Nation No Longer A ‘Wasteland’ For Entrepreneurs

China Daily, July 7, 2015


China’s Xiaomi Redmi 2 smartphones are displayed to the media during their launch in
Sao Paulo, Brazil, June 30, 2015. [Photo/Agencies]

Rising generation of business leaders creates value-added solutions

People unfamiliar with recent developments within China generally believe that the nation lacks innovation capabilities as well as the infrastructure to support entrepreneurship. The stereotypical view, often fueled by Western media, portrays China as an “innovation desert” full of copycat companies that make shanzhai (fake) products.

They describe a China that lacks innovativeness due to an inadequate system of intellectual property protection, a rote-learning educational system that stifles creativity and a business landscape dominated by State-owned enterprises.

This perception is based on China’s history, but it does not reflect current realities. Worse, it fails to recognize the emerging wave of innovation from China.

Understanding innovation in the context of contemporary China requires a broader definition of innovation, beyond the classic product or technology-centric view espoused by Western management theory. We suggest a broader interpretation of innovation that includes solutions that offer added value to customers or businesses, which may be manifested in a variety of forms, but are not limited to low-cost disruptions or technological breakthroughs.

To better understand this broader view of innovation, we should look deeper into examples coming from China.

Three layers of innovation

In our view, there are three essential layers of innovation: people, organization and market.

At the core are people. Large corporations often find it difficult to maintain the same level of creativity and freedom, both of which are conducive to the innovation process, as exists within startups. In China, a growing culture of mass entrepreneurship and relevant favorable policies are emerging. As a result, we are witnessing rapid growth in startups, which serve as the breeding ground for creative entrepreneurial minds.

Inspired by successful examples of private entrepreneurs, a “why-not-me” mentality motivates aspiring young entrepreneurs to create solutions that deliver value. This new breed of young entrepreneurs are adept at identifying new and creative ways to add value to consumers’ lives within a volatile and sometimes sub-optimal environment.

Among the entrepreneurs who were born in the 1980s and 90s, there is a strong sense of entrepreneurial zeal and optimism ignited by recent successful examples of Alibaba Group Holding Ltd’s Jack Ma, Xiaomi Inc’s Lei Jun, Tencent Holdings Ltd’s Pony Ma and many others.

There are other factors in play that are creating a more favorable environment for innovation. These include China’s grassroots’ openness to the world, experienced returnee entrepreneurs with expertise and access to a global pool of resources gained from their experience abroad, and simply China’s scale that allows good business ideas to scale up rapidly.

China’s large population base also helps increase the probability of success from “trial and error” experimentation with new solutions. Many grassroots entrepreneurs are able to spot market imperfections and leverage that contextual understanding to create relevant solutions.

Lei Jun is a case in point. Xiaomi’s approach to innovation relies on a deep understanding of customer needs and continual feedback to tailor products for specific usage requirements.

Second, organization. Organizations typically resist change when they become successful. As markets mature, market leaders often lose their competitive edge as they fail to anticipate change, typical across numerous global industries.

As we know, China’s market changes fast. Many Chinese companies are very young and have a higher risk appetite for opportunities and radical innovations. A well-known case is how Haier Electronics Group Co Ltd achieved significant growth when it introduced a washing machine capable of cleaning not only clothes but also potatoes.

This demonstrates Haier’s awareness of indigenous demand from China’s lower-tier cities and the company’s customer-centric management philosophy.

Entrepreneurial Chinese organizations can be described as hungry, agile and nimble. They continually push for growth because there is no legacy of success to protect. This innovative character results in higher levels of patent activity and investment into research and development.

Third and last is the market. Critics often point to the flaws in China’s lack of market-centricity when expressing concerns about the future. These criticisms often dwell on the dominance of SOEs in certain sectors, a lack of transparency, the abundance of government incentives pushing for technological change without oversight mechanisms and the heavy presence of government investment to drive the economy.

SOEs will continue to play a major role in China, but private companies have emerged across multiple sectors (including foreign entities in China) and will become the dominant forces of innovation and economic expansion. In open sectors, competition has become intense as foreign corporations, SOEs and local private companies vie for a piece of the pie. Deregulation has been a major driver for China’s growth over the past couple of decades and that will remain the case.

Over the past couple of decades, China’s market has experienced unprecedented economic expansion, aided largely by government policies that provided top-down support at national and provincial levels. Tangible benefits include science and R&D parks as well as industry clusters throughout China. The supporting foundation for continued growth and innovation is also falling into place, including fast consumer adoption of the Internet, creation of startup incubators, and increased sources of funding for new businesses from venture capital, private equity and angel investment.

Innovation breeding ground

China is a complex, diverse and dynamic market, characterized by intense competition. Chinese companies are emerging with unique capabilities to win the bases of competition through lower cost, better quality and faster execution.

Innovative Chinese companies such as Baidu Inc, Alibaba, Tencent, Xiaomi, Haier and others have demonstrated unique capabilities and an innovation mindset well-suited to China’s unique context. Such businesses have proven capable of building cross-industry ecosystems for collaborative innovation and a willingness to “boundary jump” across traditional industry lines. These ecosystems exhibit “biodiversity”, which makes the entire value chain more robust and sustainable; of course, up to certain limits.

The China context can be described as a highly complex, diverse, dynamic and discontinuous environment accentuated by time-space compression. Within this breeding ground, innovative Chinese companies are leveraging this market context to deliver exponential growth.

Edward Tse is founder and chief executive officer and Bill Russo is managing director of Gao Feng Advisory Co, a global strategy and management consulting firm based in China.

Internet Car Sales Click With Chinese Consumers

Ward’s Auto, January 5, 2015

Chinese automaker Geely will sell about 3,000 units online in China in 2014, five years after launching Internet sales on the country’s leading e-commerce site.

“The impact of Internet firms has been a major success for the company,” Geely spokesman Ashley Sutcliffe says.

Consumers have embraced e-commerce in China, the world’s most networked country. They are willing to buy just about anything online, including cars, and thus a new distribution model is being created.

But don’t count traditional dealerships out. They still play a crucial role.

“E-commerce in the automotive market is taking off,” says Paul Hu, chief marketing officer for Greater China and ASEAN at Volkswagen Group China. “In my personal opinion, online sales in the total car market in China will account for 10% in the near future.”

Shanghai Volkswagen, one of VW’s joint ventures in China, sells cars online in China though a handful of sites. Customers place orders online, but pick up the vehicle at a dealership.

“We do believe that there is some disruption to come to the distribution model, but it is not imminent,” says Kyle Dickie, CEO of Sewells Group, a dealership best-practices consultancy. “In China, there is an unusually high level of trust still placed in the sales consultant. In other words, consumers still want to interact face to face.”

Smartphones are the disruptive agent. By the end of 2014 China was to have more than 500 million smartphone users, says Wang Xiangrong, an official with China’s State Internet Information Office.

Those phones are kept busy buying stuff. Beijing-based iResearch predicts 2014 online retail sales in China will surge 45.8% to RMB2.76 trillion ($444 billion).

The explosion of online commerce in China is aided by e-commerce giants such as Alibaba, Tencent and Baidu. All are playing a role in changing the vehicle-distribution model in China.

Alibaba owns Tmall, the country’s leading e-commerce site. Formerly called Taobao, it is the site where Geely launched Internet sales. Last year, Alibaba partnered with another Chinese automaker, SAIC, to create an Internet-enabled car.

Though consumers can buy a Geely car online, dealers still close the deal. “Consumers can pay a deposit or pay for cars outright online, (but) the official sale will be handled by the nearest dealer,” says Sutcliffe.

That allows the dealer to sell additional products to the buyer and also gives the customer a point of contact for aftersales service, he says. Geely has some 800 dealerships in China.

Demise of Dealerships From Ride Sharing?

Online sales aren’t what will cut dealers out of the sales loop, argues Bill Russo, managing director at consultancy Gao Feng in Shanghai. Business-to-consumer connected-transportation applications might, however. These basically are ride-sharing applications but in China taxi drivers are used.

“Empowered with technology, consumers of mobility services are likely to make choices other than what the automakers and their dealers are offering today,” says Russo.

China’s Internet giants are deeply involved in mobility services.

Alibaba is an investor in Kuaidi Dache, a taxi application that sometimes tops 6 million daily orders. Tencent offers the taxi app Didi Dache, which claims more than 100 million registered users and says it processes more than 5.2 million orders daily.

The Baidu search engine has 500 million monthly mobile users and offers Baidu Maps and Total View, which uses satellites to show actual locations. It is a Chinese version of Google Maps’ Street View; Google is blocked in China.

The U.S. ride-sharing service Uber has just entered the China market and will use Baidu’s maps and Street View.

Internet-savvy young Chinese increasingly are becoming accustomed to using such services, says Russo. They “are increasingly likely to opt out of traditional car-ownership hassles,” he says.

Geely is one automaker that is playing both sides. It owns London Taxi, a famous brand in the U.K. A few months ago it introduced a fleet of the vehicles in Shanghai.

The iconic taxis – which in Shanghai are gold, rather than black – are larger than regular taxis and equipped to accommodate wheelchair users or others with special needs, says Sutcliffe. Right now they can only be summoned using a phone.

“There are plans for an app,” Sutcliffe adds.