increasingly sophisticated domestic market, the country’s highly centralized government and weak intellectual property system have severely hampered China’s standing as a global innovator.

It may be too simplistic to assume that the notion of innovation is understood, standardized, and commonly defined across the world. China is considered the world’s largest developing market, displaying both characteristics of other emerging markets as well as its own wholly unique notions of success. The simple concept of innovation is very nuanced in China and is most deeply understood by listening to Chinese consumers directly and analyzing what has and hasn’t worked in the marketplace thus far.

Chinese consumers now set new standards

While the macro-economic view of China’s innovation is well covered, the point of view of the Chinese consumer is less known. The following are some of the more common characteristics that Chinese consumers give when asked to define innovation, based on frog’s design research interviews and consumer insights survey.

What does it mean to be first?

When you ask a white-collar, mass-affluent Chinese consumer what characteristics signify an innovative company, the first thing that will come to mind is whether the company is first to market. If you probe a little deeper on what this means, you soon realize that this is not about being a “pioneer” in terms of new technology or design, or being the first to do something no other company has done before. Instead, being innovative is more about being the first to achieve commercial success. To innovate is to win. Take China’s most active social networking site (SNS) Sina Weibo, for example. “No SNS has reached the scale that Sina Weibo has reached” says Bella, a Beijing-based editor in her late 20s. Many Chinese consumers view Sina Weibo as the most innovative Chinese-branded product, not because it is the first SNS to seamlessly combine the functionality of Twitter and Facebook, but for being the first SNS to achieve popularity among the Chinese white-collar segment. The popular sentiment regarding Weibo, or any other company for that matter, is that if everyone seems to be using and loving it, the product must be innovative—and cool.

Keeping your product or service fresh

The second characteristic that, according to popular Chinese consumer sentiment, makes a company innovative is how often it launches new features. Chinese consumers associate companies that are good at doing so with continuous improvement and change, which is reflected in the booming economic development in Tier 1 cities. Dianping, one of China’s leading restaurant review sites with more than 40 million active users to date, launched in early 2003, almost two years before Yelp in the United States, and has since expanded the site to offer a range of related products that piggyback on users’ love of dining out. For instance, users can earn VIP cards or a retail coupon book for discounts at certain restaurants. Dianping has also recently extended its reach to offer discounts to entertainment and daily service venues. Last year, the company launched its mobile application that included a group-buy offering (similar to Groupon). Chinese consumers feel that there is always some new enhancement to look forward to from Dianping, unlike its competitor Taobao, whose product offering and “look and feel” haven’t changed since it was launched in the same year as Dianping, nearly a decade ago.

“I don’t think Taobao is innovative even though I can find anything that I want on their site. Its business model and the look and feel of its Web site haven’t changed at all since I started to use it when I was in university,” says 28-year-old Jodi, a project manager from Shanghai. Taobao is likely to continue to dominate the market because it’s become a basic necessity as an easy-to-use, one-stop online shopping site and it’s considered a commodity, albeit a step behind smaller, foreign rivals such as Amazon. This position potentially leaves Taobao more vulnerable and slower to respond to outside competition.

Service expectations

Last but not least, mass-affluent Chinese consumers also believe that companies that can provide exceptional customer experiences are innovative. Extraordinary services are still rare in China, so companies that do it well leave a strong, lasting impression on their customers. Haidilao, a popular Chinese hotpot restaurant chain provides thoughtful service for its customers waiting for a table, including free manicures, games, shoe shines, and Internet TV. Wait staff are trained to interact with customers warmly, attentively, and with a high level of enthusiasm.

Another example of standout service in China is 360buy, China’s biggest 3C (Computer, Communication, and Consumer electronics) online retailer. It is famous throughout the country for its efficient customer service and after-sales support. “I buy almost everything on 360buy. The whole buying experience, especially their after-sales support is thoughtful and so is their attention to detail,” says 23-year-old Andy, a consultant currently working in Beijing. 360buy guarantees that customers ordering before 11 a.m. will receive their products by 6 p.m. the same day. Similarly, orders placed before 11 p.m. are fulfilled by 9 a.m. the next morning. Each delivery person is equipped with a smartphone-sized point-of-sale terminal to allow customers to pay with a bank debit card upon receipt of their orders. Furthermore, the company has a “100-minute” policy wherein all product complaints receive a response within an hour and 40 minutes of the complaints being lodged.

Opportunities for companies trying to innovate in China

Domestic competition within China is among the fiercest anywhere in the world. With foreign companies already having success on the vast mainland, understanding their strategies for success has become increasingly critical for Chinese companies. The types of innovation we see working with varying degrees of success across industries. Whether they are appropriate depends on so many variables— whether you’re a modern Chinese private company, a state-owned enterprise (SOE) or former SOE, a foreign multinational, or a startup. Here we’ll outline a few of the key innovation strategies that have proven to succeed in China.

Innovation through acquisition

Understandably, the most common type of innovation seen in China, acquisition presupposes that it’s better in the long run to gain new ideas, processes, customers, and market potential by investing in those who have already achieved innovation (or proven they know how), rather than spending the time and resources to do it internally. In recent years, scores of Chinese companies have swallowed up major ailing Western brands such as PC-maker Lenovo, which had previously bought IBM and currently sponsors the NFL in the U.S., in the hopes of acquiring not only Western innovation and IP, but also the mind of the Western consumer. The best approach seems to be to buy low, optimize ailing parts of the business, and leave the core experts alone to make great products and services (e.g., Volvo being acquired by Geely in 2010). Acquisition is not mutually exclusive to other strategies, and companies that put all their eggs in one basket run the risk of having their innovations not translate from their Western organizations to their Chinese counterparts (or vice-versa).

Micro-innovation is changing China step-by-step

“It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward.” — Old Chinese Proverb

Micro-innovation is the strategy of competing not by offering larger, completely new products and services, but by gradually improving existing ideas. Micro innovation also allows for a cheaper and more efficient process of launching new products, or new ideas— compared to launching fresh R&D projects and hoping that they result in viable products. The prescription for micro-innovation is simple: Start with what works and slowly tweak it. The downside of a micro-innovation strategy is that it can be extremely risk-averse, to the point that wrong situations lead to stagnation instead of real improvement.

This is a common approach to innovation among Chinese firms because many executives believe that planning for product launches too far in advance in the face of rapidly changing market preferences can be strategically disastrous. As a product manager of Tencent, a leading Chinese ISP, told frog, “Chinese consumers’ technology preferences change every month. We have to launch products incrementally to get the latest market reaction. We would lose our competitive edge if we tried to launch a perfect product one year from now. We would be really out of touch with the market.”

In recent history, in other markets around the world (and namely in the United States), companies have looked to celebrate the grandiose idea, the disruptive new product or service. In China, disruption is sometimes rejected as being imprudent.

Remixing is the healthiest form of competition

Remixing is the acceptance that “co-option” is not only OK, but crucial to the spread of ideas and making products better. More and more, Chinese companies are willing to co-opt a marketing slogan, an idea, a way of distribution, or a product feature (whether foreign or domestic) and make it their own—with lightning-fast results. This is often referred to broadly as Shanzhai, a very powerful force to be reckoned with. (For more information on the Shanzhai phenomenon, please refer to the article by Rainer Wessler on page 28.) But it’s more than just Shanzhai; remixing is the mindset that both business and consumers have come to expect from some of their favorite domestic brands. If a company can only create one good product and not improve on it, in a fierce competitive market, they’re as good as dead in the water. That’s why any startup in China that wants to get funding needs to have a six-month release strategy that anticipates being copied, and a strategy of how to stay ahead. Remixing is about judging the competition and co-opting their ideas, but without pushing boundaries. Taken too far, a brand can instantly cease to be trustworthy in the minds of fickle Chinese consumers, and be perceived of as more reflective of last year’s fad than as currently “hip.”

Mass-craft is driving a new soul of engineering

Mass-craft is a form of engineering-driven design collaboration that requires companies to be acutely aware of their capabilities to create beyond just the superficial, and use that awareness to drive creation. It’s about understanding the materials, the code, the moving parts, the pixels and plastics, and what’s feasible versus what’s merely paper-ware (i.e., just a great concept). The greatest benefit of a mass-craft approach is that it encourages design and engineering teams to make decisions first and foremost based on practical, real-world possibilities.

The best Chinese companies at the heart of this movement are not only creating their products faster, but they’re doing it while starting to understand what consumers truly need. Many leading Internet companies in China, such as Alipay, Tencent, and Baidu, have hundreds of designers cranking out nearly every permutation of a possible design before quantitatively testing out what works with consumers. This is considered too risky by some executives because it could potentially lead to an over-reliance on consumer feedback, lack of responsibility internally, and failure to accurately judge what’s going to be successful in the market. But at its core, mass-craft is at the soul of modern industrial and software design—a process dictated by understanding the materiality of what’s being made while still making it inexpensively for hundreds of millions—if not billions—of customers who have expressed the need or desire for a certain type of product.

Chinese innovation is discovering its voice, but not without significant influence from both outside market force.s and listening to consumer demands. The smartest organizations already realize this, and are undergoing a kind of cultural change that internalizes these forces.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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