Thanks for making the time to talk Shaun. The titles of your books are quite provocative. First of all, I want to ask how The End of Copycat China relates to the previous book, The End of Cheap China?
The cost of doing business in China is rising in China, with blue collar wages going up fifteen to twenty percent this year despite the weakening economy. Real estate prices are very strong and rents are going up in double digits. I wrote The End of Cheap China a couple of years ago to tell executives that you are going to have to readjust your strategies; you’re going to have to think about manufacturing elsewhere; you’re going to have to sell into China.
The End of Copycat China is sort of a follow up. Because of rising prices it’s becoming extremely difficult for Chinese firms especially to squeeze out profits so a lot of companies in the last few years have really done three things: they’ve either shut and gone completely out of business; there have been thousands of factories closing in south China. They’ve had to relocate to other markets like Sri Lanka, Cambodia or even now Africa. But most importantly a lot of brands have decided to move up the value chain and start to focus on innovation. For the next 5 – 10 years you are seeing Chinese entrepreneurs, Chinese large companies, looking to innovation to generate profits to offset the end of Cheap China.
If there is a recognized skill shortage as new industries emerge, how will this impact on innovation and creativity?
Before I answer that I want to talk about why do we have innovation now and not before. Many people like US Vice President Joe Biden say that Chinese people can’t innovate. But over the last thirty years for instance it didn’t make sense to focus on innovation. In those days there was so much low hanging fruit out there and there was too much copycatting and too much intellectual property problems that the risk was too high to focus on innovation. It was much easier to put up a skyscraper or to focus on nepotism and be able get a monopoly somewhere selling wine or another widget to a ministry.
There was too much risk to focus on innovation but we’ve seen that as the market gets tougher to eke out profits the best way to do it is innovation. The low hanging fruit is gone too especially with the anti-corruption crackdown. And second, there’s a lot of money to be made in innovation, for instance the public equity markets as well as venture companies are starting to see companies like 91 Wireless or Tencent get huge valuations precisely because they are innovative. That’s why entrepreneurs are starting to focus on innovation as a key growth driver.
To answer your question about manpower, I think that is definitely an issue but when I interviewed entrepreneurs and venture capitalists for this book surprisingly they told me that intellectual talent tended not to be the biggest problem; they say that’s a big problem for scaling a company large, and becoming a global player: it’s hard to get a mid-level executive or a country head because there is definitely a labour shortage. But when it comes to innovation they say it tends to be done by a relatively small number of people at the top and so the lack of talent is not the biggest problem preventing innovation.
I guess there are three other parts to that: first so many Chinese are now going internationally to Australia, to the United States to study and then they are bringing back what they learn into China. You see schools opening up campuses in China, like Duke; Yale is opening up a school of business; Julliard, the famed art, music and drama school is opening up a gigantic campus in Tianjin.
Schools are either coming to China or students are going abroad. But, and perhaps most importantly of all is on-the-job training, especially in biotechnology. There are lot of people working in multinational companies and joint ventures and these have served as training grounds for people in biotechnology.
It’s obvious that China is trying to turn a brain drain to a brain gain. Are joint ventures a good way for to learn new skill sets?
In my research for my book I interviewed a lot of senior executives from 3M which is considered one of the most innovative companies in the world on par with Google and Apple. What they told me is that the competition is quite fierce among domestic players. A lot of their senior 3M executives who are Mainland Chinese have left and joined domestic competitors. This is an example of what I like to call the ‘bamboo ceiling.’ A lot of Chinese feel like they can’t make it to the top of their organizations in multinationals. They’re moving to the Chinese private sector where companies have a lot of money for research and development. And there’s no bamboo ceiling. So why be the country head of R&D for 3M when you can be the global head of R&D for a private Chinese company? It’s happening that a lot of multinational companies now have to realize that their biggest competitors are often people that they trained directly over the past decade.
We interviewed Fortune 500 firms and 70 percent of them told us that their biggest obstacle to growth was not corruption, not anti-monopoly but recruiting and retaining top talent. Before Chinese would often leave for another foreign international competitor but now they are going to domestic Chinese companies—and not so much the state-owned enterprises anymore.
And these domestic companies are pretty cashed up at the moment.
A: Absolutely. The Chinese firms are cash rich; they’ve got access to credit lines from the banks; they’ve supported by the government and they’re very aggressive and ambitious. This is especially true in biotechnology. I think the two sectors that are seeing the most innovation, and where entrepreneurs are most optimistic and ambitious, are biotechnology and mobile services, mobile devices.
Do you have any insights in your book about the creative industries such as film, media and advertising?
I do look at that a bit. Creativity remains a problem; it’s a barrier for the pure creative industries. In advertising a lot of great creatives for the agencies seem to be from other markets outside of China but the government is focusing a lot on creativity in terms of art, for instance jewellery design. I profile a woman called Wendy Ye (or Ye Mingzi) who is designing a new line for Swarovski and I think that creative part is coming from—and this is a big theme in the book—the definition of the Chinese Dream.
So the first half of the book talks about innovation, the second is more about consumer trends and how consumers don’t want to copycat the ideal of Western beauty anymore and the Western conception of happiness. They’re now looking at the Chinese Dream. A lot of Chinese want to go back to Chinese roots; for the first time in a while there’s a pride in Chineseness—authentic authentic Chineseness; they’re not nostalgic for the past but they’re not turning away from it like they used to.
So Xi Jinping has plugged into something.
Xi Jinping has plugged into what was already pushing through on the ground but then he made it appropriate, turned it into an everyday discourse. It surprised me in the last twelve months how many people are talking about the Chinese Dream and wanting to define it. That means when you are doing fashion design you have to create for China; you just can’t bring in a design or advertising campaign that worked in the West and introduce it and have Chinese consumers slavishly run after it and copycat it.
There’s definitely a movement in entertainment and creative industries. It might be slightly different from how we in the West might define it; it might not be pure unbridled freedom of speech. In TV there’s definitely a very heavy hand of regulation so that means that people are trying to be creative elsewhere, in design, the design of jewellery for instance.
There’s the issue of working within the system. It’s pretty difficult for film makers.
There are a lot of people in the film business that are frustrated with the censorship and with a lot of the confines, the odd rules, for instance, you can’t have aliens. You find directors like Feng Xiaogang, who has been very vocal, but in the short term they are not going to go against the government; they are going to work within the system. Most people hope that the system will continue to improve. I do think that in certain areas like the internet we’ve seen some steps backward. The last couple of years have been quite dark on the internet side of things and that does in many ways hurt innovation.
Is the copycat phenomenon known as shanzhai a legitimate mode of innovation?
If you look at it the United States, it gained its power in manufacturing in the 19th century from copycatting Western European technology. All counties need to start in a copycat stage. In the book I have three stages of innovation; the first is the copycat stage, which is where China was in the last 30 years, and where the US was before; that was the shanzhai phenomenon.
Then stage two is the innovation for China stage, or innovating for your own home market. I think what’s happening right now is that Chinese consumers don’t want shanzhai anymore; they don’t want fakes; they want the real item. So what’s really happened is that a lot of the companies that were part of the supply chain that produced shanzhai products are now part of the supply chain producing Xiaomi or Huawei or Lenovo, or the legitimate items because they realise a) that consumers are demanding real products and b) there’s just more money to be made when you are part of a brand. I think that whole shanzhai phenomenon is pretty typical of the stage one on the innovation curve. You see it Thailand, you see it in Myanmar, and you see it all over the world; this is not a Chinese cultural or Chinese morality thing; it’s a function of poverty
Is weak intellectual property enforcement an enabling or disabling factor in China’s innovation system?
It’s definitely hurting. When I’ve talked to entrepreneurs many of them said what has stopped them from innovating in larger things tends to be lack of enforcement. The laws were pretty strong but sometimes the regulatory system was vague, or more importantly even if the judgement was correct the enforcement was lacking. A lot of entrepreneurs told me that if a competitor steals their technology the fine that they have to pay is so low; from a pure profit or money-making perspective it makes sense to go out and cheat people because you can make money;
That said, because of the IP concerns a lot of the innovation is in the mobile space. The reason is that only need three or four people to do it: you go quick; you create some app or some product that can sell for two or three months before the copycats come. So they’re constantly trying to update and come up with the newest things. But I think that overall that lack of IP protection hurts more than it helps innovation in China.
The government does understand it and they are doing a better job because the domestic Chinese companies are starting to complain. The government is not going to protect Microsoft or foreign players that they feel are engaging in a form of colonization by selling high-priced products that everyday Chinese can’t afford. But when it’s the real constituents, the Tencents, the Alibabas, the people that support the government, and when domestic players lobby for support, the government has to listen, and they are.
So I suppose it’s not really the end of copycat China but a turnaround.
Absolutely, the ‘end of copycat China’ means we are now on stage two of the innovation curve. Chinese companies are innovating for China specifically and are starting to think about becoming global players. But it’s important to define the difference between invention and innovation. When a lot of people first think about innovation they think that companies need to be inventing in the white space. That’s not true. You look someone like Steve Jobs, one of the great innovators of the last fifty years century; he didn’t invent anything. He didn’t invent the phone, the music player, or the MP3 player. He just took unmet demands from customers and improved on them and that’s what Chinese players are very good at, for the Chinese market specifically.