The Difference Between Innovation and Disruption, and Why China Needs the Latter

The Difference Between Innovation and Disruption, and Why China Needs the Latter

July 8, 2013 by C. Custer

Last Friday, I wrote an article about why China doesn’t produce many disruptive technologies, in which I argued that China’s political system is biased towards maintaining the status quo in industries like internet and telecommunications, where state-owned firms dominate. In response, I got a lot of arguments like this:

That’s misleading. The real reason China doesn’t innovate is that it doesn’t have a mature enough (or risk-taking enough) investment environment or strong enough IP laws, so big new ideas often can’t get the funding and protection they need to grow and thrive.

That’s all very true, but innovativeness and disruptiveness are not the same thing. And especially in China, where foreign players are often shut out of the market either by legislation or by the formidable language and culture barriers, a product does not need to be innovative at all to be highly disruptive.Let’s steal an example from my original post and talk about WeChat. WeChat is a highly disruptive product, so much so that China’s state-owned telecoms are up in arms about it destroying their SMS and phone calling services by offering basically the same thing for free. And they’re right to be worried. WeChat is poised to more or less replace the regular functions of phones, and if the government doesn’t step in, China’s telecom market and users’ mobile talk and chat habits will probably look very different even 5 years from now. Now that’s disruptive.

Yet WeChat is not, by any stretch of the imagination, an innovative product. It came out well after Whatsapp, but even in Asia it was mimicking the features of mobile apps KakaoTalk and Xiaomi’s Miliao, both of which were launched in 2010 (WeChat didn’t hit the scene until 2011). If innovation is the introduction of new ideas or products; WeChat wasn’t innovative at all; the idea behind it was already widespread and a very similar product was already available in the Chinese market.

Protecting and fostering innovation is important from an industry perspective, but disruption is more important from a user perspective. After all, most WeChat users don’t care that Xiaomi and KakaoTalk had the idea first; what’s important to them is being able to use the app to chat with their friends in new ways. The same is true of the taxi apps many Chinese cities have blocked or restricted. Users don’t care if they’re innovative, they just want to be able to find taxis easily. And these apps could help them do that and change the taxi industry in the process, if the government wasn’t getting in the way.

More investment money wouldn’t fix that — many of these apps are operated by major internet companies that have tons of cash floating around. And China’s lack of IP protection, while a serious problem, isn’t what’s preventing these apps from taking off and changing China’s transportation industry. In many cases, it’s the government that ultimately decides whether or not it will permit tech companies to disrupt the industries they operate in, and success isn’t guaranteed even if you have the right idea and the right amount of money if your idea threatens a status quo that benefits government officials or the state-owned firms they control. And when the government says no to industry-changing disruptive ideas*, the ultimate losers are generally China’s end-users.

*There are plenty of examples of this happening, by the way, and sometimes it even prevents state-owned companies from disrupting their own industries! For example, China Mobile already has pretty mature 4G LTE technology, and it has been operating a commercial 4G network in Hong Kong for well over a year. But mainland users still can’t access 4G because regulators reportedly don’t want to disrupt the growth of China’s 3G industry yet.

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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