Magazine Spring 2019 Issue Research Feature

Understanding China’s Next Wave of Innovation

Three types of emerging innovators in China are making it increasingly difficult for Western multinationals to compete.

Mark J. Greeven, George S. Yip, and Wei Wei Reading Time: 16 min 

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Carolyn Geason-Beissel/MIT SMR | Getty Images

In recent years, a handful of Chinese companies have emerged as global innovators and have garnered a lot of attention. This group includes online retail giant Alibaba, appliance maker Haier, search and data technology provider Baidu, and Tencent, the social communication and gaming ecosystem. These companies are challenging the R&D strategies of foreign companies to keep up with the pace in China,1 and they are providing valuable lessons on how to make ideas commercially viable.2 But there’s another, less obvious force to be reckoned with in China as well: thousands of innovative companies that are quietly disrupting numerous industries, overtaking incumbents, and developing new products and new business models. For a variety of reasons we’ll discuss here, these emerging innovators are not easy to identify — yet they pose real threats, often in unexpected places.

For example, Royole, a Shenzhen-based startup that develops electronic products capable of bending and folding, has entered the automotive market with a superthin flexible display that can serve as the interface of a car’s dashboard. Backed by an abundance of venture capital, Royole has also introduced the world’s first bendable smartphone, which can be folded like a wallet.3

By expanding the distribution of their products, some established companies are also catching multinationals off guard. One such company is Jiangsu Dongcheng M&E Tools, a manufacturer of power hand tools. In the early 2000s, Dongcheng operated at the low end of the local market and was not seen as a serious rival to name-brand competitors like Bosch and Stanley Black & Decker. However, today it is China’s best-selling power-tool brand, outselling Stanley Black & Decker 10 to 1 there, and it is competitive in markets all over the world.

Over the past decade, we interviewed hundreds of executives, entrepreneurs, and investors in China and studied more than 200 Chinese companies. Our goal was to understand how innovation is being practiced in China and how it is changing. We identified three types of Chinese innovators, each of which presents a different set of challenges for competitors. We refer to them as hidden champions, tech underdogs, and change makers. (See “About the Research,” and “Three Types of Emerging Chinese Innovators.

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About the Authors

Mark J. Greeven is a professor of innovation and strategy at IMD, a business school in Lausanne, Switzerland. George S. Yip is a professor of marketing and strategy at Imperial College Business School in London. Wei Wei is CEO of GSL Innovation, a consulting firm based in Shanghai. This article draws on insights in their forthcoming book, Pioneers, Hidden Champions, Change Makers, and Underdogs: Lessons From China’s Innovators (MIT Press).

References

1. D. Prud’homme and M. von Zedtwitz, “The Changing Face of Innovation in China,” MIT Sloan Management Review 59, no. 4 (summer 2018): 24-32.

2. E.S. Steinfeld and T. Beltoft, “Innovation Lessons From China,” MIT Sloan Management Review 55, no. 4 (summer 2014): 49-55.

3. See L. Kelion, “,” BBC News, Oct. 31, 2018.

4. “Hidden champions” is a term originally coined by German consultant Hermann Simon. See H. Simon, Hidden Champions of the Twenty-First Century: Success Strategies of Unknown World Market Leaders (Berlin: Springer, 2009).

5. This estimate is based on our own empirical research, and it is corroborated by Sino Manager’s “2016 Chinese Manufacturing Hidden Champion List.”

6. This estimate comes from our discussions with executives in China, including one hosted by the Innovation Roundtable in Shanghai on Sept. 7, 2017.

7. As reported by SolarBe.com, a Chinese professional solar industry platform, accessed Nov. 17, 2018.

8. According to leading news portals such as Caijing.com.cn, Sina.com, and Technode.com, Tencent was the largest player in terms of monthly active users as of June 2018, but newcomer Toutiao is rapidly closing in. Toutiao’s monthly user numbers increased from 140 million in May 2017 to 240 million in June 2018. In comparison, Tencent had 250 million monthly active users in May 2017 and 260 million in June 2018.

9. Internet penetration in the United States is around 88%, compared with around 56% in China. However, of the 772 million internet users in China at the end of 2017, 753 million, or 97%, were mobile internet users. See Internet Live Stats, accessed Oct. 31, 2018.

10.Simon, Hidden Champions.

11. C.K. Prahalad and G. Hamel, “The Core Competence of the Corporation,” Harvard Business Review 68, no. 3 (May-June 1990): 79-91.

12. D. Jolly, B. McKern, and G.S. Yip, “The Next Innovation Opportunity in China,” strategy+business, no. 80 (autumn 2015): 16-19.

i. In contrast to hidden champions and tech underdogs, for whom the key distinguishing financial metric is revenue, the key metric for change makers, whose revenues fluctuate widely, is valuation.

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Comments (2)
David LAVOREL
Interesting article, and I’m looking forward to reading the book and learn more. I am not entirely convinced though by some of the examples described:

- Hidden champion:
Goldwind is not exactly hidden: It was the topic of an article in the Financial Times in 2016! https://www.ft.com/content/6b536324-f1ea-11e5-9f20-c3a047354386 If a firm with a turnover just under USD5b in your field is under your radar, you’d better change your radar… They might not make the headlines of the international/US media, but they cannot be absent from the local ones. Of course, it is not in English, but this should not be an issue, as many MNC have offices in China and therefore Chinese staff. Not to mention there are companies offering research/business intelligence. For the ones in the tech category, a regularly updated patent mapping could be very informative.  

- Chinese companies becoming global players.
Many local champions have difficulties to develop their activities abroad. It is particularly the case in the ICT sector. In some cases, one of their strengths was to be able to navigate a legal gray area, and/or to know what they can get away with. It proved difficult in some cases, like bike-sharing, as Chinese companies have folded their foreign operations as quickly as they had launched them.
They might also face a political scrutiny they would not expect. Their link/relationship with the CCP could be good/essential for their success in China, and give them an edge (or more) over their foreign competitors, but could become a liability abroad. Every company that collects data for their operation might face suspicion/backlash. Not to mention those who work closely with the Chinese security apparatus. Actual or perceived security risks, or association with entities/policies at odds with universal values could make (further) developing activities abroad a challenge. See for instance Hikvision https://theintercept.com/2019/04/09/hikvision-cameras-uk-parliament/ https://www1.hikvision.com/cn/support_det_45_i518.html 
See also the case of Beijing Kunlun Tech and Grindr https://www.scmp.com/tech/apps-social/article/3003479/us-says-chinese-ownership-gay-dating-app-grindr-national-security 

-IPR issues/strategy. 
Not that many Chinese companies file patent applications abroad. In this regard, the case of Weihua, which is in this category as per a quick patent search in EPO and USPTO databases (as are other Chinese players in the perovskite solar cells field https://www.iam-media.com/perovskite-solar-cells-harnessing-clean-energy-bright-future) will be interesting to follow. Not to mention that being “the best” do not guarantee success or even survival, especially in the renewable energy sector (https://www.chinadialogue.net/article/show/single/en/10775-China-s-solar-industry-is-at-a-crossroads)
Rahul Bhoi
Chin is really leading in innovation in all sectors like defense and technology. In the next few decades, China will surely cross the USA and Japan in innovation.