Essec Business School

ESSEC Knowledge: Why this persistent old myth that ‘China can’t innovate’?

Yan Li: The “West” has a very specific perception of what it means to be innovative. “Innovation” tends to get reduced to the transformative technologies and radical changes in business models that are created at start-up level. Westerners point to Steve Jobs or Mark Zuckerberg and argue that the really big ideas come from California garages or Harvard dorm rooms.

To be fair, many of the current Fortune 500 companies do hail from America’s healthily start-up economy. Silicon Valley appears to be the perfect breeding ground for disruptive, high-tech innovation: Stanford supplies the engineering talent and the area is teaming up with venture capitalists and lawyers who understand the complexities of starting a high-tech business.  

Although the Chinese government has tried very hard to replicate this kind of environment by pushing for the development of IT infrastructure, offering special tax status to innovative companies and assisting Chinese expatriates who want to come home to start a company, it will take some time before we’ll really see a Silicon Valley in China. 

Yan Li: Until now, innovating in China has been seen by the westerns as tailoring existing ideas to the very specific Chinese market. However, China is now home to four of the world’s ten largest internet and technology companies – Alibaba, Baidu, Tencent and Xiaomi.

Therefore, beware of labeling Chinese innovators as “copy-cats”. While the Chinese do sometimes “copy” existing western business models, they adapt them with huge amounts of localization for the Chinese market – this is a kind of incremental innovation.

Indeed, by catering specifically to the needs of Chinese youth and focusing on social games, Tencent QQ beat out Microsoft’s Windows Live Messenger service. Zhenai.com, although similar to services like Match.com, offers counseling and debriefings to its customers, which fits well with the indirect manner of affection display in Asian culture.

Chinese netizens are just a lot different from their Western counterparts. With the fastest growth of Internet usage lying in online shopping thanks to the boom of e-commerce in China, they are used to shopping, sharing shopping experiences and commenting products online.

In fact, local Chinese people have been so receptive to e-commerce, that their mobile commerce adoptions rates are also very high. The reason that mobile technology is doing so well in Asia has a lot to do with People’s attitudes there, which is very different from that of the European consumers. 

Some may argue that Alibaba was able to take the upper hand in China over their western competitor Amazon because they understood how to maneuver China’s government regulations. This argument ignores the many incremental innovations Alibaba has made in order to fit seamlessly within, and dominate the Chinese e-commerce market.

Baidu, the Chinese answer to Google, shares a similar success story. Of course, Google was at a disadvantage in this region because of government regulations. But there are other reasons for Baidu’s success. They have an understanding of the local market that Google just didn’t have, and they were able to innovate accordingly and become uniquely Chinese. They understand the social behaviors and habits of the Chinese people – so they develop services that respond to these needs.

By being local, Chinese entrepreneurs have their fingers on the pulse of Chinese society and are able to innovate from existing models by tweaking it to cater to the unique Chinese consumers. “The biggest mistake that Google made in China,” said Baidu CEO Robin Li, “stemmed from their CEO not spending 6 months in China to understand the country.”

ESSEC Knowledge: Is Chinese innovation more than just adapting a good idea to the Chinese market?

Yan Li: Chinese innovation is more than just adapting a good idea to the Chinese market. It’s about engaging in a kind of innovation “ping pong” game. In other words, Alibaba might have taken a few cues from Amazon, but Amazon is also learning a thing or two from Alibaba when entering Chinese market. Sure, the ball might have started in Amazon’s court, but now China is developing the service in a new way, and Amazon is learning from that.

In fact, Amazon won’t really have a choice. Where they once held a near-monopoly on US soil, Amazon is going to face some stiff new competition from a company that can offer a similar products and services at more competitive prices. Indeed, the Alibaba IPO has changed the international landscape and created two e-commerce poles – one based in China and the other in the United States.

Alibaba has already started to flex their international muscles by tapping into the South East Asian market. And their IPO will speed up their internationalization peocess.  

But one area where Amazon really stands to learn a thing or two from Alibaba is on the mobile commerce front. China’ growing economy is increasingly focused on mobile, so m-commerce has huge potential in China. Alibaba is well positioned to leverage their e-commerce properties to excel in this market. In fact, Alipay, Alibaba’s third-party payment service, has brought in USD $89 billion in assets under management in 10 months, making it already a top three global money market fund and proving that it is more than “the PayPal of the East”. It’s a force to be reckoned with in its own right.

In fact, e-commerce and m-commerce are where Chinese innovation goes from incremental to disruptive: the Chinese retail industry has effectively been revolutionized, to the point where in store purchases are dropping and the increase in the number of physical stores has been stagnant. The booming of e-commerce and m-commerce is imposing a tremendous impact on the Chinese retailing landscape, a change that has never been seen before.