Economy, Talking Point

Creative destruction

Its factories make practically everything, but can China innovate?

Creative destruction

He’s got the idea: government wants to shed nation’s low-cost, copycat image and promote high-tech

It wasn’t much bigger than a basketball, and emitted a radio squeak little louder than a cricket’s. But the Sputnik satellite that began circling the earth in October 1957 still came as a mighty shock to American sensibilities. Its message was stark: the Russians had beaten them into space. Soon Yuri Gagarin would make it into orbit too.

With hindsight, these were high-water marks in Soviet one-upmanship. Twelve years later, Kennedy would get his man onto the moon. But back in 1957 the headlines were fearful ones. There was a real sense that whoever controlled space might also get the upper hand closer to home.

Fast forward half a century, and technological progress is still being framed as a competitive struggle. President Obama’s most recent State of the Union address included the claim that whoever was ahead in clean energy would also be the one to lead the global economy. “America must be that nation” was the call-to-arms.

So substitute Sputnik for solar power, and the technology race seems on again. But a new country is now portrayed as the great challenger. However, is China really about to take the lead in the innovation stakes?

Where are the battlegrounds?

Clean energy comes in for a lot of coverage. WiC has reported before on the warnings of those who fear that China’s green energy juggernaut will steamroller all before it (WiC 30).

As a viewpoint, it continues to garner headlines. There has been much more clean-tech M&A activity in China than anywhere else in the last 12 months, for instance, and significantly more government spending on green industries than in other countries. That has led to a growing number of Chinese giants in industries like solar power, where 7 of the 10 largest manufacturers by volume are now China-based.

The newsflow fits into a more general thesis about China’s growing technological base. The country is producing thousands more engineering graduates than its rivals, and is also catching up fast in terms of the number of academic papers published or patents registered (The Nikkei newspaper this month published an article forecasting that “it may not be long before China begins filing more patent applications than Japan.” )

Behind it all is the policy prompting of the Beijing leadership; wooing home a generation of overseas Chinese professionals (the ‘sea turtles’; see WiC27), pushing for homegrown standards under an “indigenous innovation” strategy (WiC55) and targeting a much higher share of R&D spending in national GDP.

So expect a tidal wave of Chinese tech innovation?

Not necessarily, say the sceptics. One response is to challenge the numbers. Even the Chinese media has being doing this recently, on tax policies designed to favour innovative companies.

Under rules launched in 2008, firms meeting criteria in patent ownership, R&D spending and employee skills have been enjoying significant tax breaks. This month government officials told Caixin magazine that more than 20,000 companies have registered for certification. But they went on to say that at least half are not high tech firms at all. A common tactic is to buy a patent to qualify for the tax break, and then not bother developing it for commercial sale. (It’s an innovative approach to taxes, rather than technology itself…)

Another rallying point is to talk about quality rather than quantity. Yes, the statistics seem to suggest that China is challenging countries like the US and Japan in many of the criteria believed to foster an innovative economy. But the law of large numbers will often see the Chinese top the ranks by default. They have the most smokestacks too. And the largest spring roll consumption.

The question then becomes how the stream of data now being released relates to final outcomes. What do all those new patents cover and how many will make it through to commercialisation, for instance? As for the massive new influx of engineering graduates: does this necessarily translate into a capacity to think in an innovative way?

And the hard evidence of Chinese progress…

That requires a real-time roll call – things designed in China and not just made there. Elsewhere in the world evidence of innovative product breakthroughs abound: we might talk of Intel and processor chips, or the telecom brains behind the advent of 3G and wireless standards. Perhaps too the ‘two finger’ touch-screen scrolling technology in Apple’s handheld products (rather tellingly promoted as “Designed by Apple in California. Assembled in China”) or Pixar’s advances in digital animation, or Boeing’s new composite airframes that allow for huge fuel savings.

From China itself, there are fewer candidates. BYD, the carmaker, might get a mention for its battery-powered vehicles. But the reality is that the company hasn’t sold many genuinely green cars to date, even if its stock price has traded profitably on its environmental credentials.

The Loongson (or “Dragon Chip”) processor is another contender. As a challenger to Western-made chips it has been in development since 2001. Beijing clearly hopes that it will take on rivals from companies like Intel and AMD. But at the moment the Loongson is talked of more as a longer-term prospect, and not as something about to go mass-market globally.

But those efforts will pay off soon?

It’s a case that can be made, not least as part of that law of large numbers working again. Having such a huge population must increase the chances of genuinely outstanding new ideas emerging, especially if social and economic conditions permit it.

Innovative thinking has flourished before amongst the Chinese, at least up to about a thousand years ago. They were great pioneers and their inventions included gunpowder, the compass and the printing press to name a few – the list goes on and on.

Then the innovative gene seems to have gone into hibernation. Victor Hugo, the 19th century French essayist, talked of a Chinese stagnation, like a foetus pickled in a jar. Academics today continue to discuss the reasons for the decline.

Can the Chinese still innovate?

A controversial new book dividing opinion in the Chinese media is adding to the debate. Chu Yu’s Criticism of the Chinese People’s Thinking suggests that the Chinese may well have a flair for invention but have often failed to capitalise on it. They invented gunpowder, Chu agrees, but then used it mostly for fireworks. It took Western application to develop firearms, and with it the promotion of “national strength”. Similarly, for years the Chinese used the compass mostly for geomancy. It was only after its adoption elsewhere that it became a crucial tool for exploration and conquest.

Chu’s book follows in the footsteps of Joseph Needham, the Cambridge scientist and Sinologist who famously asked why China had fallen so far behind the West technologically (the field of study now bears his name: ‘the Needham Question’).

Some think the Chinese lagged because their culture ossified and became backward-looking. In the novel The Dream of the Red Chamber (one of China’s four classic works of literature, and published in the late eighteenth century just as the country’s decline was becoming evident) the protagonist tellingly remarks: “I remember reading in some old book that ‘to recall old things is better than to invent new ones.’”

Others point to one of history’s more chauvinistic world views. China saw itself as the blessed and favoured land at the centre of the universe, ruled by the son of heaven and gifted with ‘everlasting prosperity and peace’. But the downside of assuming that you are at the centre of everything may be that you feel less compelled to change or innovate. China was also philosophically wed to the concept of yin and yang and, underpinning this, the idea of harmony and balance (innovation might upset the balance, so should it really be encouraged?).

Some even go as far as saying its pictographic language was less condusive to exploring abstract concepts than at describing what already existed. The Chinese writing system, in this view, held back scientific thought.

It’s a complex and unresolved debate, although it leads to the next question of whether the Chinese are rediscovering their innovative roots.

The problem is that measuring progress is an inexact science, and there is no commonly agreed formula for calculating how and when innovation occurs. Most count up the various “outputs” (like numbers of patents or the volume of royalty and licence fees), as well as accompanying “inputs” (R&D spend as percentage of GDP, or things like the educational and technical skills of the workforce etc) to try to get a sense of how things may be changing.

Then the environment for innovation is scored too – parameters like IP protection, macroeconomic stability or the openness of a culture to different forms of thinking.

How does China compare to others? The short answer is that it is improving fast, but is still some distance from a podium position. A joint study from Cisco Systems and the Economist Intelligence Unit in 2009 forecast that it will be in 46th place by 2013, and a similar survey authored by INSEAD, a business school, and the Confederation of Indian Industry had it in 37th place, closing in on Slovakia, Slovenia and Bahrain.

As subjective assessments, both are prone to dispute. The sample is small and the rankings may well be too low. But they point more to potential than immediate prowess.

When will that potential become real?

Talk to a few international CEOs and it sounds like time is almost up on the West’s technological lead, especially with the work that the Chinese are already doing, like spending more on education or promoting policies that reward investment in research and development.

Notions of a genetic block on innovative thinking are nonsense, as China’s history of invention suggests. Ethnicity itself can’t be a factor: although no Chinese-born scientist has won a Nobel Prize for research conducted at home, several have been recognised for work overseas.

That puts the spotlight back on the environment in which most of China’s innovators now live and work. Chu’s book complains of an educational culture prone to excessive respect and rote learning, as well as a cultural preference for practical experience over structured or conceptual thinking.

But there are signs of new vitality. Foreign firms are tapping into the rapid growth of a domestic consumer market by establishing R&D centres on Chinese soil. Companies like Haier (with a washing machine that can run a spin cycle to clean farmers’ potatoes) and Lenovo (PCs designed specifically with countryside conditions in mind) are clearly capable of adapting to local circumstances. Last week WiC reported on the Apple Peel 520, a potentially disruptive technology from Shenzhen that may trouble Apple’s engineers in California (see WiC74). That’s because for just $57 it converts an iPod Touch into an iPhone (an option Rmb3,000 cheaper than buying an iPhone directly). The young inventor, an engineering graduate, came up with the idea because he couldn’t afford an iPhone himself.

And reverse engineering is also leading to innovation in its own right. This week the CEO of Caterpillar, the construction equipment giant, told the Wall Street Journal that his Chinese competitors were proving “pretty darned good” in product development, forcing their rivals to invest in more R&D of their own.

That won’t be enough to satisfy Beijing’s planners, though, who want to go beyond shanzhai successes (see WiC50) and a reliance on reverse engineering. They expect to see Chinese companies reduce their dependence on foreign patents, and launch new technologies of their own overseas.

Over-ambitious, say the sceptics, who question how Chinese firms will cut it outside their home markets. Policymakers may have delivered economic growth to order. But conjuring up an innovative society (a policy goal by 2020) is a different task altogether. Especially in a political context in which challenges to the status quo are frowned upon.

Economists (and IP lawyers) also ask why local firms would see a need to invest in R&D when ideas can often be borrowed (legitimately or otherwise) from foreign partners.

As a factor, it’s a relevant one: the Chinese may have a long legacy of inventive achievement but some of their short-term incentives pull them in a different direction.

The challenge for the policymakers is to steer the economy into a more innovative future.

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