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China: Scaling The World’s Highest Innovation Peaks

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In a world of statistics, here’s a number that stands out: 71. That’s how many times the word “innovation” was mentioned in a communiqué issued after the Chinese Communist Party’s recent plenary meeting, which focused on China’s next five-year plan.

It’s clear why China is concentrating so many words — and so much energy and effort — on innovation. Indeed, as a recent McKinsey report points out, to keep its economic expansion on track, this nation of 1.3 billion people must generate two to three percentage points of annual GDP growth through innovation.

The return on this investment could be substantial. By 2025, these innovation opportunities could contribute as much as $1-$2.2 trillion a year to the overall Chinese economy.

After spending several weeks visiting legions of Chinese innovators — entrepreneurs, companies, educational institutions and government officials — I believe that these ambitious numbers will be reached.

And the reason is that China uses monumental scale and massive scaling to innovate, something that no region or country in the world — including the United States — can currently match or replicate.

With more than four times the population of the U.S., and more than one out of seven people on the planet, China has a tremendous advantage based on the sheer size of its rapidly urbanizing consumer market. This helps Chinese companies develop and deliver new products and services quickly and on a huge scale.

The world’s largest manufacturer, with 150 million factory workers, China also has a supplier network that is five times larger than Japan’s. This encourages and enables Chinese companies to trigger continuous cycles of widespread innovation.

China is leveraging the profound power of scale and scaling.

A good example is high-speed trains. Over the past seven years, a determined China — the private sector with help from the government — has built ever-improving next-generation technology in this vital global transportation sector. The result? A cutting-edge manufacturing product set that has accounted for nearly 90 percent of the worldwide growth in high-speed trains since 2008.

Aggressive and real breakthroughs like this contradict the long-held conventional wisdom that China is simply an innovation sponge that absorbs and re-purposes inventions and ideas from the U.S. and Europe.

The danger is that this traditional thinking is becoming increasingly outdated, obscuring the all-important fact that China is leveraging the profound power of scale and scaling to accelerate its bid for global innovation leadership.

To be sure, wherever you look in China today, there are gargantuan innovation processes and programs in progress and in place that require radically new approaches to technology product development, financing, manufacturing, marketing and logistics.

Without these groundbreaking systems, it’s impossible to grow 10x year after year, a goal that scores of Chinese companies set as the norm. And, unlike many technology enterprises in Silicon Valley, which are expanding their businesses virtually, a number of China’s fast movers are growing physically in the real world.

I’m not disparaging Silicon Valley’s innovation excellence in any way, but I am trying to put China’s significant advances in perspective. When we innovate, we create an idea and go (using venture capitalist Peter Thiel’s definition) from zero to 1.

When scaling happens in China, the assumption is that this is not real innovation, but, instead, a scale-out of technologies, 1 to n, using that same definition. My contrary observation is that true innovation is, in fact, growing in China, and, to achieve scale on many new technologies, there’s absolutely an element of zero to 1.

That’s a big difference, and an entirely different way of viewing innovation — one that we need to acknowledge and learn from. Put another way, if we want to compete with China in the rest of the world, especially in potentially giant markets like India, Africa and China itself, which represent three of the most fertile commercial opportunities of the 21st century, we need to start innovating at scale.

Innovating on this vast and sweeping level won’t be easy — because we haven’t done it yet, and because China has a new cadre of hungry and experienced entrepreneurs who want to innovate and scale quickly on just about every continent. These world-tested entrepreneurs don’t need permission to experiment, and they aren’t afraid to adapt or fail.

Alibaba’s transactions last year totaled nearly $250 billion, more than those of Amazon and eBay combined.

Last year, for example, Baidu, the Beijing-based technology giant that was once seen as China’s Google but has since expanded into hardware and software research in areas like natural language processing and image recognition, hired a new Chief Scientist named Andrew Ng. Born in the U.K., Ng was a Stanford University professor who launched Google’s artificial intelligence program and co-founded Coursera, a high-profile online education company.

Frank Wang, the 34-year-old founder of Dajiang Innovation Technology (DJI), which accounts for 70 percent of the consumer drone market, is another strong-willed new-breed Chinese entrepreneur who is intent on taking the world by storm.

Launched out of a Hong Kong dorm room nine years ago, DJI and its global workforce is expected to generate $1 billion in sales this year. But, more importantly, the company has dominated the worldwide consumer market in aerial photography, and recently released an innovative flying platform for third-party software developers to add new functionality, like thermal scanning.

When you’re talking about Chinese entrepreneurs like Wang, who use innovation at scale to command a market, the conversation also must include Pony Ma, the co-founder and CEO of Tencent Holdings, which now presides over a mobile texting service that is actively used by 600 million people (or approximately half the population) in China.

WeChat, as it’s known, isn’t just about texting, however. Functioning more like an extended operating system, it deftly blends elements of Twitter, Facebook, LinkedIn, Skype and PayPal, a combination that may ultimately make it onerous for those vaunted off-shore companies to truly penetrate the large and lucrative Chinese market.

Amazon also could possibly fall victim to muscular Chinese innovation at scale. The Seattle-based company appears to have achieved victory in the e-commerce markets of North America and Europe. And its sales are growing in India. But China is a different, and more difficult, challenge, because that’s the home base of Alibaba, the world’s largest e-commerce company in the world’s fastest growing e-commerce market.

Founded by high-profile Chinese entrepreneur Jack Ma, Alibaba’s transactions last year totaled nearly $250 billion, more than those of Amazon and eBay combined. And on Singles’ Day — November 11 — which celebrates the unmarried, Alibaba generated more than $14 billion in sales, more than all Americans spent online and offline over the post-Thanksgiving weekend.

Uber may run into the same type of roadblock in China, as a result of innovation at scale. This time, though, a mega-merger between China’s two biggest taxi apps — Kuaidi Dache (backed by Alibaba) and Didi Dache (backed by Tencent) — has created a formidable obstacle in China’s trillion-dollar car-sharing and taxi-hailing service market. The resulting entity, Didi Kuaidi, is currently doing 3 million rides a day in China, versus 1 million for Uber.

Looking beyond the numbers, Didi Kuaidi, led by president Jean Liu, a 12-year veteran of Goldman Sachs, is now rolling out a series of innovative new products and services designed to further distance China’s emerging transportation giant from vigorous foreign competition.

For its part, Chinese automaker BYD is innovating at global scale to thwart its rival, Tesla Motors, in the race to build the best — and most — batteries for electric vehicles around the world. Backed by Warren Buffet’s Berkshire Hathaway, BYD is more than tripling its capacity over the next four years.

China is creating sweeping new commerce models.

Most of the state-of-the-art production will be in China, but the company is also adding a major new factory in Brazil and will scale up manufacturing in the U.S., where Tesla is based. BYD, which has plants in Southern California that produce electric buses for public transportation, is also growing this cutting-edge investment.

In addition to developing new products and services and rolling them out at scale anywhere and everywhere in the world, China is creating sweeping new commerce models that have the potential to change the way global business is conducted. A good example is the Online-2-Offline model currently being championed by Alibaba’s Ma because it finds consumers online and brings them into real-world stores.

This is all part of an unspoken, and even free-form, emergent strategy being embraced by so many Chinese companies today. Dexterously pursuing a host of different solutions and adding many seemingly disparate pieces, these intensely innovative enterprises are pulling ahead of their foreign competition as they integrate all the complex parts and forcefully scale in an effort to reach some of the highest business peaks in the world.

The challenge for many large-growth companies in the U.S. over the next few years will be climbing the same commercial mountains as the Chinese. Regardless of whether a trans-Pacific strategy of collaboration or competition is adopted, one of the best ways to do this is by learning how to innovate rapidly and at global scale.

Featured Image: Tracy ben/Shutterstock