Subtitles section Play video Print subtitles [MUSIC PLAYING] GEORGE S. YIP: OK. Thanks for coming along to this. So it's based on this book. There are still some free copies left up front if you want them. So I was doing the research on this book when I was based in China at the top business school there, China Europe International Business School, from 2011 to 2016. And the subtitle is really the theme of my talk, "From Imitation to Innovation." You used to hear about how China is about imitation, now it's about innovation. In the early days, of course, China was just copying. From 1978 onwards, they were copying products were illegal, sometimes were called shanzhai which mean mountain bandit. You see here a product called the Blockberry endorsed by President Obama, probably without his knowledge. On the right, something that surprise you, this is not a cigarette packet pretending to be a cell phone; it's a cell phone pretending to be a cigarette packet. Just to show you how different the Chinese can be, they actually love smoking so much some of them wanted to pretend their cell phone was a cigarette packet. So then China starts moving from copying to fit for purpose. So in the earlier days-- 1980s, 1970s-- China was poorer, lower per capita income. So for practical innovations, such as Guangdong crane moving from double welded to single welded, so a lot of process innovations. China, of course, makes more solar panels than anybody else. And the critical innovation there, self-cleaning. Because if you have a dusty solar panel, then that's a massive problem. So in the beginning, these are not rocket science innovations but typical Chinese innovations. They are pragmatic and profitable. Then you start to see-- and I'll talk a bit more later on about Alibaba, Taobao-- these online systems where we start seeing innovation online. Haier, one of their biggest and probably the most international company in major appliances, now the world's biggest major appliance companies. Lots of initially small innovations, like early on they found that their washing machines were getting clogged up in rural areas. They discovered it was because the farmers were using them to wash potatoes, rather than just clothes. Now, a Western response might have been put a label saying, do not wash crops. Instead, their innovation was they changed the filter system and added a label saying, suitable for both clothes and crops. Refrigerators, when they first moved to the US market, they went at the lower end, such as college dorm rooms. And they realized that college dorms were small, so they added a folding tabletop to double up as a desk, a trivial innovation. Today they have a more significant innovation, technical. They have innovated the world's first three temperature compartments refrigerator. The third compartment is designed to store the food that is the most important to Americans. What food is that? No, not pizza. Anything else? Ice cream. What's wrong when you take the ice cream out of the icebox? It's too hard. And Americans don't like to wait. So it took a Chinese company to have this insight and then typical of Chinese innovation to invest the R&D money and to be able to manufacture it in an economical way. So this is a typical innovation. But they are now moving beyond this. They're moving toward waterless washing machines, for example. So genuine technological innovations. Chinese are very customer-focused, as well. I'll just talk about the bottom ones. We visited a number of start-ups. So Suzhou Nano-Micro, world class nanoproducts; SVG Optronics, they make security films over ID cards and so on that are higher than the quality you find in the USA or in the European Union. I'll talk about some of these other companies in a moment as well. The entire ecosystem for Alibaba I'll talk more about. GoodBaby makes 80% of the world's baby carriages. A typical innovation now, you hold the baby in one arm and one button that you press folds up the baby carriage. Again, a typical Chinese innovation. You have to invest in it, requires significant manufacturing capability. Now they start to make things that are a bit more technically advanced, so Tencent, social networking, instant messaging service, online gaming, and so on. Medical devices are very big in China, aging population. And then the intersection of online and medical devices are going to be a very big sector in China as well. Xiaomi, the mobile phone company, sends out software upgrades every week based on input from its millions of customers. And then the bottom, Newsoft, an example of integrating medical devices and information technology. And these are organized to relate to each other. So of course, with the solar panels, we have the wind energy. The third one, they're now experimenting with roads using solar power to recharge the bus as it drives along. That also is a typical Chinese innovation in that it requires a top-down government to put in that kind of innovation. Can you imagine trying to do that in the streets of Cambridge, Massachusetts, putting in a system like that? On the top right, Huawei, the telecoms company, now the largest telecoms equipment company in the world, genuine innovation, creating a product that ran 2G, 3G and 4G in one product. Again, typical Chinese orientation to the customer because this was more practical for the customer to have only one machine. And now investing more and more in R&D. It has R&D centers around the world. For example, outside Milan, Italy, it has a microwave research technology center hiring Italian scientists, keeping them in the local ecosystem. The middle row, high-speed trains, of course initially copied. The Chinese train company was sued by Siemens and Hitachi but has breezed through that. China, of course, has more high-speed rail tracks than anywhere else in the world. I don't think the US has a single mile of high-speed rail, nor does the United Kingdom. And of course, this means they also build more trains that they're now innovating with and selling all over the world. In the middle, aerial drones. China did not invent the aerial drones, but most aerial drones are now manufactured in China. And this is a product that's classically suited for Chinese innovation in that innovation for this product happens better next door to the factory. Why? Because innovations are to add more rotors, to change the carrying capacity, make it bigger, make it smaller. There's now a Chinese one that can carry a person. Good luck traveling in that yourself one day. And this is opposed to say something like a mobile, a cell phone, where you do the innovation in California and you have it manufactured in China. So also, this is a product that is based on metal, plastics, and some electronic combination, again ideal for the lower cost Chinese engineers and scientists. And on the right, this is the mid-sized jet that China has just test flown. It's going to go up against Boeing and Airbus. Why is it able to do that? Because China buys more new jet aircraft than any other country in the world. It already has 500 advance orders before it is proven. And of course, most of those advance orders are coming from Chinese airlines who have to buy from this state-owned manufacturer. Initially copying, but with innovations that they're going to add and with enforced technology transfer from the West, which is why we have this tariff war that's just started in the last week or so. Now, the internet-based innovations are different. The traditional innovations in China are based on low cost engineers for both R&D and for manufacturing. While that is less the case with internet-based companies, or at least my interpretation, and you know more about it than I do, is that internet-based innovation comes from experimentation with large numbers of customers. So China has more internet users than any other country in the world, so this is now a great advantage for them. And toward the end, I'll show you some visuals about the internet ecosystems. I won't go through them all, as I said. You can just look at the PDFs yourself. So our sort of model, our theory of how this happened, is that we have four drivers, the ones in red and pink, and we have three phases in yellow that I'll go through. The first driver, customers. Initially, the customers were poorer so Chinese companies and Western companies had to innovate in China in order to develop products that were cheap enough. The other thing we find is that Chinese customers are quite different in many of their tastes from the West. So again, different types of products needed. Culture. We have the entrepreneurial culture of Chinese executive, and we include under culture the drive of the government. The Chinese government really wants innovation now, and the word innovation has reached the top line of the latest five-year plan. And the Made in China 2025 initiative is all about innovating in China, rather than just manufacturing. On the right, over time, firms enhance their capabilities to innovate, learning from Western partners and also as they became more profitable, investing the cash that they generated in R&D. And two other uses of the cash are setting up foreign R&D centers and thirdly, buying foreign companies for their technology. And I'll show you some examples of that. So with this, they moved from the phase one, copying to fit for purpose, to moving from being followers to world standard products. And in the third phase, global expansion, including acquisitions. Early acquisitions were resources like oil fields, property. But more and more, they're making acquisitions for knowledge. So here are some famous Chinese acquisitions. Of course, the first one was by IBM's personal computer business. Then another example, Volvo, bought by a mid-level Chinese company most of you have never heard of called Geely. One of the reasons they were able to buy Volvo is that the Chinese government designated them as the only Chinese car company allowed to bid for Volvo. They beat off the non-Chinese competitors. When they won, the CEO of Geely said, it's like a Chinese peasant marrying a Hollywood movie star. And of course, they're starting to learn technology from Volvo. Putzmeister, a leading construction equipment company in Germany, bought by now the world's largest construction equipment company, China's Sany. They've even bought Club Med, which I think is for the large, evolving leisure market in China. Most controversial, in the middle, Kuka. In 2016, a Chinese medical device company, Midea, bought one of Germany's leading robotics companies. For the first time, the German government said, really, perhaps we shouldn't let this go. And the German prime minister asked a German consortium to outbid them, but they were underbidding 20% and it went to China. Only on the right, finally, last year was one German acquisition blocked, Aixtron, under US pressure because it makes semiconductors, some of which goes into defense.