China’s Path to Innovation

July 18, 2016

Ideas can arrive in a flash, but innovation takes time.

Electric automaker Tesla, for example, was founded in 2003 but did not produce its first mass-market product until 2012.

Successful innovators share patience, an appetite for risk, and a knack for producing new technologies that satisfy a deep human desire, said Tom Zhu, general manager of Tesla China.

"They know what people want," he said, "that they didn't know they wanted."

The entire Chinese economy is now trying to play that same innovation long game, according to business leaders who spoke at the Duke International Forum at Duke Kunshan University.

Zhu, a 2010 graduate of the Daytime MBA program at Duke University's Fuqua School of Business, said the sheer size of the Chinese market "will not just encourage domestic innovation, but also attract lots of advanced technology globally to this market. That will help us accelerate in the coming years and to excel in so many areas."

China's shift in focus from production to innovation — from manufacturing products designed overseas to designing the products its factories are shipping all over the world — requires a cultural sea change.

"Imagine the U.S. being told, 'Hey, the way you've been doing things for the last 50 years, you're going to have to do them differently,'" said Briand Greer, president of Honeywell Southeast Asia and member of Fuqua's East Asia Regional Advisory Board.

China has manufactured airplanes for decades, but is now working to adapt to western certification standards to crack that market, Greer said.

"Technology is not the issue for China," he said. "It's not about their technical expertise, it's more around the system piece, from a programmatic perspective, being able to organize all of this."

Integrating the countless systems in a new aircraft to unfamiliar standards is dizzyingly complex, Greer said.

"China's trying to do alone what is an incredibly difficult thing to do," he said. "They're trying to do in a fairly short period of time what it took the rest of the world generations to do."

That takes patience, which Poman Lo said many Chinese entrepreneurs lack. Lo, a 1999 graduate from Duke, is founder and CEO of Century Innovative Technology, a China-based family edutainment company.

While many companies profess a grand and noble vision, she said, it's often the case that "in fact, the underlying vision is simply to make most profits in the shortest available time."

For example, it costs about $800 million to develop a new drug in China, said Yi Shi, managing partner of Lilly Asia Ventures, a biotech investment firm. He said that's about the same as it costs to build a Shanghai skyscraper.
"Investors would rather build the skyscraper and collect the rent," he said.

Shi, a 1999 graduate of Fuqua's Daytime MBA program, said China is producing pharmaceutical innovation for the multinational companies, who snap up individual Chinese talent. Chinese startups have found it too expensive to produce drugs to the international standards that would allow them to export, he said. But change is coming. Shi said some startups have begun licensing their products to multinationals as a way of marketing them overseas.

"That's probably the beginning of a wave that we'll see in the coming years," he said.

Still, Shi said, it's important not to let success stories obscure the associated risks.

"I can tell you innovation is a tough, tough business," he said. "Investing in innovation is extremely risky.  Most people still don't appreciate how risky it is. People only look at the successful cases and not at the 90 percent that failed."

Prasad Boradkar, a professor of industrial design at Arizona State University, said while there is a lot of focus on disruptive ideas, innovation often comes about when firms make incremental changes in areas such as product or service design; business model; brand experience; sustainability; or internal processes. But, he added, that's not easy, especially for large companies.

"It's sometimes easier for startups to make these sort of changes, to incorporate design into the way they think," Boradkar said. "They are smaller. They are agile. They can institute change more quickly."

Slowly though, multinationals in China including IBM, 3M and others are also working to foster innovation, he said.

"I think large organizations are recognizing that to build a culture of innovation," he said, "you need to start thinking like a startup."

Despite the challenges, Greer said China has proved before that it can change, and fast.

"Never underestimate China and how fast it can move," he said. "When China decides it wants to move, it has the resources and the will to do it very quickly, and it can turn on a dime."

Contact Info

Gregory Phillips
Duke University
The Fuqua School of Business
100 Fuqua Drive
P.O. Box 90120
Durham, NC 27708-0125

Tel: 1.919.660.7801
Email: gregory.phillips@duke.edu

Erin Medlyn
Duke University
The Fuqua School of Business
100 Fuqua Drive
P.O. Box 90120
Durham, NC 27708-0125

Tel: 1.919.660.8090
Email: erin.medlyn@duke.edu