Innovation key for Chinese firms

12 January 2011

BEIJING: Companies in China must enhance their innovation efforts to drive growth, McKinsey has suggested.

The consultancy reported that 1.5% of Chinese GDP was allocated to research and development in 2008, up from 1.25% in 2004.

While this leap may not appear substantial, the rapid expansion of the domestic economy means it translates into a considerable improvement in real terms.

Although the official 2010 target of 2% is likely to be missed, China currently accounts for approximately 12% of worldwide R&D expenditure, and is due to soon pass the US regarding the number of patents filed per year.

One major shift is a move in impetus away from institutes funded by the authorities to small- and medium-sized businesses, now responsible for 60% of the total outlay on research and development.

Multinational corporations, which have set up almost 1,500 innovation centres in China, take a 7% share, despite concerns about intellectual property protection.

Another transition followed the formal recognition that governmental attempts to impose certain systems were generally sub-optimal.

For example, the TD-SCDMA powering 3G mobile services for operators like China Mobile proved largely unsuccessful at home and received little interest from abroad.

Telecoms specialist ZTE is leading the way forward, having recently unveiled the ZTE Lite LTE - a 4G tablet computer - at this month's Consumer Electrics Show in Las Vegas.

"ZTE has pioneered LTE devices in many global markets," said Cheng Lixin, president, ZTE USA. "ZTE is ahead of other vendors as our dedication and sizeable investment in LTE technologies has paid off."

The automotive category similarly demonstrates this new outlook in practice, as the Chinese authorities plan to allot $8bn to various manufacturers developing electric vehicles, alongside offering incentives to shoppers.

"This is an industry that is still very much open to innovation at the global level," McKinsey said.

Indigenous organisation BYD is aiming to roll out its e6 electric model in the US, having redesigned it specifically for American tastes.

"BYD is going to be a new energy-car brand," said Wang Chuanfu, its chairman.

"That's because in the US there is fierce competition for gasoline cars. I don't think we have an advantage, but with electric cars it's a different story."

Indeed, McKinsey suggested that while India's Tata Motors modernised petrol passenger vehicles, launching the low-cost Nano, China lags behind at present.

The financial segment, where state-owned banks hold the primary position, has also witnessed limited genuine innovation to date.

Equally, consumer electronics brands have been slow to advance beyond "copycat" status, as Japanese and South Korea rivals retain the lead.

"Chinese companies still place too much focus on expanding global market share with just-good-enough products instead of creating markets with totally new products," McKinsey said.

Bucking such a trend, Lenovo, the IT giant, recently introduced a hybrid device, the U1, combining features of a slate and a laptop, boasting a touchscreen and sliding keyboard.

Rory Read, Lenovo's chief operating officer, believes tablets and similar offerings will boost its overall performance rather than hitting PC sales.

"We see it more as a third or fourth screen; additive, like a smartphone," he said.

Lenovo also sells the LePhone smartphone in China, but Read revealed the firm would consider carefully before taking the handset overseas.

"The idea is to get the scale first. We think you only get one time to make that best first impression," he said. "Other players are rushing to bring I think premature technology to market."

Data sourced from McKinsey, Reuters, Wall Street Journal; additional content by Warc staff