From factory floor to innovation powerhouse: how China has changed

A man talks on a mobile phone near the Pudong financial district in Shanghai July 17, 2014.

Image: REUTERS/Carlos Barria

Dan Starta
Partner, Asia Pacific, A.T. Kearney
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This article is part of: Annual Meeting of the New Champions

China’s economy is transitioning to a “new normal” of higher labour costs, lower growth, increasing competition, and changing demographics.

But where some see this as a challenge, others see it as an opportunity. Using the combination of China-led innovation and highly efficient and effective value chains, successful businesses can take advantage of this new environment and convert opportunities in China into a global leadership position.

Throughout 2010, China was the world’s hyper-growth leader, with GDP growth of at least 10% as a matter of course. Yet China was not perceived for its innovation; rather, it was the factory floor of the world, with low labour costs and a rapidly growing consumer base.

As growth has eased since 2012, with GDP growth slipping below 7% in 2015, businesses are now forced to consider the “new normal” of declining returns on capital, diminishing cheap labour, and lower productivity.

At the same time, competitors have become more ruthless, local brands have gained market share, and China has begun going global. China's secret is that it is increasingly innovative: from its leading technology companies like Xiaomi, Tencent, Alibaba, DJI and Baidu, to its more than 1,500 technology incubators, to its rapidly growing supply of manufacturing robots.

The game has changed and positioning for the future requires a focus on four key areas.

1. Become a ruthless competitor

Growth is not as easy in the new normal. It requires a “ruthless competitor” mindset based on operational efficiency and local customer knowledge. The China business model remains low-cost compared to Western standards, and it is modernizing at an aggressive pace. For example, its retail e-commerce market is now the largest in the world. Being ruthless means developing an asset-light supply chain that can evolve with middle-class growth and urbanization while focusing on the nuances and needs of local consumers. Existing businesses must put on their competitive hats to challenge their own existence – or else face irrelevance.

2: Ride the wave of China’s innovation focus

China’s innovation engine is based on more than technology. “Mass entrepreneurship and innovation” is a key plank of the government’s plan to drive growth. A.T. Kearney’s Global Innovation Study and China Best Innovator awards have highlighted China’s progress over the past five years:

  • It has moved into the top three in knowledge and technology outputs.
  • It has overtaken more than 40 other countries in both human capital and ICT infrastructure.
  • It has gained 25 positions in creative outputs and 17 in business sophistication.
  • Business can ride the wave by building on the innovation sectors promoted by the government: automation and robotics, transportation, new materials, and bio science. Another key will be developing open innovation networks that allow for reinventing businesses while supporting customers, to become more innovative and competitive.
3: Seize on China’s uniqueness and localized expertise

China has a unique set of demographics that could allow it to be an innovation petri dish in the coming years: an upwardly mobile population that could be 50% middle class by 2020; the largest e-commerce sector in the world; an always-connected consumer base; and a dense urban population. These characteristics provide a rapid learning environment to test many advanced business opportunities, including self-drive vehicles, energy solutions, and urban delivery logistics.

4: Prepare for the global China

China has always had an eye towards the rest of the world, to learn from best practices and partner with leaders. Today, home-grown Chinese businesses are challenging leaders across nearly every sector with products that favour local tastes and are at a suitable price point. With the One Belt, One Road policy, China has renewed its emphasis on going global – not just in terms of the manufacturing component of the value chain, but as an international leader in multiple sectors.

In recent years, Wanda has taken on sports and entertainment, LeEco has positioned itself as the connector of everything that matters to consumers, and Haier, with its acquisition of GE’s appliance business and strategic partnership, is taking China to the next level on the global stage. The challenge for multinationals in the future may not be growth in China, but rather defending their home markets from China’s new global leaders.

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