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November 3, 2015

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Despite manufacturing prowess, China faces long road toward success in innovation

INNOVATION is an important buzzword in China these days.

It commands such importance that a national movement of innovation is steadily gathering momentum.

In many official statements and policy papers, innovation is deemed central to China’s bid to move up the value chain and build a knowledge-based economy.

To many, this means a shift away from the country’s old role as a world factory doing low-end assembly jobs for multinationals.

But this planned metamorphosis will not be easy to achieve. According to the predictions of some business leaders and economists, the US will likely re-emerge as a leading manufacturing center in one decade or two, further eroding China’s already decreased advantage in manufacturing.

Ronnie Chan is among those who foresees a resurgent US manufacturing sector. Chairman of Hang Lung Group, a Hong Kong-based real estate developer, he recently spoke at a forum on innovation held at Fudan University’s School of Management.

“Every element that is necessary for the US to become a manufacturing powerhouse is there,” said Chan.

In addition to technology, capital and management, energy is another major advantage of US manufacturers. The country boasts a large reserve of shale gas, which is now among the cheapest sources of energy in the world.

And with the advent of 3D printing, new materials and other technologies, “labor is perhaps no longer the most important force, not to mention that differences between labor costs in the US and China have shrunken considerably in recent years,” Chan claimed.

While it is indeed imperative to become innovative as a nation, in his opinion persistence in cherished traits, such as craftsmanship, is equally important.

Although Chinese companies are now capable of producing high-speed trains and smartphones that compete against foreign-branded handsets, Chan believes craftsmanship is embodied more often in such ubiquitous items as an exquisite fan or a water pot that doesn’t leak.

“China is on its way to become a strong nation, and for that we need innovation. But while we innovate, we also need to persist in areas such as craftsmanship,” Chan told the forum.

Unlike Chan, who juxtaposed innovation and persistence, Lawrence Lau, professor of economics at the Chinese University of Hong Kong, saw no contradiction between innovation and persistence.

In his opinion, successful innovation itself is the outcome of persistence. He cited the example of Silicon Valley, where it’s common for start-up entrepreneurs to succeed on a third attempt and obtain venture capital funding thereafter.

Lau claimed that at the end of the day, innovation requires long-term investment in R&D. Investment usually doesn’t pay off immediately, but “you can see that over time it really can make a difference.”

Waiting or breakthroughs

When it comes to innovative capacity, an important indicator of national economic strength, China, despite its increased R&D outlays, still lags behind developed nations and neighbors like South Korea in terms of its investment-to-GDP ratio — whether in overall or per capita terms.

Much of China’s existing innovation activity usually revolves around reinventing business models rather than achieving technological breakthroughs.

According to many venture capitalists, nowhere is this more evident than in the case of the solar industry.

What often happens after a Chinese solar businessman receives funding from VCs or private equity is that he tends to copy technology to build a manufacturing line, but has no ability to actually innovate, said Gary Rieschel, founding managing partner of Qiming Venture Partners, a Shanghai-based venture capital firm.

In his speech Rieschel said the irresponsible, or rather, wasteful, use of capital contributed to the notorious overproduction in the solar sector.

An army of new investors lacking new technologies quickly reduced solar equipment manufacturing to a loss-making industry. “By 2009 there were 117 manufacturers of poly-silicon cells in China. So what was a 19 percent growth margin business in 2005 and 2006 turned into a negative growth margin business from 2009 to 2014,” said Rieschel.

He believes that across every aspect of the Chinese economy and society there is certainly a need for innovation. And as evidenced by the capacity glut in the solar sector, the problems that China faces are usually on a scale not seen elsewhere in the world.

In many cases, the solutions for China have to be uniquely designed and built in China, Rieschel claimed.


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