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

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.

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, “Royole’s Bendy-Screen FlexPai Phone Unveiled in China,” 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.

1 Comment On: Understanding China’s Next Wave of Innovation

  • Rahul Bhoi | March 7, 2019

    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.

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