8 reasons why China is now the world’s innovation engine

Developing a taste for Chinese fare / Photo credit: Tech in Asia

The following is an edited excerpt from Chinnovation: How Chinese Innovators are Changing the World by Ying Tan. The excerpt was provided by Wiley Publishing. You can buy a copy of the book here.

Chinnovation is applying changes in technology and business strategy to have new and better ways to create value for both the customer and the corporation. In China, this is often characterized by eight distinctive characteristics (termed the “Eight Rs of Chinnovation”).

Revenue

Compared to their Western counterparts, Chinese innovators are laser-focused on revenues. Eric Tao, vice president of Keytone Ventures (formerly an associate at Kleiner Perkins Caufield & Byers China) concurs: The investment strategy for China is very different. Companies like Google with 100x returns don’t come to China.

VCs tend to do later-stage deals and invest in the later rounds. For example, U.S. Kleiner Perkins (KP) offices invest in over 30 pre-revenue companies. The KP office in China is completely the opposite; our China team never invests in companies without revenue, unless the company has an extremely convincing model and revenue and clear customer absorption rate.

Rapidity

Chinese innovators move fast. One of the innovators I talked with acted on an inspiration days after Michael Jackson’s death, securing the rights to build a Neverland Ranch in China. In manufacturing industries, certain companies that started off doing OEM for foreign firms have moved from OEM to ODM to Research & Development to taking over the entire value chain within a couple of years.

One of the innovators I interviewed took only 18 months between starting a company and listing it on NASDAQ. Rapidity also refers to the rapid prototyping process, where Chinese innovators are lauded for engaging with customers closely to develop products and sales processes quickly in a series of iterations.

Requirements

Requirements are whatever the customers say they are. Chinese innovators are highly localized and sensitive to the needs of their customers, as they pay close attention to people struggling with solutions available in China. Widely perceived as the world’s largest manufacturing base, China has innovators who understand that the higher value in the chain is in consumer-facing innovative products.

By tapping China’s cost advantage in niche markets to increase their process flexibility, China’s innovators are fulfilling the requirements of their customers at rock-bottom prices.

Reproduction

One Facebook in the U.S. will spawn 20 copycats in China overnight. There is a fine line between innovation and low-value reproduction. On the other hand, there’s a lot of pressure to copy. Several Chinese entrepreneurs told me that VCs refused to fund them because their business model was not based on a proven U.S. business model. Zany Zeng, co-founder of Oak Pacific Interactive, says: “There are more me-too innovations in China.

When I operated Xiaonei, I’d change its homepage when Facebook changed theirs, without understanding why. My rationale was that if Facebook has a reason to do this – I had better emulate this.” Despite this, it’s not all copying. For instance, the hugely successful online game “Farmville” has its roots in China.

Rivals

China is good or bad because everyone is an entrepreneur. Spurred by rivals, Chinese companies have a constant stimulus to innovate. Innovators who do not innovate after copying usually do not survive. China always has a handful of local copycats appearing within weeks of a company being featured on prominent Western technology magazines.

Restrictions

Restrictions have spurred entrepreneurship and innovation.

The banning of Facebook in China has resulted in at least half a dozen Facebook clones mushrooming there. Frank Levinson, a successful entrepreneur who founded Finisar (a NASDAQ-listed company in the fiber-optic subsystems and components sector), explains that resource limitations can stimulate creative thinking. Often the best movies were shot under budget constraints so severe that the director had to innovate – and the same principles apply for start-ups. For example, rural workers in China often need to wash both potatoes and clothes but can only afford one washing device; in response, Haier released a washing machine capable of washing loads of either clothes or potatoes (or both together).

Remixing

Raw materials