The Chinese way

[Image by Jan Dyrda under Creative Commons]

How different is innovation in and by Chinese industry from that by Indian industry? That is the question to which I sought an answer when I started reading China’s Disruptors: How Alibaba, Xiaomi, Tencent and Other Companies are Changing the Rules of Business by Edward Tse (Penguin, 2015).

Innovation in China

The debate about the nature of innovation in China has been raging for some time. On the one hand, many influential commentators have dismissed China as a copycat and affirmed that the locus of innovation is likely to remain in the United States for several years to come. On the other, authors like Tse make the argument that innovation is happening in China, and at a pace that will influence the rest of the world sooner than later.

Tse indicates that China’s business environment, particularly for internet companies, is very challenging for myriad reasons including lack of supportive infrastructure (e.g. absence of payment gateways and logistics challenges in delivering products efficiently), changing regulations, fickle consumers who lack brand loyalty, rapidly changing consumer preferences, and the difficulty in retaining trained talent. The core of Tse’s argument is that companies like Alibaba and Xiaomi that have been able to create multi-billion dollar businesses in such an environment through continuously re-inventing themselves have demonstrated an adaptability and flexibility that reflects a very high level of innovation capability.

Tse buttresses his argument by drawing on the work of management scholars like Stanford’s Kathleen Eisenhardt who have argued that in the hyper-competitive environment prevalent in many industries, advantages are not enduring, and even a powerful vision may offer limited benefits. Instead, reinvention, and the ability to continuously generate and test new ideas is key.

While the major dimensions of Chinese innovation have been what Tse calls process and practice, there are certain sectors where the Chinese approach has had significant global impact. Telecom is one. Tse gives the example of Huawei which has almost single-handedly caused the restructuring of the global telecom equipment industry by offering good (but not over-engineered) products at prices that established companies in the West were simply unable to match.

What Tse’s book definitely calls into question is the argument made by Tarun Khanna and Yasheng Huang in their provocative piece, ‘Can India Overtake China?’, in Foreign Policy 13 years ago that India’s strength that could help it grow faster than China is its set of dynamic, home-grown entrepreneurs. While Khanna and Huang didn’t make any direct comment about the quality of entrepreneurship in China, the core of their article was that China’s growth is driven largely by foreign direct investment (and, by implication, not by local entrepreneurs). But, Tse’s book conclusively establishes the importance of the Chinese private sector as well as the quality of China’s entrepreneurs.

In fact, there is little doubt that the growth of private industry in China has been impressive. There were no privately-owned businesses in China before 1976. In the past 40 years, as Tse points out, private industry has grown to account for three quarters of that country’s economic output. You can’t ignore the scale of some of China’s largest businesses—I just read that Alibaba has overtaken Walmart as the world’s largest retailer.

Comparing China with India

Though Tse does not write about India at all in his book, I was mentally mapping out the differences between China and India as I read it.

One is, of course, the dramatic growth of internet-based businesses in China vis-à-vis those in India. The Chinese ones started earlier and their growth paralleled the major growth of the Chinese economy after 2000, particularly the growth in individual incomes and consumer spending. Car sales in China grew from 1.2 million in 2000 to 13.8 million in 2010 and internet users grew from 20 million to 450 million during the same period.

The second is the diverse presence of locally-owned companies in consumer goods, medical devices, battery technologies, consumer electronics and a whole range of other sectors in China. In contrast, the presence of large Indian companies in either technology-intensive industries (that need major investments in R&D) or consumer-driven businesses (that need continuous adaptation to changing consumer needs) appears to be lower than in China.

The third is the major thrust by the Chinese government to have local capabilities in sectors that it considers important including aircraft design and manufacture, high-speed trains, telecom equipment, etc. These have all been R&D-intensive initiatives. India has depended almost completely on import in these sectors. China’s R&D intensity (proportion of the GDP spent on R&D) is today between 1.5% and 2% while India’s remains stubbornly below the 1% mark as it has for years.

And, fourth, and perhaps most dramatic, is the apparent willingness of Chinese entrepreneurs to make radical changes within their companies. Haier, for example, is experimenting with a major decentralisation of the company that will make it more nimble and agile. India’s large business groups have shown a much higher degree of inertia towards organizational transformation though several of them have tried to imbibe the continuous improvement ethic through the adoption of Japanese management practices like Kaizen.

If Tse is to be believed, corporate growth including innovation in China is driven by a strong sense of national pride and a common identification of strategic goals that is reminiscent of the post-War re-building of Japan. While I don’t doubt the patriotism of individual businessmen or their senior management teams, I think it’s fair to say that Indian business houses have been driven by and large by more mundane goals of growth in size and wealth.

It would appear from this book that though the Chinese government may be more keen on ensuring that its primacy in governance issues is not questioned, the business environment in China may actually be less regulated than in India. This appears to be particularly true in the financial sector where Chinese internet companies are taking on a number of finance-related activities that the Indian regulatory system simply wouldn’t allow without separate licences and oversight.

Another interesting point that Tse makes is with respect to the increasing social focus of China’s successful entrepreneurs. The environment theme, in particular, seems to have become an important passion of some of them. A bigger focus on social responsibility may make Chinese firms seem more like Indian firms, and “The India Way” as described by Wharton professors Harbir Singh, Michael Useem and Peter Cappelli seem less distinctive.

Socio-political Environment and Innovation

One intriguing question that the Chinese experience in general, and Tse’s book in particular, raises is how important are political freedoms and openness to create a supportive environment for innovation?

Normatively, one would expect that innovation would thrive in a more open environment than a closed one. After all, innovation depends on questioning things and taking nothing for granted. But the Chinese experience seems to defy this. Chinese entrepreneurs seem to have been successfully schizophrenic in their ability and willingness to question the status quo within their businesses while accepting the Chinese political system as it is. And, to the credit of the Chinese government, it seems to have given the businesses that freedom as long as the primacy of the Chinese Communist Party is not called into question.

Tse’s book does indicate, however, that there is variation across Chinese entrepreneurs in the extent to which they are aligned with the government with some of them hoping for political change in the years ahead.

At the End….

As a partner with leading global consulting firms in China, Edward Tse has seen Chinese firms from up close. So, there’s every reason to believe that his account of Chinese firms, even if somewhat exaggerated to make a point, has the right directionality. I would therefore recommend China’s Disruptors to anyone with an interest in how the Chinese economy is evolving.