Near People’s Square, Shanghai
Skyline in Silhouette
Walking the floor at both CES in Las Vegas and Electronica China in Shanghai within a ten-week space provides one with a clear view of how far Chinese enterprise has come, and, equally important, the degree to which international technology businesses have lost their former dominance in China.
One could conclude from these impressions that multinational tech companies are in a state of permanent decline in China: Beijing’s unstated but ongoing policy of import substitution has succeeded, and foreign companies are fighting a losing battle. You don’t need to go to trade shows for anecdotal evidence. Just look in purses and backpacks: ZTE, Huawei, TCL, Lenovo, and Yulong are five of the top ten mobile device brands, and they’re gaining on the global giants.
But if you dig a bit deeper, as you can at a show like Electronica, you find that the opportunities for foreign tech companies have not disappeared: they have evolved. To understand why and how, it is useful to start by looking back on how the tech business developed in China.
From Buy to Make
Since the beginning of reforming and opening in China in 1978, the nation has essentially gone through three phases of foreign involvement in technology-based industries.
The first phase was imports, when the government focused on bringing urgently-needed products like personal computers, telephone switches, automobiles, machine tools, and other technology-based products into China. The need for these products, most of which were essential to ease key bottlenecks in the development process, was so urgent that key ministries were permitted the use of precious foreign exchange to purchase those goods.
China’s leaders always expected, however, that the nation would begin producing these goods on its own, preferably in local companies, but realistically in joint ventures with global technology companies who would bring three essential ingredients: the products, with their component technologies; production know-how, with process technologies; and the capital to build the production facilities. This was the second phase: the shift to local production.
By the mid-1990s, though, another shift began to take place. As the global tech giants ramped up production in China to a mass-scale, local firms began manufacturing their own technology goods. Local firms began to dominate production, using a “fast-follower” approach: “maybe we won’t be innovators, or even the first to market with a given innovation, but we will come to market so soon after the innovation leader that we will still reap our share of the market.”
By last year, the payoff of this shift had become apparent. Chinese high-tech companies were long past needing foreign manufacturers to teach them how to build high-tech products, to help them implement cutting-edge production processes, or even to finance the construction of factories. Those local firms unable to bootstrap their own capabilities and finance now had a vast stable of local and foreign companies ready to provide the necessary technology, and finance, thanks to cash flow and capital markets, was no longer a problem.
Innovation, however, remained a challenge. While a handful of local tech companies – notably (but not limited to) Huawei, ZTE, Xiaomi, and Leovo – had begun to innovate, widespread innovation that would offer a more sustainable competitive advantage (and a larger share of profits) still seemed a ways off.
Enter the Innovation Platforms
And there it remains today.
This gap between efficient production and value-driven manufacturing is the heart of the next opportunity for foreign firms. While the days of foreign brands utterly dominating technology markets in China may be past, more than ever China’s manufacturers need a steady stream of innovations upon which they can base their own innovating.
Technologies that serve as the foundation that allows others to innovate are what we can call innovation platforms. Five factors make innovation platforms stand out from other technical advances:
Significant – The core innovation is a genuine advance that is both useful and relevant;
Substantial – There is a obvious, large, and diverse market for products based on the innovation that offer substantial profit potential, and the technology is easily commercialized;
Shared – The company promulgating the core advance is more interested in creating an ecosystem than a monopoly, i.e., it is content with focusing on supporting and enhancing the core technology and not getting into the business of its customers/licensees;
Stable – Any subsequent changes in the underlying technology are likely to be iterative, not major, for several generations of products. This makes it economically viable for companies to invest in R&D based on the innovation platform.
Supported - Rather than serving as a glorified patent troll, the companies that develop innovation platforms invest heavily in resources designed to assist product developers create viable commercial products, such as on-site engineering support, system validation labs, extensive documentation, or developer groups. In addition, the company continues to invest in improving the core technology.
Early Innovation Platforms
Many innovation platforms take the form of acknowledged industry standards. Examples like Wi-Fi, Bluetooth, and USB could be considered a form of innovation platforms, in that their technologies enabled the creation of products and even companies.
But when we talk of innovation platforms, we are really looking at products and technologies that spawn not only products, but companies and entire industries. Some illustrative examples:
The Xerographic Process: Invented by Chester Carlson and later commercialized by Haloid/Xerox, which begat the photocopier, the laser printer, desktop publishing, and many specialized sectors;
The Intel 8000 microprocessor family, that together enabled the creation of the personal computers, stand-alone video games, and a half-dozen major industries;
Qualcomm’s CDMA: CDMA enabled the commercialization of the internet, created the telematics industry, and is on its way to recreating the automotive, trucking, and healthcare industries, among others.
Each of these companies took an indirect lesson from the failure of Thomas Edison’s Motion Picture Patents Company, an industrial trust that tried to control the film business as well as the manufacture of cameras and film stock. It was, arguably, Edison’s greatest failure. By exercising a modicum of control over the core technology, supporting it, advancing it, and making it available on reasonable terms, Xerox, Intel, and Qualcomm each fostered the creation of immense economic value.
Platforms for the Future
In a world where industrial and engineering capability is a scarce quantity, the easiest way to make a return on a major innovation is to create a vertical industry around it, building the components, creating the product or system, and distributing it under your own brand. The Bell System did this for nearly a century with telephones, and IBM and a handful of other companies did this for the first three decades of the computer industry.
But when the ability to design, engineer, and industrialize complex products is widely distributed, as it is today, robust companies are built on either using innovation to enable industries, or in building on innovation to create industries.
For the time being, Chinese companies are (generally) comparatively better at building industries based on key innovations, and European and particularly US companies are (generally) comparatively better at consistently creating core innovations that can serve as the platforms for those industries. This does not mean that no core innovations will come out of China, or that the US is no longer capable of product development and commercialization.
But it does suggest that the richest opportunities in China for foreign companies, particularly those in science, engineering, and technology-based industries, lies in licensing and enabling Chinese manufacturers, rather than competing with them.
The question facing tech companies, then, is whether and how to make use of the company’s innovations – or an ongoing stream of them – in order to serve as a profitable and indispensable platform for Chinese innovation. And for those of us who watch this market, the pressing question is “in which industries will the next round of innovation platforms emerge?
I leave the first question to the companies themselves. For the second question, my early research points to transportation, healthcare and biosciences, construction, energy, and the environment. I know: I have my chips on a lot of spots on the roulette table. In the coming months, I look forward to sharing with you why I think things are going that way.