Beijing Summit Ponders Chinese Innovation

Lv Guozeng, China’s Assistant Minister of Foreign Affairs at the China Business Summit organized by the World Economic Forum.

BEIJING — The rise of China as a global force for technology innovation emerged as a keynote theme at the World Economic Forum’s China Business Summit held here over the weekend (Sept. 9 to 10).

But in interactive discussions throughout the summit, delegates cautioned that taking China’s technology companies global poses challenges due to several critical factors. Among these are a lack of innovation in product development, an immature domestic capital structure, and a critical shortage of talent in the ranks of top management.

The economic overtones of China’s technology development ambitions heard at the 2005 China Business Summit echo concerns voiced by tech industry analysts in the run up to the government/industry sponsored International Creative Industry Forum that took place earlier in the week across town, in northwestern Beijing’ Haidian District’s Zhongguancun Technology Zone (see Sept. 12 story)

Paul DiPaola, managing director of Bain & Company China, delegates and panelists summed up the key issues in an extensive series of comments posted on the World Economic Forum’s China Business Summit website. He noted that China has been building strong companies since the 1990s and he ticked off a list of the gating factors holding back more rapid business and technology development in China today.

“They are critically short of talent and their management teams (are) spread very thin. Their products are not unique enough — they need more product innovation. They also need to maintain a strong core business at home.”

China Business Summit delegates chewed over the innovation issue in depth at one panel session entitled: Innovation in China: Smart Money or Smart Strategy? Many of the issues they discussed have been sensitive topics among U.S. business executives in the U.S. semiconductor and electronics industries for several years. Many U.S.-based electronics makers have pioneered their way into China by setting up R&D centers but executives at these companies are also mindful of the high risks involved in new product innovation back in Silicon Valley.

While the issue of intellectual property protection was not on the China Business Summit agenda it’s the subject of ongoing discussion for many on the sidelines (see story)

Cheng Siwei, vice chairman Standing Committee, National People's Congress, People's Republic of China, noted that China is currently introducing technological innovation and resources from abroad.

“We have to upgrade our industries. We have to do our own innovation; we have to do our own R&D; and [invest] our own venture capital.” He described China to a “body country” rather than a “head country” implying that there is much more focus on labor than on innovation.

Edward Yao-Wu Yang, vice president and chief technology officer of Hewlett Packard’s Personal Systems Group, responded to a question on the evolution of innovation by noting that “...innovation has a very high failure rate,” adding “We should not be afraid of failure.”

Going forward in China, partnership and collaboration are two core competences. In the 20 years that HP has been in China, it has moved from manufacturing to software development to research and developing university relationships.

“China has always been creative,” Yang noted, adding that China is where paper and gunpowder were invented. “New skills are necessary to take it to the next plateau. We are not taking advantage of the full potential.”

As head of a small emerging technology company, David E. Reisner, president and CEO of nanomaterials company Inframat Corp., told the panel: “Chinese partners are very eager to adopt U.S. technology. That is an opportunity for us.” China's greatest asset is its “abundance of people,” Reisner asserted. “There is a huge opportunity to deploy the talent of this country.”

Yang said that in order to use China's population pool more effectively, certain issues need to be addressed. “How do we encourage off-the-wall thinking? It's very important in my view to be customer-centric. Customers don't know what kind of technology they need.” At HP, employees talk about the “imaginative understanding of customer needs.” Reiser added that one thing that stands in the way of innovation is the Chinese “cultural phenomenon of saving face.” Entrepreneurs need “to be able to fail and move on,” Yang said.

One participant asked Cheng if the government could “formulate strategy to promote technological advancement.” Cheng advised general managers to adopt longer-term thinking rather than just focusing on the next three years. “From an external point of view, preferential policies like tax breaks need to be introduced to encourage them to attach importance to innovation,” he added.

In summary, Soumitra Dutta, Dean of Executive Education, European Institute of Business Administration (INSEAD), France stated: "With China's rich history of innovation, there is no reason why it cannot continue." Innovation is not just about "technology innovation. A lot can happen in business models, taking a broader perspective of innovation", he concluded.

Going Global

Delegates also tackled the broader issues of globalization facing China’s technology sector. Noting high-profile globalization moves such as the IBM-Lenovo deal and the ill-fated CNOOC-Unocal deal, Arthur Yeung, Philips Chair Professor of Human Resource Management, China Europe International Business School (CEIBS), People's Republic of China, stated that such moves are prompting observers to ask: “How ready are these Chinese firms to go global? What are their competitive strengths and weaknesses?” “There are only some that can go global and should go global,” asserted DiPaola, hedging his comments by saying that there are many American firms that are not ready to go global either. Companies can overcome the hurdle of going global by spending more on innovation and marketing. Furthermore, Chinese firms should pay global salaries to executives. In addition, local firms will have to engage in more mergers and acquisitions — “they don't have a lot of M&A experience.” He strongly encouraged companies to set up R&D centers overseas. “Learn your customer needs; invest ahead of your entry.”

Michael J. Cannon-Brookes, vice president of business development, IBM, People's Republic of China, said that the major challenge facing Chinese companies is that the formula which worked at home often "has to be thrown out when you go overseas. There's a great challenge in understanding business ethics, the way business is done differently overseas than in China." Cannon-Brookes emphasized the importance of “contractual obligations” in mature markets versus “guanxi” or relationships, in China.

On the financial front, having a viable exit strategy, especially for VC-backed companies in China is also a critical issue.

“We need a 'Chinese Nasdaq' to further develop the market. The current Shenzhen Board has around 50 listed companies but we recognize this is too few and we are encouraging further development,” said Cheng Siwei, Vice Chairman, Standing Committee, National People's Congress, China, during a private working group session of Financial Services and IT/Telecom executives taking part in the World Economic Forum's Industry Partnership Program.