- The emergence from China of world technological leaders is the result of particular domestic conditions.
- Key factors contributing to the success of companies like Huawei include experimentation, a willingness to adapt, a focus on comparative advantage, and the mobilisation of scale.
- In considering how to build or maintain international competitive advantage, both private actors and states should study and understand these factors.
So much has been made of the fact that some Chinese companies, such as Huawei, have emerged as world leaders that we often ignore the need to understand how this has happened. Accordingly, this piece addresses the business conditions that have fostered advantage and the experiments in innovation management we are currently studying.
Sources of innovation
In their well-received book, China’s Next Strategic Advantage: From Imitation to Innovation(MIT 2016), George S. Yip and Bruce McKern describe how Chinese companies are advantaged by both a national innovation system and their broad focus on customers, competitors, costs, and competencies (their ‘4 Cs’). Our recent research has delved into the mechanisms that implement these four Cs, specifically in terms of management practices.
In the 1970s, Japanese automobile manufacturers adopted American management principles of “just in time” – aligning orders from suppliers directly with production – as a guide for both the rapid expansion of supply chains and modernisation of factories. This worked well, along with the Japanese incorporation of other novel Silicon Valley practices to stimulate innovative capacity. Japanese companies also leveraged the structural advantages of their financial cliques, or “zaibatsu”, to reap benefits in financing, branding, sharing know-how and leveraging supply chains. In aggregate, this led to a new generation of innovation systems that seeped quickly into Japanese industry more broadly. Other infrastructure projects, such as their high-speed (‘bullet’) trains system and a focused government department (the Ministry of International Trade & Industry), further stimulated these gains. What is happening in China is to some degree analogous and it is leading to another new generation of innovation systems.
Echoing the mechanisms of Japan’s transformation from an imitator to an innovator, Chinese companies now experiment with key innovations that originated in the United States. Many have been awkwardly emulated, transferred by employees who learned on the job in the US or simply by reading American management magazines and textbooks. Others learned directly from US consultancies working in China such as McKinsey & Company and their Chinese copies. Huawei has long been a huge customer of IBM, followed their advice on management practices, expansion, and other matters for many years. A few Chinese firms also adopted the practice of acquiring Japanese and American firms that they believed they could learn from. Haier, a home appliance company, did this first by acquiring parts of Sanyo in 2011 and then GE Appliances in 2016.
A few distinct features differentiate the Chinese firms from the Japanese ones that they emulated. However, they share large and brand-loyal domestic markets, and patient capital, which in Japan from the zaibatsu structure and in China from large investment groups, including those backed by state finance. The rapid growth and scale of China’s high-tech industry has fostered experimentation, differentiation and an implicit tolerance for failure, all factors that promote risk taking and innovation. Indeed, one of the overlooked features of Chinese high-tech is a high but healthy failure rate and the celebration of serial entrepreneurs, such as Lei Jun, founder of electronics company Xiaomi.
This is the background to some highly successful coordination policies, competition conditions, and management practices that should attract our study rather than the sole focus placed on trade contentions. The positive features of Chinese high technology business should not be ignored while we highlight nefarious practices including theft of intellectual property, restrictions on foreign involvement in the domestic market, uncompetitive state bank financing, and aggressive business expansion practices led by state actors including those associated with the Belt & Road Initiative.
Coordination and management
The Chinese government has put forth a plethora of national and local policies to stimulate the country’s high-tech industry. These policies seem to have been beneficial even as it remains difficult to assess their macroeconomic effects, when we consider that some of them seem to be zero-sum games at the national level as they advantage certain regions, sectors or practices at the expense of others.
For example, municipal and provincial governments have spearheaded efforts to repatriate foreign-trained engineers to gain comparative advantage. Similarly, Shenzhen’s ability to overcome disincentives to mobility enables the city to attract highly-capable people from all over the country and beyond. Other national policies that favour domestic producers through state procurement and financing practices, as well as standards-setting and export guarantees, have long accompanied targeted infrastructure projects that favour particular industrial regions with rail, air, interstate highway and shipping facilities. While the specific lobbying pressures are shrouded, it is clear that some sectors, such as advanced manufacturing (e.g. robot-enhanced factories for both consumer goods and heavy engineering production) and digital platforms (e.g. e-commerce and advanced logistics) have been able to expand rapidly.
These policies’ success, however, requires sophisticated management practices; here we can see some distinct Chinese contributions that experiment with and extend American and Japanese high technology management. Three areas that have been especially amenable to Chinese scaling techniques are in knowledge management, market intelligence and corporate governance. On the other hand, sourcing, communicating, sharing, and exploiting abstract and often tacit knowledge is only distantly analogous to ‘heavy metal’ manufacturing supply chain management.
Chinese firms such as Haier, Alibaba, and Huawei have been especially enthusiastic about finding ways to coordinate their growing network of research facilities, outreach and “open” innovation investments, and advanced teams of product developers. By stimulating and exploiting the boom in engineering graduates, these firms constitute a massive laboratory, testing ideas about how to improve teamwork and feedback, unconventional knowledge sourcing, and prioritising suggestions. This has been coupled with machine learning enhancements for the systematic use of market feedback in the form of data analysis of online customer responses. Taking ideas periodically applied in Silicon Valley and elsewhere, firms such as Xiaomi cultivate very large communities of customers and sift through many hundreds of thousands of requests, suggestions and constructive criticisms.
Chinese high technology firms have also been imaginative and varied in their corporate governance schemes. Although employee share ownership arrangements date back to time immemorial, Silicon Valley start-ups showed that talented young workers could be especially incentivised to loyalty and innovativeness if they are offered an equity stake in the firm. Chinese tech companies, in turn, both made this a common practice and experimented with contrasting models, including Huawei’s 98 percent distribution of equity to half their employees and the now common practice of offering employees between five and 15 percent equity in firms approaching their initial public offerings.
In the continuing assault against Chinese firms, actors within the West and West-aligned countries risk overlooking, or worse, disregarding, the management and innovation practices that made Chinese national champions so successful in the first place. As described, these includeexperimentation in innovation, a willingness to adapt quickly, a strong focus on comparative advantage, and the judicious use of scale to promote diversity and tolerate failure. Too often, however, when focusing on China’s drivers of technological success, Western commentary focuses on state support, restrictive investment controls, strong central guidance, and “long-term thinking”. Worryingly, this has led to a dangerous narrative around how nations should respond in the face of greater international competition from Chinese companies. The focus has, to a large degree, rested on increased state involvement and quashing Chinese competition. But China’s success factors should give pause to both private sector actors and policymakers. The world still has much to learn from Chinese innovators; the current rhetoric, unfortunately, risks foregoing this knowledge.
This article gives the views of the author, and not the position of the China Foresight Forum, LSE IDEAS, nor The London School of Economics and Political Science.