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2013 China Innovation Survey
An emerging innovation power
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Contacts
Strategy&
Beijing
Steven VeldhoenPartner+86-10-6563-8300steven.veldhoen @strategyand.pwc.com
Hong Kong
Bill PengPartner+86-10-6563-8300bill.peng @strategyand.pwc.com
Munich
Anna ManssonPrincipal+49-89-54525-579anna.mansson @strategyand.pwc.com
Shanghai
Sarah Butler Partner +86-21-2327-9800 sarah.butler @strategyand.pwc.com
John JullensPartner+86-21-2327-9800john.jullens @strategyand.pwc.com
Huchu XuPartner+86-21-2327-9800huchu.xu @strategyand.pwc.com
China Europe International Business School
George YipProfessor of [email protected]
Bruce McKernProfessor of International [email protected]
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About the authors
This report was originally published by Booz & Company in 2013.
Steven Veldhoen is a partner with Strategy& based in Beijing and head of its consumer and retail practice in China. He is the co-leader of the firm’s global innovation practice and co-leads the firm’s China innovation practice.
Anna Mansson is a principal with Strategy& based in Munich. She is the leader of the firm’s Greater China operations practice, principally working with companies in the engineered products, consumer, and retail sectors. She also co-leads the firm’s China innovation practice.
Bill Peng is a partner with Strategy& based in Hong Kong. He is the leader of its engineered products and services practice for Greater China, principally working with clients in the automotive, machinery, and manufacturing sectors.
George Yip is a professor of management and co-director of the Centre on China Innovation at CEIBS. He is co–executive editor of Chinese Management Insights. His current research concerns innovation, strategic transformation, and managing global customers.
Bruce McKern is a professor of international business at China Europe International Business School (CEIBS) and co-director of the CEIBS Centre on China Innovation. His research interests are innovation and the globalization of firms from rapidly developing economies.
The authors would like to thank Strategy&’s John Jullens, Charles Wong, Olivier Pincon, and Michelle Wang, as well as Eric Chen, formerly of Booz & Company, for their contributions to this report. In addition, the authors would like to thank Mariska Kiewiet de Jonge, general manager, Shanghai, and Robbert Gorris, general manager, Beijing, of the Benelux Chamber of Commerce in China, along with Bofan Wu, publisher of 21st Century Business Review.
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Executive summary
China is regaining its historical position as a global innovation power. The nation that brought the world such inventions as water-powered mills, paper money, and explosives is increasingly viewed as a center of 21st-century innovation excellence. That said, corporate and government leaders know that Chinese companies must move up the value chain for China to achieve “developed nation” status, and that the way to do this is by focusing on new technologies, product offerings, and services within the country. Local companies continue to spend massively on R&D, the government sector is actively supporting their efforts, and multinational companies (MNCs) are making large investments in China as a laboratory and workshop for global innovation.
The China Innovation Survey, now in its second year, shows that innovators in mainland China are gaining rapidly in competitiveness compared with companies in Europe, United States, and other regions. This year, nearly two-thirds of respondents at MNCs operating in China said some Chinese competitors are at least as innovative as their own companies, a strong increase since last year. Chinese companies also said their innovation efforts are competitive with those of MNCs in China, although they still see significant room for improvement. And though they believe they are less innovative overseas than their multinational rivals, they plan to increase the amount of their innovation directed toward overseas markets. The survey also shows that China is well on its way to becoming a true global innovation hub for MNCs from developed markets: Some two-thirds of the respondents reported that they are conducting R&D in China for foreign markets — and even more plan to do so in the future.
In addition, the survey contradicts a piece of conventional wisdom: that innovation in China tends to focus on copying and making incremental improvements to existing products. In fact, the data shows that Chinese companies — to a higher degree than most global competitors — pursue the same kind of innovation strategies that are practiced by the world’s most successful innovators, notably companies based in Silicon Valley.
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These companies pursue Need Seeker strategies, as we will show below: focusing their R&D efforts on consumer needs, developing products that meet those needs, and then quickly getting the products to market. The challenge for Chinese innovators going forward will be to preserve and build on this model as they grow domestically and internationally. For MNCs in China, the challenge will be to integrate innovation in China into their established global innovation models.
Finally, this year, for the first time, we asked participants to cast votes for the most innovative Chinese companies (see “Top 10 Innovative Companies in Mainland China,” page 26).
The China Innovation Survey is jointly conducted by the Benelux Chamber of Commerce in China, 21st Century Business Review, China Europe International Business School, and Strategy&. This year’s survey reflects the views of 264 respondents, more than double the number who participated in 2012. More than 80 percent of the respondents are C-suite executives, corporate officers, directors, or managers. To further develop our understanding of the data, we also conducted individual interviews with key executives in a range of companies and industries (see Appendix, page 27).
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China’s innovators on the rise
China’s investments in R&D are rapidly increasing. The number of China-based companies appearing on Strategy&’s Global Innovation 1000 (which lists the publicly held companies that spend the most each year on research and development) has risen from 15 to nearly 50 over the past five years. In 2011, companies headquartered in China increased their R&D spending by 26.5 percent — more than double the global average, five times as much as European firms, and 11 times as much as Japanese firms (see Exhibit 1, next page).
The strong growth in R&D spending is evidently beginning to pay off. This year’s China Innovation Survey shows that both the perceived quality and the effectiveness of innovation in China continue to advance. Some 64 percent of the respondents at non-Chinese companies said some Chinese competitors are equal to or better than their own companies at innovation — a strong increase from 48 percent in the 2012 survey (see Exhibit 2, page 8).
Other data confirms this perception. A recent survey of more than 1,500 senior executives in Europe conducted by Strategy&, the European Executive Council, and INSEAD found that European companies now consider China a greater competitive threat in the field of innovation than the U.S., India, or Japan. China, the report stated, “is being seen as an innovation heavyweight largely due to its massive catch-up investments in R&D and education.”1
Chinese companies are moving aggressively to make their innovation programs more global. More than two-thirds of respondents this year said they are now conducting product development for the rest of the world in China, up sharply from 41 percent in 2012. Even more expect to be doing so in the future: 88 percent of Chinese companies said they will be doing global R&D in China by 2023 (see Exhibit 3, page 9).
Chinese executives, however, are striving for far more, and they believe there is considerable scope for further improvement in innovation, according to the survey. Just more than half the participants at Chinese companies said their companies are among the most innovative in their
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home market, but only about a quarter count themselves among the most innovative companies in the world (see Exhibit 4, page 9). This is particularly true for companies in the automotive, finance/insurance, and computing and telecom industries.
As Chinese companies become more competitive in innovation, they increasingly worry about potential obstacles to further innovation growth. The survey shows that access to talent, retention of talent, and rapid cost increases are all key concerns for innovation in the future. The areas of concern that have increased the most over the last year include difficulties in understanding market needs (particularly in the
Note: 2012 Global Innovation 1000 yearly R&D comparison for the 918 companies for which R&D spending is available for both 2011 and 2010.
Source: Bloomberg data; Strategy& Global Innovation 1000 articles in strategy+business; Strategy& analysis
Exhibit 1Chinese companies are increasing their investments in R&D faster than competitors in any other market
0
5
10
15
20
25
30
Japan
2.4%
Europe
5.4%
NorthAmerica
9.7%
Rest ofworld
12.2%
China
26.5%
Change in R&D spend by companies headquartered in each region, 2010–2011
Average9.6%
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Source: 2012 China Innovation Survey; 2013 China Innovation Survey
Exhibit 2Nearly two-thirds of non-Chinese respondents say Chinese competitors are better than or equal to their own company in innovation
industrials sector), inadequate infrastructure and innovation ecosystems, and inadequate intellectual property protection (particularly in the health and life sciences industry). These worries are likely to increase pressure for stronger laws regarding intellectual property protection, and may well lead to more innovative ways to conduct R&D in cooperation with universities, institutes, and other entities. MNCs in China, however, did not report increasing concerns over the past year (see Exhibit 5, page 10).
“Some Chinese competitors are better innovators than my company”(% of non-Chinese company respondents)
18%
Chinese more innovative
Chinese equally innovative
Chinese less innovative
24%
36% 40%30%
53%
2012 survey 2013 survey
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Source: 2012 China Innovation Survey; 2013 China Innovation Survey
Exhibit 3Chinese companies are increasingly developing products for the rest of the world
Chinese respondents conducting product development for foreign markets in China
88
6468
41
% of respondents
100
80
60
40
20
0
+38%
+66%
In 10 years(2023)
In 10 years(2022)
20132012
2012 survey 2013 survey
5
4
3
2
1
0 Developing
markets
3.6 3.3
Developed Asian markets
3.4 3.1
Westernmarkets
3.3 3.0
MainlandChina
4.7 4.6
10 years later
2013
Relevance of R&D from China for different markets“My company’s R&D efforts in China contribute to developing products/services in….” (1=strongly disagree, 5=strongly agree)
Average agreement
Chinese companies’ and MNCs’ views of their innovation competitiveness in China and in the world (1=strongly disagree, 3=neutral, 5=strongly agree)
Averageagreement
3.6 3.4
5
4
3
2
1
“One of the most innovative in our industry in mainland China”
Averageagreement
2.83.6
5
4
3
2
1
“One of the most innovative in our industry in the world”
Non-Chinese companyChinese company
Exhibit 4Despite recent progress, Chinese respondents do not consider themselves among the global elite in innovation
Source: 2012 China Innovation Survey; 2013 China Innovation Survey
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Source: Strategy&
Exhibit 5Key concerns of Chinese innovators include understanding market needs, a lack of IP protection, and an insufficient innovation ecosystem
Key obstacles today and in the future“In the process of conducting innovation in China, my company faces and will face the following challenges” (1=strongly disagree, 5=strongly agree)
3.33.43.72.9
4.23.9 3.93.83.93.4
4.24.2 3.93.83.93.54.34.3
12345
+18% +12%+5%+18%-1% +7%
Inadequate intellectualproperty
protection
Inadequate infrastructure
and innovation ecosystem
Rapid cost increases
Difficulties inunderstanding market needs
Talent retentionTalent access
2023 perspective in 2013 survey
2012 survey2013 survey
3.53.23.23.34.03.7 3.63.23.63.2
3.94.03.33.0
3.72.9
4.14.0
12345
+2% +2%
+11% 0%
-1%+7%
Chinese companies
Non-Chinese companies
Inadequate intellectualproperty
protection
Inadequate infrastructure
and innovation ecosystem
Rapid cost increases
Difficulties inunderstanding market needs
Talent retentionTalent access
Ave
rag
e ag
reem
ent
Ave
rag
e ag
reem
ent
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China for the world
The results of the China Innovation Survey also show an acceleration of China’s development into a true global innovation hub for MNCs from developed markets. Two-thirds of the MNCs in China that took part in the survey reported that they are already conducting product development for foreign or global markets in China, a significant increase from last year’s survey, when just more than half said they were doing global R&D there. Participants were even more aggressive in their projections for the future: 74 percent said they expect to be conducting global R&D in China for the rest of the world 10 years from now, up from 65 percent last year (see Exhibit 6, next page).
Among MNCs in China, the greatest proportions of companies doing R&D for global markets are in automotive (77 percent) and computing and telecom (76 percent), followed by consumer goods (72 percent), health/life sciences (71 percent), and industrials (70 percent). As is the case with Chinese companies, chemicals and finance/insurance are below average in this category.
In nearly every industry, the proportion of MNCs conducting global R&D in China is expected to rise over the next 10 years. Consumer goods, health, and industrial companies have the most aggressive plans for global innovation based in China. By 2023, for example, 94 percent of the survey respondents at consumer goods MNCs in China, as well as 88 percent of those in health/life sciences and industrials, expect to be doing global R&D in China (see Exhibit 7, page 13).
One example of the kind of products generated by innovative MNCs based in China is the Chevrolet Sail car, manufactured by Shanghai General Motors (a joint venture of General Motors and SAIC Motor). The latest model was designed and engineered at Shanghai GM’s Pan-Asia Technical Automotive Center, and is exported to India, Latin America, North Africa, and the Middle East. In other industries, such as healthcare, MNCs are using innovations pioneered for the Chinese market for export to other markets. GE Medical Systems’ subsidiary in Wuxi, for example, developed and launched a sophisticated, compact ultrasound diagnostic machine that has become a global success.
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MNCs plan to increase innovation from China for Western markets — now seen as equally important as the Chinese market for local companies — and they increasingly feel that their R&D efforts contribute to developing better products and services for those markets. Asked for their 10-year projections, they rated the importance of innovation slightly higher for Western markets than for developing markets or developed Asia (see Exhibit 8, next page).
MNCs also plan to further develop their innovation centers in China: The vast majority (83 percent) believe that China-based R&D is adding equivalent or higher value to their bottom lines in comparison with R&D conducted in other regions. By 2023, almost all respondents expect that China-based R&D will be adding equivalent or higher value (see Exhibit 9, page 14).
In 10 years(2023)
In 10 years(2022)
20132012
2012 survey
2013 survey
Non-Chinese companies in China that conduct product development for foreign/global markets
746566
51
0
20
40
60
80
100
+29%
% of respondents
+14%
Source: 2013 China Innovation Survey
Exhibit 6China is becoming a true innovation hub, even for non-Chinese companies based in the country
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Source: 2013 China Innovation Survey
Exhibit 7In most sectors, innovation among non-Chinese companies based in the country is expected to increase
Industrials
88
70
10 years later
Present
Average68
100
80
60
40
20
0
% of respondents
Health/life sciences
88
7172
Computing & telecom
8276
Chemicals & energy
6954
Automotive
8077
Consumergoods
42
67
Finance/insurance
94
Non-Chinese companies that conduct product development in China for foreign/global markets
Source: 2013 China Innovation Survey
Exhibit 8MNCs in China now see innovation in China for Western markets equally important as for developing markets and the rest of Asia
Developingmarkets
Developed Asian markets
Westernmarkets
MainlandChina
Developingmarkets
Developed Asian markets
Westernmarkets
MainlandChina
Relevance of R&D from China for different markets (responses from non-Chinese companies)“My company’s R&D efforts in China contribute to developing products/services in….” (1=strongly disagree, 5=strongly agree)
2.2
2.93.0
4.2
3.1
3.73.9
4.65.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0
3.23.13.0
4.3
3.73.63.4
4.55.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5
1.0
2013 survey 2012 survey
Average agreement Average agreement
10 years later
Present
Note: Developed Asian markets include Japan, South Korea, and Taiwan; developing markets include (but are not limited to) India and Southeast Asian countries.
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Note: Sums may not total 100 due to rounding.
Source: 2012 China Innovation Survey; 2013 China Innovation Survey
Exhibit 9The value of R&D work done in China is equal to or greater than that done in other markets
“In comparison with R&D work performed worldwide, my company’s R&D work performed in China is.…”(1=lower value added, 3=equivalent, 5=higher value added)
32%
27%
10%13%
51%
23%
7%
32%
33%
28%
16%
18%
5
4
3
2
1
2023 expectation
4%2%
2013 rating
4%
2012 rating
Equivalent
Lower value added
Higher value added
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Innovation case study: WeChat
WeChat is a good example of Chinese innovation. The free program, developed internally by Tencent, builds on the instant-messaging functions of earlier platforms like WhatsApp and the social media components of Facebook by combining these features into a single app and adding new functions. Launched in January 2011, the program has grown extremely rapidly, with more than 450 million users today. That success stems from Tencent’s capabilities in three specific areas: Internet user intelligence, microinnovation, and execution excellence.
Internet user intelligence: Tencent, the largest Internet company in China (and among the largest in the world), has significant experience in Internet operations. The company’s portfolio includes QQ.com, a major Web portal in China, along with QQ, an instant-messaging service; social networks; e-commerce technology; and game platforms. As a result, it has a deep understanding of Chinese Internet users, allowing it to rapidly identify the market potential of new applications and services.
Microinnovation: In addition, WeChat does not merely mimic earlier programs. Tencent has strong capabilities in microinnovation, which allow it to develop new features to meet the needs of Chinese consumers. For example, WeChat allows voice chat and group chat, along with several innovative social media features. One of them, called Shake, allows users to connect with other WeChat participants, locally or worldwide, simply by shaking the phone. Drift Bottle lets users send a message out to float among the WeChat user base — like a message in a bottle — until someone decides to open it and respond. In addition, Tencent recently announced that it will add mobile gaming functions to the platform as well.
Execution excellence: Tencent’s large team and sufficient resources enable it to roll out programs extremely rapidly. The company launched tailored versions of WeChat for different mobile platforms (iOS, Android, Symbian, Windows) within a week, and it released 44 updates in its first year.
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The China innovation strategy
The 2013 survey results show that innovation strategies by MNCs in China and local Chinese companies differ significantly, more so than indicated last year. We posed a series of questions about the innovation strategies that companies are pursuing, using the taxonomy developed over the last eight years in Strategy&’s Global Innovation 1000 study,2 which slots innovators into three categories: Need Seekers, Market Readers, and Technology Drivers (as estimated by Strategy& from respondents’ answers).
Need Seekers, such as Apple, Procter & Gamble, and Haier, focus on proactively engaging customers directly to generate ideas. They develop new products and services based on superior end-user understanding. Their goal is to seek out both articulated and unarticulated needs, and then to try to get new products that address these needs to market first.
Market Readers, such as Hyundai and Caterpillar, generate ideas by closely monitoring their markets, customers, and competitors and creating value through incremental innovations. This implies a more cautious approach — one that depends on being a “fast follower” in the marketplace.
Technology Drivers, such as Google and Bosch, depend heavily on their internal technological capabilities to develop new products and services. They leverage their R&D investments to drive both breakthrough innovation and incremental change, in hopes of meeting the known and unknown needs of their customers via new technology. They tend to be the least proactive in directly contacting customers.
Although each of the strategies can be highly successful, analysis from the Global Innovation 1000 study shows that following a Need Seeker strategy, although difficult, offers the greatest potential for superior performance in the long term. Fifty percent of the respondents who defined their companies as Need Seekers in the 2012 study, for example, said their companies were effective at both the ideation and conversion stages of innovation, compared with just 12 percent of
Following a Need Seeker strategy, although difficult, offers the greatest potential for superior performance in the long term.
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Market Readers and 20 percent of Technology Drivers. The study also found that these are the same companies, by and large, that consistently outperform their peers financially.
This year’s China Innovation Survey shows that a much higher share of Chinese companies are following the Need Seeker strategy. In 2013, fully 44 percent of the Chinese companies we surveyed see themselves as conducting activities that make up the Need Seeker strategy, compared to the Global Innovation 1000 average of 27 percent. Non-Chinese MNCs, on the other hand, were near the global average, at 29 percent, with the majority of respondents following a Technology Driver approach. This disproves the conventional wisdom that Chinese companies tend to be more in the fast follower camp, copying and improving other companies’ products (see Exhibit 10, next page).
Interestingly, Chinese companies share their propensity to pursue the Need Seeker strategy with companies in one other distinct geography: Silicon Valley. The Global Innovation 1000 study found that 46 percent of Silicon Valley companies are Need Seekers, just a bit more than the share of Chinese companies.3
MNCs in China, in contrast, continue to drive innovation in the country predominantly through their “technology advantage,” stemming from fundamental research and superior technology. As Chinese competitors gain experience and maturity, however, it is likely that they will catch up in these areas over time. We therefore expect that MNCs will find it increasingly important to adopt some components of the Need Seeker strategies and tools used by local companies, so they can identify customer needs more quickly and leverage the resulting insights to innovate along the entire value chain, including channel and service innovation. The fragmentation of customer needs across the vast country will also make it more and more important to understand these needs in order to tap into demand in lower-tier cities.
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Note: State-owned enterprises are more oriented to a Need Seeker approach (47% Need Seeker, 22% Market Reader, and 31% Technology Driver) than private Chinese companies (41% Need Seeker, 27% Market Reader, and 32% Technology Driver). Sums may not total 100 due to rounding.
Source: 2012 China Innovation Survey; 2013 China Innovation Survey
Exhibit 10Chinese companies are more likely to be Need Seekers than the global average
Innovation strategy (by company type)
33% 32%
47%
28%25%
26%
50%
34%
38% 44%
27% 30% 29%
37%
20%
Technology Driver
Market Reader
Need Seeker
20132012World average of Global Innovation 1000
20132012
Non-Chinese MNC in ChinaChinese company in China
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Needed capabilities not yet clear
Participants were asked to identify the most critical capabilities (which we define as processes, tools, knowledge, skills, and organization) for each of the four stages of innovation: ideation, idea conversion, product development, and commercialization. The results show that Chinese innovators (both local and MNCs) have a less distinct view of the key capabilities needed. This points to several conclusions:
1. The innovation environment is still evolving.
2. Companies operating in China require a distinct set of capabilities that are different from those needed in other markets.
3. There is significant scope for Chinese companies to improve their effectiveness in deploying innovation capabilities.
There is less agreement among companies about which key capabilities are needed to innovate successfully in China than in other geographies. We calculated this by asking participants to rank the importance of capabilities needed at each of the four stages of innovation. In the global average, there was a large spread between the capability that companies rank the highest at each stage, and the capability they rate the lowest, showing a consensus about which capabilities are required for success at each stage of innovation (a sign that the global innovation market is relatively mature).
No similar consensus, however, was evident in the results for Chinese companies and MNCs operating in China. Instead of identifying a distinct, clear-cut winning capability for each innovation stage, respondents gave very similar rankings to both the most and least important innovation capabilities. For example, at the ideation stage, the global consensus is clear: The two most important capabilities are consumer and customer insights and analytics, and understanding of emerging technology trends; the least important is supplier and distributor engagement. For Chinese companies and MNCs operating in China, in contrast, the rankings for all the capabilities are clustered in the middle ranks. The results for the other three stages of innovation
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are similar. This suggests that the innovation market in China continues to evolve, and that both local companies and MNCs are having difficulty identifying and prioritizing the most important capabilities (see Exhibit 11, next page).
Even though Chinese companies and MNCs operating in China do not cite many distinct innovation capabilities, the ones that are distinct are different from the ones we see globally. The survey results show that Chinese companies are still focusing on core innovation capabilities such as platform management and production ramp-up, and are also moving away from reverse engineering as the sole source of innovation. The MNCs in China are more formal and process-driven, and focus on capabilities related to government relationship management and understanding the market potential (see Exhibit 12, page 22).
Chinese companies and MNCs also favor different innovation tools. For example, at the ideation stage, Chinese companies are making greater use of customer-focused tools such as direct customer observation and end-user/customer focus groups, while MNCs in China appear to make greater use of feedback from sales/customer support, and technology road mapping (see Exhibit 13, page 23). Both sets of favored tools are quite different from the global averages.
One of the survey results shows the potential for Chinese companies to further improve their innovation efforts: Chinese companies consider themselves weakest on the very capabilities that they see as most important to contributing to the company’s success. For example, Chinese companies ranked the capability to manage global, enterprise-wide product launches as the most critical, but also gave themselves poor marks for their competence in executing this capability. The results are similar for product life-cycle management and open innovation/capturing new ideas (see Exhibit 14, page 24). (For MNCs operating in China, there is no significant relationship between importance and competence.)
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Capability average importance(1=least important, 5=most important)
3.9
3.4
+1.3
Production ramp-up 3.2
3.5
Controlled rollouts 3.6
Customer engagement 2.6
Supplier/partner engagement 3.0
Reverse engineering 3.3
Specific goal design 2.9
3.2
2.8
2.9
2.8
Market potential assessment 3.4
3.1
Supplier/distributor engagement 3.0
Competitive insights 3.0
2.8
Understanding of technology trends
Consumer and customer insights
Resource forecasting and planning
Portfolio trade-off decision making
Technical risk assessment/management
Strategic disruption decision making
Product platform management
Product life-cycle management
Diverse user group management
Regulatory/government relationship management
2.8
Open innovation 3.4
Global average
Non-ChineseMNCs in China
2.7
+2.8
2.4
2.4
3.4
3.9
4.1
2.6
1.7
3.0
3.7
2.4
2.5
2.7
4.5
3.2
2.0
2.7
4.2
3.5
2.9
2.9
3.5
+1.3
3.3
3.3
3.9
2.6
2.9
3.0
3.2
3.3
2.7
3.0
3.0
3.0
3.2
2.9
2.9
2.9
3.1
3.2
Chinese companies in China
Commercialization
Product development
Idea conversion
Ideation
Source: 2013 China Innovation Survey
Exhibit 11Companies in China are less clear on innovation priorities than firms in other markets
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Source: 2013 China Innovation Survey
Exhibit 12Chinese and non-Chinese companies emphasize different innovation capabilities
Top seven capabilities for innovation in China(1=low importance, 5=high importance)
Commercialization Product development Idea conversion Ideation
Chinese companies’ rating of most important capabilities Non-Chinese MNCs’ rating of most important capabilities
Project resource requirementsforecasting and planning
3.2
Open innovation/capturing ideasat any point in the process
3.2
Production ramp-up 3.3
Product platform management 3.3
Diverse user group management 3.3
Product life-cycle management 3.5
Pilot user selection/controlled rollouts 3.9
Reverse engineering
3.5
Pilot user selection/controlled rollouts
3.6
Regulatory/governmentrelationship management
3.9
3.4
3.4
Ongoing assessment of market potential
Product life-cycle management 3.4
3.3
Diverse user group management
Open innovation/capturing ideasat any point in the process
Unique critical capabilities
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Respondents’ use of key ideation tools
37
58
65
57
62
78
52
48
78
57
59
63
% of respondents
100 80 60 40 20 0
15Direct customerobservation
Traditional marketresearch
Idea workoutsessions
Feedback from sales/customer support
End-user/customerfocus groups
Technology roadmapping
Ideation processes,tools, and practices
Non-Chinese companyChinese company
13
10
15
Note: Key tools are those used by more than 50% of respondents.
Source: 2013 China Innovation Survey
Exhibit 13Chinese and non-Chinese companies favor different key ideation tools
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Perceived capability importance vs. competency (all capabilities)
4.0 4.5 5.0
Importance for success
0.0
2.5
3.5
4.0
4.5
5.0
Competency
3.0 3.5
3.0
2.5 0.0
Product life-cycle management
Global product launches
Open innovation/capturing ideas
High
Low
Low High
Non-Chinese companies
Chinese companies
Source: 2013 China Innovation Survey
Exhibit 14Chinese companies indicate weakness in the capabilities they perceive as most critical
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Market implications
Companies in China have made great strides in building their innovation competitiveness, according to the 2013 China Innovation Survey. The sharp improvements from 2012 to 2013 also show that the innovation imperative in China has momentum, and that further advances are likely over the next several years. Chinese companies are more aggressively using their unique innovation strategies to pursue opportunities in global markets, particularly Western markets. Critically, however, the data also shows that Chinese companies have not become complacent, but instead are quite self-critical and aware of the potential for improvement. This suggests that they can make even greater gains in the future if they can extend the innovation results they have achieved domestically to markets in the developed and developing worlds.
China has already established itself as a location for R&D that is competitive with most other regions of the world, according to the survey. MNCs are developing their innovation centers in China as global hubs, and they are accordingly adding value to their organizations there. Overall, R&D spending in China was nearly 2 percent of GDP in 2012, still less than the 4 to 5 percent typical in developed countries. China, however, is a large country, and spending in cities like Shanghai and Beijing is already in the 4 to 5 percent range, indicating that these cities are becoming global innovation hubs.
Innovation in China is rapidly gaining strength, and the country may regain its place as a world center for innovation. Chinese companies will use their specific innovation strategies and advantages to compete with their rivals — at first domestically, but later also globally. Multinational companies, for their part, will find themselves forced to adapt their innovation models in order to compete more effectively with Chinese companies. They also will have to face the challenges of figuring out how to integrate China-based R&D into their global research networks.
For Chinese companies, the biggest challenge will be to preserve some of the advantages they have built up, particularly as MNCs begin to understand the abilities of their Chinese competitors and look for ways to emulate their strengths and incorporate them into their own proven ways of doing business.
Innovation in China is rapidly gaining strength, and the country may regain its place as a world center for innovation.
26 Strategy&
Top 10 innovative companies in mainland china
Respondents to the 2013 China Innovation Survey were asked to name the most innovative Chinese company (see Exhibit A). Alibaba Group was voted number one. According to vice president Junling Li, the nation’s leading B2B company pursues innovation on two levels: at the strategic level, which requires top-down decision making from the core management team, and through frontline employees providing new ideas from the bottom up. What’s essential to keep the innovation mechanism healthy, says Li, is the right culture: “There should be a culture, rather than a process, to make information flow effectively within the organization. Process is the foe of innovation.”
Three other companies on the Top 10 list are Internet-based: Tencent Holdings (3), whose businesses include social networks such as the Tencent QQ instant-messaging service, Web portals, e-commerce, gaming, and the extremely popular
WeChat application (see “Innovation Case Study: WeChat,” page 15); Baidu (7), the Web services company best known for its Chinese language search engine; and 360Buy Group (9), the nation’s largest B2C retailer.
Five of the top 10 are manufacturing companies: Huawei Investment & Holding (2), which operates in the telecommunications equipment, mobile devices, and consulting industries; Lenovo Group (4), computers and smartphones; Sany Heavy Industry Company (5), heavy machinery; Haier Electronics Group (8), consumer electronics and home appliances; and Wanxiang Group (10), auto parts.
China Merchants Bank (6), the Shenzhen-based banking company with more than 500 branches in mainland China, Hong Kong, and New York, is the only company in the Top 10 from the financial sector.
Source: 2013 China Innovation Survey
Exhibit AMost innovative Chinese companies
1
2
3
4
5
6
7
8
9
10
Rank Company name
Alibaba Group
Huawei Investment & Holding
Tencent Holdings
Lenovo Group
Sany Heavy Industry Company
China Merchants Bank
Baidu
Haier Electronics Group
360Buy Group
Wanxiang Group
Rank Company name
27Strategy&
Note: Chinese companies include both private organizations and state-owned enterprises. Non-Chinese companies include MNCs and Sino-foreign joint ventures. Sums may not total 100 due to rounding.
Source: 2013 China Innovation Survey
AppendixSurvey population
Breakdown of participants by position Breakdown of participants by industry
2013
264
96 (36%)
161 (61%)
7 (3%)
2012
110
66 (60%)
44 (40%)
Non-Chinese companiesChinese companiesNot disclosed
Total respondents
3%
14%
7% 9%
13%
14%
9%
9%
22%
Other
Professional services
Health/life sciencesFinance/insurance
Consumer goods
Computing & telecom
Chemicals & energy
Automotive
Industrials
9%
17%
27%
18%
28%
Other
Manager
Director/generalmanager
Vice president(including
SVP & EVP)
C-suite
© 2013 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Disclaimer: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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This report was originally published by Booz & Company in 2013.
Endnotes
1 “Growing Europe: The Competitiveness Imperative,” State of the European Union 2013, Strategy&, INSEAD, and European Executive Council, www.strategyand.pwc.com/media/file/Strategyand_EEC_INSEAD_Revitalising-the-European-Dream-2013.pdf.
2 “The 2012 Global Innovation 1000 Study: Making Ideas Work,” Strategy&, www.strategyand.pwc.com/media/file/Strategyand_The-2012-Global-Innovation-1000-Study.pdf.
3 Barry Jaruzelski, John Loehr, and Richard Holman, “The Global Innovation 1000: Why Culture Is Key,” strategy+business, Winter 2011, www.strategy-business.com/article/11404?gko=dfbfc.
