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Can China Move Up the Value Chain?

Posted By Jeff Moad, August 15, 2011 at 8:24 PM, in Category: The Innovation Enterprise

Can China become an engine of innovation, successfully competing with Western manufacturers in the race to invent breakthrough new products and create new markets? Should China even try?

A couple of academics from Georgia Institute of Technology recently published a book, (Run of the Red Queen), in which they argue, among other things, that the Chinese government’s campaign to push its manufacturing sector to compete with U.S. and European companies on novel product innovation is time-consuming, wasteful and, ultimately, premature. Instead, say Dan Breznitz and Michael Murphree, China’s government and its manufacturers should continue to focus on and invest in the kind of process innovation in manufacturing, sourcing, and logistics that have turned the country into a growing contract manufacturing giant.

“China doesn’t need to crave novel innovation,” Breznitz said in a (recent interview in The New York Times ). “For China’s stage of development, with the amount of people it has, the size of the labor force, and the skills developed by China’s education system, [focusing on process innovation] is a vastly smarter utilization of its muscle and brainpower.”

Not that China’s leaders appear to be taking Breznitz and Murphree’s advice right now. As I’ve recently written, China’s government is pushing hard for manufacturers there to (innovate new products and create new product categories)  rather than just produce products invented elsewhere. There’s good reason for this. China’s leaders know that the country’s long-term growth will depend on its manufacturers’ ability to move up the value chain. As China’s middle class grows and its costs begin to catch up with those of Western countries, it will become increasingly difficult for the country’s manufacturers to remain the world’s low-cost producer. Therefore China must own—not just borrow or copy—intellectual property.

As Breznitz and Murphree correctly point out, China has a long way to go before it can truly compete with the West on innovation and entrepreneurialism. China’s finance system doesn’t naturally support entrepreneurs. Its legal system doesn’t adequately protect the rights and inventions of innovators. And the Chinese state’s tendency to focus first on outcomes rather than on creating an atmosphere where innovators can flourish is a problem.

But don’t count China out as an engine of innovation. Some Chinese manufacturers already are showing the way, partnering with Western companies to build their own intellectual property portfolios. Take Huawei Technologies Co. Ltd., China’s largest manufacturer of telecommunications equipment. Since 2003, Huawei has been partnering with Western manufacturers, creating a series of jointly owned research and development relationships. Huawei’s partners have included Siemens, Motorola, Symantec, and 3Com Corp. (now part of HP). These ventures have helped Huawei develop innovative products that have found customers outside of China. The company has grown to become the world’s second-largest telecom equipment maker. In 2010, its global sales grew by 24%.

Suntech, a maker of solar panels, is another Chinese manufacturer that is already competing on innovation.

But it’s not just Chinese companies that are beginning to invest in innovation in China. In an attempt to pry open potentially huge Chinese markets, Western manufacturers are also doing so. Recently, for example, General Electric announced that it will move the global headquarters of its X-ray division from Wisconsin to Beijing. This is part of GE’s larger plan to invest $2 billion in China, an investment that will include six new customer innovation and development centers.

Those kinds of investments tell me that China and its R&D partners will eventually be successful growing innovation in that country, particularly if the government there begins to bring down structural barriers to innovation. Remember, few predicted just how rapidly China was able to grab virtual ownership of low-cost contract production of everything from apparel to electronic devices. Western manufacturers shouldn’t assume the same thing won’t happen on the innovation front.

Written by Jeff Moad

Jeff Moad is Research Director and Executive Editor with the Manufacturing Leadership Community. He also directs the Manufacturing Leadership Awards Program. Follow our LinkedIn Groups: Manufacturing Leadership Council and Manufacturing Leadership Summit

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