R&D takes new shape in China

06 February 2012

BEIJING: Innovation models are taking on a different shape in China, as indigenous and foreign companies enhance their capabilities in ways reflecting the market's distinctive characteristics.

In a study, McKinsey, the consultancy, showed the number of patents held by Chinese organisations and individuals have doubled since 2005, with growth led by electronics specialists Huawei and ZTE.

The country is also setting the pace in sectors like solar and wind power, while Sina's Weibo microblog, Tencent's QQ instant messaging platform and Alibaba's Taobao ecommerce site all boast unique revenue structures.

"There are a lot of companies here - Chinese companies in particular - that are capable of very good innovation, doing it, putting it into the market, and building a big local supply or consumer base that will extend into the rest of the world," said Kevin Wale, managing director of GM China, the carmaker.

A core trend observable in China is that local firms "innovate through commercialisation", launching products and improving them with subsequent iterations, meaning they have shorter lead times.

The Chinese government has also made steps to emphasise innovation, for example by creating R&D hubs around the country focusing on areas from semiconductors to life sciences and biotechnology.

"Another aspect is China's urbanization. There are consequences to the migration to megacities with populations of more than 20m," Steve Yang, head of R&D in Asia for AstraZeneca, the pharma group, said. "The scale of such innovation is where China can offer ground for experimentation and ... a marketplace where the impact can be shown."

The weaknesses of Chinese companies at present include a failure to leverage in-depth consumer insights, conservative corporate cultures and a general lack of internal collaboration.

The size and potential of the domestic audience, language barriers, business models built on low-cost labour and favourable access to capital also make it difficult for the firms to expand abroad.

For multinationals, concerns exist about "copycat innovation" and protecting intellectual property, as the need to share such information with partners in joint ventures. Retaining talent remains an issue across the board.

Overseas players do typically have advantages in branding and marketing; what they can lack, though, is on-the-ground know-how, meaning that local R&D centres are becoming vital in order to design or adapt brands for Chinese needs.

"We've ... added additional investment in China around research and development to really capture the consumer trends … and to drive innovation that really is going to be impactful for the Chinese consumer," John Culver, president of Starbucks China, said.

Data sourced from McKinsey; additional content by Warc staff