An Emerging Innovation Power: 2013 China Innovation Survey
Steven Veldhoen, Anna Mansson, Bill Peng, George Yip, and Bruce McKern

China is regaining its historical position as a global innovation power. The China Innovation Survey, now in its second year, shows that innovators in mainland China are gaining rapidly in competitiveness compared with companies in Europe, United States, and other regions.



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Perspective

Steven Veldhoen Anna Mansson Bill Peng George Yip Bruce McKern

An Emerging Innovation Power 2013 China Innovation Survey

Contact Information Booz & Company Beijing Steven Veldhoen Partner +86-10-6563-8300 [email protected] Bill Peng Principal +86-10-6563-8345 [email protected] Shanghai Sarah Butler Partner +86-21-2327-9800 [email protected] John Jullens Partner +86-21-2327-9800 [email protected] Huchu Xu Partner +86-21-2327-9800 [email protected] Anna Mansson Principal +86-21-2327-9941 [email protected] China Europe International Business School George Yip Professor of Management [email protected] Bruce McKern Professor of International Business [email protected]

The authors would like to thank Booz & Company’s John Jullens, Charles Wong, Olivier Pincon, Eric Chen, and Michelle Wang for their contributions to this Perspective. In addition, the authors would like to thank Mariska Kiewiet de Jonge, general manager, Shanghai, and Robbert Gorris, general manager, Beijing, of the Benelux Chamber of Commerce in China, along with Bofan Wu, publisher of 21st Century Business Review.

Booz & Company

INTRODUCTION

China is regaining its historical position as a global innovation power. The nation that brought the world such inventions as water-powered mills, paper money, and explosives is increasingly viewed as a center of 21stcentury innovation excellence. That said, corporate and government leaders know that Chinese companies must move up the value chain for China to achieve “developed nation” status, and that the way to do this is by focusing on new technologies, product offerings, and services within the country. Local companies continue to spend massively on R&D, the government sector is actively supporting their efforts, and multinational companies (MNCs) are making large investments in China as a laboratory and workshop for global innovation. The China Innovation Survey, now in its second year, shows that innovators in mainland China are gaining rapidly in competitiveness compared with companies in Europe, United States,

and other regions. This year, nearly two-thirds of respondents at MNCs operating in China said some Chinese competitors are at least as innovative as their own companies, a strong increase since last year. Chinese companies also said their innovation efforts are competitive with those of MNCs in China, although they still see significant room for improvement. And though they believe they are less innovative overseas than their multinational rivals, they plan to increase the amount of their innovation directed toward overseas markets. The survey also shows that China is well on its way to becoming a true global innovation hub for MNCs from developed markets: Some twothirds of the respondents reported that they are conducting R&D in China for foreign markets—and even more plan to do so in the future. In addition, the survey contradicts a piece of conventional wisdom: that innovation in China tends to focus on copying and making incremental improvements to existing products. In fact, the data shows that Chinese companies—to a higher degree than most global competitors—pursue the same kind of innovation strategies that are practiced by the world’s most successful innovators, notably companies based in Silicon Valley. These companies pursue

Need Seeker strategies, as we will show below: focusing their R&D efforts on consumer needs, developing products that meet those needs, and then quickly getting the products to market. The challenge for Chinese innovators going forward will be to preserve and build on this model as they grow domestically and internationally. For MNCs in China, the challenge will be to integrate innovation in China into their established global innovation models. Finally, this year, for the first time, we asked participants to cast votes for the most innovative Chinese companies (see “Top 10 Innovative Companies in Mainland China,” page 16). The China Innovation Survey is jointly conducted by the Benelux Chamber of Commerce in China, 21st Century Business Review, China Europe International Business School, and Booz & Company. This year’s survey reflects the views of 264 respondents, more than double the number who participated in 2012. More than 80 percent of the respondents are C-suite executives, corporate officers, directors, or managers. To further develop our understanding of the data, we also conducted individual interviews with key executives in a range of companies and industries (see Appendix, page 16).

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1

CHINA’S INNOVATORS ON THE RISE
China’s investments in R&D are rapidly increasing. The number of China-based companies appearing on Booz & Company’s Global Innovation 1000 (which lists the publicly held companies that spend the most each year on research and development) has risen from 15 to nearly 50 over the past five years. In 2011, companies headquartered in China increased their R&D spending by 26.5 percent—more than double the global average, five times as much as European firms, and 11 times as much as Japanese firms (see Exhibit 1). The strong growth in R&D spending is evidently beginning to pay off. This year’s China Innovation Survey shows that both the perceived quality and the effectiveness of innovation in China continue to advance. Some 64 percent of the respondents at nonChinese companies said some Chinese competitors are equal to or better than their own companies at innovation—a strong increase from 48 percent in the 2012 survey (see Exhibit 2).

As Chinese companies become more competitive in innovation, they increasingly worry about potential obstacles to further innovation growth. The survey shows that access to talent, retention of talent, and rapid cost increases are all key concerns Chinese companies are moving for innovation in the future. The aggressively to make their innovation areas of concern that have increased programs more global. More than the most over the last year include two-thirds of respondents this year difficulties in understanding market said they are now conducting product needs (particularly in the industrials development for the rest of the world sector), inadequate infrastructure and in China, up sharply from 41 percent innovation ecosystems, and inadin 2012. Even more expect to be doing equate intellectual property protecso in the future: 88 percent of Chinese tion (particularly in the health and companies said they will be doing life sciences industry). These worries global R&D in China by 2023 (see are likely to increase pressure for Exhibit 3, page 3). stronger laws regarding intellectual 30 26.5% property protection, and may well lead 25 Chinese executives, however, are to more innovative ways to conduct 20they believe striving for far more, and R&D in cooperation with universities, 15 for further there is considerable scope institutes, and other entities. MNCs 12.2% 9.7% however, did not Average improvement in innovation, in China, report 10 according 9.6% 5.4% to the survey. Just more than half the increasing concerns over the past year 5 2.4% participants at Chinese companies said (see Exhibit 5, page 3). 0 North Europe Japan their companies are among theChina most Rest of World America innovative in their home market, but
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Other data confirms this perception. A recent survey of more than 1,500 senior executives in Europe conducted by Booz & Company, the European Executive Council, and INSEAD found that European companies now consider China a greater competitive threat in the field of innovation than the U.S., India, or Japan. China, the report stated, “is being seen as an innovation heavyweight largely due to its massive catch-up investments in R&D and education.”1

only about a quarter count themselves among the most innovative companies in the world (see Exhibit 4, page 3). This is particularly true for companies in the automotive, finance/insurance, and computing and telecom industries.

Exhibit 1 Chinese Companies Are Increasing Their Investments in R&D Faster Than Competitors in Any Other Market
Change in R&D Spend by Companies Headquartered in Each Region, 2010–2011 26.5%

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Note: 2012 Global Innovation 1000 yearly R&D comparison for the 918 companies for which R&D spending is available for both 2011 and 2010. Source: Bloomberg data; Booz & Company Global Innovation 1000 articles in strategy+business; Booz & Company analysis

Letter format: - width for 3 columns: 167 - width for 2 columns: 110

Lines for legend: 0,5 pt dotted, black Source: 2012 China Innovation Survey; 2013 China Innovation Survey

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0 Exhibit 4 Western Developed Mainland Markets Asian Markets China Despite Recent Progress, Chinese Respondents Do Not Consider Themselves among the Global Elite in Innovation

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Chinese Respondents Conducting Product Development for Foreign Markets in China
2012 survey 2013 survey % of respondents

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Chinese Companies’ and MNCs’ Views of Their Innovation Competitiveness in China and in the World (1=strongly disagree, 3=neutral, 5=strongly agree) 32.8% = numbers in Data (B Average aölkdfölka = Plain text / Body cop agreement Bullet points as dash 5 Guidelines: 3.6 4 3.4 11.0 million = Subheads or highligh 3 in Subheads 2 1 30.1% = just white text on 100 % color

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Relevance of R&D from China for Different Markets “My company’s R&D efforts in China contribute to developing products/services in….” (1=strongly disagree, 5=strongly agree)
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Source: 2012 China Innovation Survey; 2013 China Innovation Survey

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Exhibit 5 Key Concerns of Chinese Innovators Include Understanding Market Needs, a Lack of IP Protection, and an Insufficient Innovation Ecosystem
“Some Chinese competitors are better innovators than my company” Key Obstacles Today and in the Future (% of non-Chinese company respondents) “In the process of conducting innovation in China, my company faces and will face the following challenges” (1=strongly disagree, 5=strongly agree) Chinese Companies
Average agreement 5 4 3 2 1 +7% 3.9 4.2 4.3 -1% 4.2

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“Some Chinese competitors are better innovators than my company” (% of non-Chinese company respondents)

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The results of the China Innovation Survey also show an acceleration of China’s development into a true 2013 global innovation hub for MNCs 30 10 years later 26.5% from developed markets. Two-thirds 25 of the MNCs in China 3.6 that took 3.4 3.3 20 3.1 in the survey reported that part 15 they are already conducting product 10 development for foreign or global 5 markets in China, a significant increase from last year’s survey, 0 when
Developed Asian Markets Developing Markets China

just more than half said they were 3.6 4 3.4 Average doing global R&D there. Participants agreement 3 were even more aggressive in their 2 projections for the future: 74 percent 1 said they expect to be conducting global R&D in China for the rest “One of of the most innovative in ou industry in mainland China” the world 10 years from now, up from 65 percent last year (see Exhibit 6). 12.2%
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Exhibit 6 China Is Becoming a True Innovation Hub, Even for Non-Chinese Companies Based in the Country

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Source: 2013 China Innovation Survey

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Booz & Company
“Some Chinese competitors are better innovators than my company” (% of non-Chinese company respondents)

Chinese Companies’ a

+38%
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for global markets are in automotive (77 percent) and computing and telecom (76 percent), followed by consumer goods (72 percent), health/life sciences (71 percent), and 4.7 5 (70 4.6 industrials percent). As is the case with Chinese companies, chemicals 4 3.3 3.0 and finance/insurance are below 3 average in this category.
2 1 In nearly every industry, the proportion conducting 0 of MNCs Mainland Western
China Markets

Asian Markets

global R&D in China is expected to rise over the next 10 years. Consumer goods, health, and industrial companies have the most aggressive plans for global innovation30 based 26.5% in China. By 2023, for example, 94 25 percent of the survey 3.6 respondents at 3.4 3.3 20 3.1 consumer goods MNCs in China, as 15 well as 88 percent of those in health/ 10 expect to life sciences and industrials, 5 be doing global R&D in China (see Exhibit 7 ). 0 Developed Developing
Markets China

Rest of World

One example of the kind 5 of products generated by innovative 4 MNCs based3.6 Average in China is the Chevrolet Sail car, 3 agreement manufactured by Shanghai General 2 Motors (a joint venture of General 1 Motors and SAIC Motor). The latest “One of the most inn model was designed and engineered industry in mainla at Shanghai GM’s Pan-Asia Technical 12.2% Automotive Center, and is exported 9.7% to India, Latin America, North 5.4% Africa, and the Middle2.4% East. In other industries, such as healthcare, MNCs
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Exhibit 7 In Most Sectors, Innovation among Non-Chinese Companies Based in the Country Is Expected to Increase

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30.1% Non-Chinese Companies That Conduct Product Development in China for Foreign/Global Markets Present % of respondents 90 70 50 30 10 0
Automotive Chemicals & Energy Computing & Telecom Consumer Goods Finance/Insurance Health/Life Sciences Industrials

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are using innovations pioneered for the Chinese market for export to other markets. GE Medical Systems’ subsidiary in Wuxi, for example, developed and launched a sophisticated, compact ultrasound diagnostic machine that has become a global success. MNCs plan to increase innovation from China for Western markets—

now seen as equally important as the Chinese market for local companies—and they increasingly feel that their R&D efforts contribute to developing better products and services for those markets. Asked for their 10-year projections, they rated the importance of innovation slightly higher for Western markets than for developing markets or developed Asia (see Exhibit 8, page 7 ).

MNCs also plan to further develop their innovation centers in China: The vast majority (83 percent) believe that China-based R&D is adding equivalent or higher value to their bottom lines in comparison with R&D conducted in other regions. By 2023, almost all respondents expect that China-based R&D will be adding equivalent or higher value (see Exhibit 9, page 7 ).

MNCs are using innovations pioneered for the Chinese market for export to other markets.

6

Booz & Company

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Chemicals & Energy Chemicals & Energy Consumer Goods Finance/Insurance Health/Life Sciences Industrials

5 Average agreement 4 3 2 1 3.6

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Exhibit 8 MNCs in China Now See Innovation in China for Western Markets Equally Important as for Developing Markets and the Rest of Asia
Relevance of R&D from China for Different Markets (Responses from Non-Chinese Companies) “My company’s R&D efforts in China contribute to developing products/services in….” (1=strongly disagree, 5=strongly agree) Average agreement 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0
Mainland China Developing Markets Developed Asian Markets Western Markets 3.0 4.2 3.9 2.9 2.2 3.7 3.1

30.1%

TAB Present 10 years later

2012 Survey

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2013 Survey

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Developing Markets

Developed Asian Markets

Western Markets

Note: Developed Asian markets include Japan, South Korea, and Taiwan; developing markets include (but are not limited to) India and Southeast Asian countries. Source: 2013 China Innovation Survey

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Exhibit 9 The Value of R&D Work Done in China Is Equal to or Greater Than That Done in Other Markets
“In comparison with R&D work performed worldwide, my company’s R&D work performed in China is.…” (1=lower value added, 3=equivalent, 5=higher value added) “Some Chinese competitors are better innovators than my company” (% of non-Chinese company respondents) 2% 4% 4% 1 18% 13% Lower Value Added 10% 2 3
16% 27%

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Note: Sums may not total 100 due to rounding. Source: 2012 China Innovation Survey; 2013 China Innovation Survey

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Present 10 years later

“Some Chinese competitors are better innovators than my company”

Innovation Case Study: WeChat WeChat is a good example of Chinese innovation. The free program, developed internally by Tencent, builds on the instant-messaging functions of earlier platforms like WhatsApp and the social media components of Facebook by combining these features into a single app and adding new functions. Launched in January 2011, the program has grown extremely rapidly, with more than 450 million users today. That success stems from Tencent’s capabilities in three specific areas: Internet user intelligence, microinnovation, and execution excellence. • Internet user intelligence: Tencent, the largest Internet company in China (and among the largest in the world), has significant experience in Internet operations. The company’s portfolio includes QQ.com, a major Web portal in China, along with QQ, an instantmessaging service; social networks; e-commerce technology; and game platforms. As a result, it has a deep understanding of Chinese Internet users, allowing it to rapidly identify the market potential of new applications and services. • Microinnovation: In addition, WeChat does not merely mimic earlier programs. Tencent has strong capabilities in microinnovation, which allow it to develop new features to meet the needs of Chinese consumers. For example, WeChat allows voice chat and group chat, along with several innovative social media features. One of them, called Shake, allows users to connect with other WeChat participants, locally or worldwide, simply by shaking the phone. Drift Bottle lets users send a message out to float among the WeChat user base—like a message in a bottle—until someone decides to open it and respond. In addition, Tencent recently announced that it will add mobile gaming functions to the platform as well. • Execution excellence: Tencent’s large team and sufficient resources enable it to roll out programs extremely rapidly. The company launched tailored versions of WeChat for different mobile platforms (iOS, Android, Symbian, Windows) within a week, and it released 44 updates in its first year.

8

Booz & Company

THE CHINA INNOVATION STRATEGY

The 2013 survey results show that innovation strategies by MNCs in China and local Chinese companies differ significantly, more so than indicated last year. We posed a series of questions about the innovation strategies that companies are pursuing, using the taxonomy developed over the last eight years in Booz & Company’s Global Innovation 1000 study, 2 which slots innovators into three categories: Need Seekers, Market Readers, and Technology Drivers (as estimated by Booz & Company from respondents’ answers). Need Seekers, such as Apple, Procter & Gamble, and Haier, focus on proactively engaging customers directly to generate ideas. They develop new products and services based on superior enduser understanding. Their goal is to seek out both articulated and unarticulated needs, and then to try to get new products that address these needs to market first. Market Readers, such as Hyundai and Caterpillar, generate ideas by closely monitoring their markets,

customers, and competitors and creating value through incremental innovations. This implies a more cautious approach—one that depends on being a “fast follower” in the marketplace. Technology Drivers, such as Google and Bosch, depend heavily on their internal technological capabilities to develop new products and services. They leverage their R&D investments to drive both breakthrough innovation and incremental change, in hopes of meeting the known and unknown needs of their customers via new technology. They tend to be the least proactive in directly contacting customers. Although each of the strategies can be highly successful, analysis from the Global Innovation 1000 study shows that following a Need Seeker strategy, although difficult, offers the greatest potential for superior performance in the long term. Fifty percent of the respondents who defined their companies as Need Seekers in the 2012 study, for example, said their companies were

Following a Need Seeker strategy, although difficult, offers the greatest potential for superior performance in the long term.

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9

effective at both the ideation and conversion stages of innovation, compared with just 12 percent of Market Readers and 20 percent of Technology Drivers. The study also found that these are the same companies, by and large, that consistently outperform their peers financially. This year’s China Innovation Survey shows that a much higher share of Chinese companies are following the Need Seeker strategy. In 2013, fully 44 percent of the Chinese companies we surveyed see themselves as conducting activities that make up the Need Seeker strategy, compared to the Global Innovation 1000 average of 27 percent. Non-Chinese MNCs, on the other hand, were near the global average, at 29 percent, with the

majority of respondents following a Technology Driver approach. This disproves the conventional wisdom that Chinese companies tend to be more in the fast follower camp, copying and improving other companies’ products (see Exhibit 10). Interestingly, Chinese companies share their propensity to pursue the Need Seeker strategy with companies in one other distinct geography: Silicon Valley. The Global Innovation 1000 study found that 46 percent of Silicon Valley companies are Need Seekers, just a bit more than the share of Chinese companies. 3 MNCs in China, in contrast, continue to drive innovation in the country predominantly through their “technology advantage,”

stemming from fundamental research and superior technology. As Chinese competitors gain experience and maturity, however, it is likely that they will catch up in these areas over time. We therefore expect that MNCs will find it increasingly important to adopt some components of the Need Seeker strategies and tools used by local companies, so they can identify customer needs more quickly and leverage the resulting insights to innovate along the entire value chain, including channel and service innovation. The fragmentation of customer needs across the vast country will also make it more and more important to understand these needs in order to tap into demand in lower-tier cities.

32.8% aölkdfölka

Exhibit 10 Chinese Companies Are More Likely to Be Need Seekers Than the Global Average

Guidelines: 11.0 million

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Innovation Strategy (by company type)

30.1%

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Need Seeker

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47% 33% 32% 20% World Average of Global Innovation 1000 2012

37%

Technology Driver

2012

2013

2013

Chinese Company in China

Non-Chinese MNC in China

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Approved Color
Note: State-owned enterprises are more oriented to a Need Seeker approach (47% Need Seeker, 22% Market Reader, and 31% Technology Driver) than private Chinese companies (41% Need Seeker, 27% Market Reader, and 32% Technology Driver). Sums may not total 100 due to rounding. Source: 2012 China Innovation Survey; 2013 China Innovation Survey

ation

Average agreement 5.0 4.3 4.5 4.5 4.0 3.5 3.0
3.0

2013 Survey

Present 10 years later

10

“Some Chinese competitors are better innovators than my company” (% of non-Chinese company respondents)

Booz & Company

3.4 3.1

3.6 3.2

3.7

2012 Survey

53%

30%

NEEDED CAPABILITIES NOT YET CLEAR

Participants were asked to identify the most critical capabilities (which we define as processes, tools, knowledge, skills, and organization) for each of the four stages of innovation: ideation, idea conversion, product development, and commercialization. The results show that Chinese innovators (both local and MNCs) have a less distinct view of the key capabilities needed. This points to several conclusions: 1. The innovation environment is still evolving. 2. Companies operating in China require a distinct set of capabilities that are different from those needed in other markets. 3. There is significant scope for Chinese companies to improve their effectiveness in deploying innovation capabilities. There is less agreement among companies about which key capabilities are needed to innovate successfully in China than in other geographies. We calculated this by asking participants to rank the importance of capabilities needed at each of the four stages of

innovation. In the global average, there was a large spread between the capability that companies rank the highest at each stage, and the capability they rate the lowest, showing a consensus about which capabilities are required for success at each stage of innovation (a sign that the global innovation market is relatively mature). No similar consensus, however, was evident in the results for Chinese companies and MNCs operating in China. Instead of identifying a distinct, clear-cut winning capability for each innovation stage, respondents gave very similar rankings to both the most and least important innovation capabilities. For example, at the ideation stage, the global consensus is clear: The two most important capabilities are consumer and customer insights and analytics, and understanding of emerging technology trends; the least important is supplier and distributor engagement. For Chinese companies and MNCs operating in China, in contrast, the rankings for all the capabilities are clustered in the middle ranks. The results for the other three stages of innovation are similar. This suggests that

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11

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nology Driver 32.8% aölkdfölka Guidelines: 11.0 million = = =

the innovation market in China continues to evolve, and that both local companies and MNCs are

having difficulty identifying and prioritizing the most important capabilities (see Exhibit 11).

Even though Chinese companies and MNCs operating in China do not cite many distinct innovation

30.1%

=

Exhibit 11 Companies in China Are Less Clear on Innovation Priorities Than Firms in Other Markets
Capability Average Importance (1=least important, 5=most important) Non-Chinese MNCs in China Open innovation Understanding of technology trends Consumer and customer insights Competitive insights Supplier/distributor engagement Resource forecasting and planning Market potential assessment Portfolio trade-off decision making Technical risk assessment/management Strategic disruption decision making Product platform management Specific goal design Reverse engineering Supplier/partner engagement Customer engagement Controlled rollouts Product life-cycle management Diverse user group management Production ramp-up Regulatory/government relationship management 3.4 2.8 2.8 3.0 3.0 3.1 3.4 2.8 2.9 2.8 3.2 2.9 3.3 3.0 2.6 3.6 3.4 3.5 3.2 3.9 2.9 Chinese Companies in China 3.2 3.1 2.9 2.9 2.9 3.2 3.0 3.0 3.0 2.7 3.3 3.2 3.0 2.9 2.6 3.9 3.5 3.3 3.3 2.4 2.4 2.7 3.4 Commercialization 1.7 2.6 4.1 3.9 3.0 Product Development 2.7 2.5 2.4 3.7 2.7 2.0 3.2 4.5 Idea Conversion Global Average 2.9 3.5 4.2 Ideation

TABLE HEADINGS

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+1.3

+1.3

+2.8

Source: 2013 China Innovation Survey

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Non-Chinese MNCs in China Open innovation Understanding of technology trends Consumer and customer insights Competitive insights Need Seeker Supplier/distributor engagement Resource forecasting and planning Market potential assessment Market Reader Portfolio trade-off decision making Technical risk assessment/management Strategic disruption decision making Product platform management Technology Driver Specific goal design Reverse engineering 3.4 2.8 2.8 3.0 3.0 3.1 3.4 2.8 2.9 2.8 3.2 2.9 3.3 3.0 and

Chinese Companies in China 3.2 3.1 2.9 2.9 2.9 3.2 3.0 3.0 3.0 2.7 3.3 3.2 3.0 2.9 capabilities

Global Average 2.9 3.5 4.2 2.7 2.0 3.2 4.5 2.7 2.5 2.4 3.7 3.0 1.7 2.6 Product Development Idea Conversion Ideation

capabilities, the ones that are Customer engagement distinct are different from the ones Controlled rollouts we see globally. The survey results Product life-cycle management show that Chinese companies are Diverse user group management still focusing on core innovation Production ramp capabilities such asrelationship platform Regulatory/government management management and production ramp-up, and are also moving away from reverse engineering as the sole source of innovation. The MNCs in China are more formal and process-

Supplier/partner engagement

driven, focus on 2.6 2.6 related to government relationship 3.6 3.9 management and understanding the 3.4 3.5 market potential (see Exhibit 12).
3.5 3.3 3.3

Chinese companies and MNCs also 2.9 3.9 favor different innovation tools. For example, at the ideation stage, +1.3 +1.3 Chinese companies are making greater use of customer-focused tools such as direct customer

3.2

observation and end-user/customer 4.1 focus groups, while MNCs in 3.9 China appear to make greater use 3.4 of feedback from sales/customer 2.4 Commercialization support, and technology road 2.4 mapping2.7 (see Exhibit 13, page 14). Both sets of favored tools are quite different from the global averages.
+2.8

32.8%

aölkdfölk

Guidelines

11.0 millio

30.1%

One of the survey results shows the potential for Chinese companies to

TABLE H A4 format: - width for - width for

Exhibit 12 Chinese and Non-Chinese Companies Emphasize Different Innovation Capabilities

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eement

Top Seven Capabilities for Innovation in China (1=low importance, 5=high importance) Chinese Companies’ Rating of Most Important Capabilities Pilot user selection/controlled rollouts Product life-cycle management Diverse user group management Product platform management Production ramp-up Open innovation/capturing ideas at any point in the process Project resource requirements forecasting and planning 3.3 3.3 3.3 3.2 3.2 3.5 3.9 Non-Chinese MNCs’ Rating of Most Important Capabilities Regulatory/government relationship management Pilot user selection/controlled rollouts Diverse user group management Product life-cycle management Open innovation/capturing ideas at any point in the process Ongoing assessment of market potential Reverse engineering 3.6 3.5 3.4 3.4 3.4 3.3 3.9

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Ideation

Idea Conversion

Product Development

Commercialization

Unique Critical Capabilities

Source: 2013 China Innovation Survey

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Chinese s in China 3.4 2.8 2.8 3.0 Need Seeker 3.0 3.1 3.4

Chinese Companies in China 3.2 3.1 2.9 2.9 2.9 3.2 3.0

Global Average

Non-Chinese MNCs in China 3.4 2.8 2.8 3.0 3.0 3.1 3.4

Chinese Companies in China 3.2 3.1 2.9 2.9 2.9 3.2 3.0 3.0 3.0 2.7 3.3 3.2 3.0 = 2.9

Global Average 2.9 3.5 4.2 2.7 2.0 3.2 4.5 2.7 2.5 2.4 3.7 3.0 1.7 numbers in Data (Black) 2.6 Product Development 32.8% aölkdfölka Guidelines: Line Weights: 0,5 pt11.0 million 0,75 pt 30.1% 1 pt Idea Conversion Ideation

Open 2.9 innovation Understanding of technology 3.5 trends Competitive insights 2.7 Supplier/distributor 2.0 engagement Market potential assessment 4.5

Consumer and customer insights 4.2 Ideation

Resource forecasting and planning 3.2

Portfolio trade-off decision making 2.8 2.7 2.8 Reader 3.0 Idea Conversion Market Technical risk assessment/management 2.9 2.5 2.9 3.0 Strategic disruption decision making 2.8 2.4 2.8 2.7 Product platform management 3.2 3.7 3.3 3.2 Specific goal design 2.9 3.0 3.2 2.9 Technology Driver Reverse engineering 3.3 1.7 3.0 3.3 Product Development 32.8% Supplier/partner 3.0 2.6 engagement 2.9 3.0 2.6 Customer engagement further improve their innovation capability to manage global, aölkdfölka 4.1 2.6 2.6 Controlled rollouts 3.6 consider enterprise-wide product launches 3.9 3.6 efforts: Chinese companies 3.9 Product life-cycle 3.4 management on the very as the most critical,3.4 but also gave 3.4 themselves weakest3.5 Guidelines: Diverse user group management 3.5 for their 2.4 themselves poor marks 3.5 capabilities that they 3.3see as most Commercialization 11.0 million Production ramp 3.2 2.4 3.2 3.3 3.9 company’s
+1.3

4.1 2.6= and open innovation/capturing Plain text / Body copy in Content Bullet points as dashes with tab position 3.9 new ideas (see Exhibit3.9 14). (For 3.4 3.5 MNCs operating in China, there is

important to contributing to the competence in executing this Regulatory/government relationship management 3.9 2.7 2.9 For example, success. capability. The results are similar 30.1% Chinese companies ranked the for product life-cycle management
+1.3 +2.8 +1.3

2.4 3.3 Commercialization significant relationship = no Subheads or highlighted text between 2.4 3.3 in Subheads importance and competence.) 2.7 2.9 = just white text on 100 % color

+1.3

+2.8

TABLE HEADINGS A4 format: - width for 3 columns: 169 mm = 6.654 in Exhibit 14 for 2 columns: 111 mm = 4.37 in - width

Exhibit 13 Chinese and Non-Chinese Companies Favor Different Key Ideation Tools

Chinese Companies Indicate Weakness in the Capabilities They Letter Perceive as format: Most Critical
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Respondents’ Use of Key Ideation Tools Ideation Processes, Tools, and Practices Direct customer observation Traditional market research Idea workout sessions Feedback from sales/ customer support End-user/customer focus groups Technology road mapping 37 52 58 48 0 20 % of respondents 40 60 80 78 63 62 59 57 57 65 78 10 13 100 15

ment

Perceived Capability Importance vs. Competency (all capabilities) Lines: 0,5 pt Lines for legend: 0,5 pt dotted, black Competency Chinese companies 5.0 Non-Chinese companies High Note: Please always delete all unused colors, after creating the exhibit, 4.5 otherwise InDesign will import the spot colors of this Illustrator file. Product life-cycle management These colors can’t be deleted in InDesign. Thanks. 4.0 Approved Colors, Tints and Patterns: 3.5 3.0 2.5 0.0 Open innovation/capturing ideas Global product launches 0.0 2.5 Low 3.0 3.5 4.0 4.5 5.0 High

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15

Importance for success

Chinese company

Non-Chinese company
Source: 2013 China Innovation Survey

Note: Key tools are those used by more than 50% of respondents. Source: 2013 China Innovation Survey

14
Chinese Companies’ ofImportant Most Important Capabilities Non-Chinese MNCs’ RatingRating of Most Capabilities Regulatory/government Pilot user selection/controlled rollouts relationship management 3.9 3.9 Non-Chinese MNCs’ Rating of Most Important Capabilities Regulatory/government relationship management 3.9

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MARKET IMPLICATIONS

Companies in China have made great strides in building their innovation competitiveness, according to the 2013 China Innovation Survey. The sharp improvements from 2012 to 2013 also show that the innovation imperative in China has momentum, and that further advances are likely over the next several years. Chinese companies are more aggressively using their unique innovation strategies to pursue opportunities in global markets, particularly Western markets. Critically, however, the data also shows that Chinese companies have not become complacent, but instead are quite self-critical and aware of the potential for improvement. This suggests that they can make even greater gains in the future if they can extend the innovation results they have achieved domestically to markets in the developed and developing worlds. China has already established itself as a location for R&D that is competitive with most other regions of the world, according to the survey. MNCs are developing their innovation centers in China as global hubs, and they are accordingly adding value to their organizations there. Overall, R&D spending in China was nearly 2 percent of GDP in 2012, still

less than the 4 to 5 percent typical in developed countries. China, however, is a large country, and spending in cities like Shanghai and Beijing is already in the 4 to 5 percent range, indicating that these cities are becoming global innovation hubs. Innovation in China is rapidly gaining strength, and the country may regain its place as a world center for innovation. Chinese companies will use their specific innovation strategies and advantages to compete with their rivals—at first domestically, but later also globally. Multinational companies, for their part, will find themselves forced to adapt their innovation models in order to compete more effectively with Chinese companies. They also will have to face the challenges of figuring out how to integrate China-based R&D into their global research networks. For Chinese companies, the biggest challenge will be to preserve some of the advantages they have built up, particularly as MNCs begin to understand the abilities of their Chinese competitors and look for ways to emulate their strengths and incorporate them into their own proven ways of doing business.

Innovation in China is rapidly gaining strength, and the country may regain its place as a world center for innovation.

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Top 10 Innovative Companies in Mainland China Respondents to the 2013 China Innovation Survey were asked to name the most innovative Chinese company (see Exhibit A). Alibaba Group was voted number one. According to vice president Junling Li, the nation’s leading B2B company pursues innovation on two levels: at the strategic level, which requires top-down decision making from the core management team, and through frontline employees providing new ideas from the bottom up. What’s essential to keep the innovation mechanism healthy, says Li, is the right culture: “There should be a culture, rather than a process, to make information flow effectively within the organization. Process is the foe of innovation.” Three other companies on the Top 10 list are Internet-based: Tencent Holdings (3), whose businesses include social networks such as the Tencent QQ instant-messaging service, Web portals, e-commerce, gaming, and the extremely popular WeChat application (see “Innovation Case Study: WeChat,” page 8); Baidu (7), the Web services company best known for its Chinese language search engine; and 360Buy Group (9), the nation’s largest B2C retailer. Five of the top 10 are manufacturing companies: Huawei Investment & Holding (2), which operates in the telecommunications equipment, mobile devices, and consulting industries; Lenovo Group (4), computers and smartphones; Sany Heavy Industry Company (5), heavy machinery; Haier Electronics Group (8), consumer electronics and home appliances; and Wanxiang Group (10), auto parts. China Merchants Bank (6), the Shenzhen-based banking company with more than 500 branches in mainland China, Hong Kong, and New York, is the only company in the Top 10 from the financial sector.

Exhibit A Most Innovative Chinese Companies

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Rank 1 2 3 4 5 6 7 8 9 10

Company Name Alibaba Group Huawei Investment & Holding Tencent Holdings Lenovo Group Sany Heavy Industry Company China Merchants Bank

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32.8% Baidu Haier Electronics Group Guidelines: 360Buy Group Wanxiang Group 30.1% 11.0 million aölkdfölka

=

=

Source: 2013 China Innovation Survey

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Appendix Survey Population
Total Respondents 264 7 (3%)
Other 3% Automotive 9% 14% 9% Chemicals & energy Other 17% 28% C-suite

Breakdown of Participants by Industry

Breakdown of Participants by Position

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Approved Color
Professional services

161 (61%)

110 44 (40%) 66 (60%) 2012 96 (36%)

Industrials

22%

14% Computing & telecom 7% 13% 9% Consumer goods

Manager

27% 18% 9% Director/general manager Vice president (including SVP & EVP)

Health/life sciences

2013

Finance/insurance

Not disclosed Chinese companies Non-Chinese companies
Note: Chinese companies include both private organizations and state-owned enterprises. Non-Chinese companies include MNCs and Sino-foreign joint ventures. Sums may not total 100 due to rounding. Source: 2013 China Innovation Survey

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Endnotes
“Growing Europe: The Competitiveness Imperative,” State of the European Union 2013, Booz & Company, INSEAD, and European Executive Council, www.insead.edu/home/documents/ INSEAD_BOOZ_SoEU_Study2013.pdf.
1

“The 2012 Global Innovation 1000 Study: Making Ideas Work,” Booz & Company, www.booz.com/global/home/what-we-think/ global-innovation-1000.
2

Barry Jaruzelski, John Loehr, and Richard Holman, “The Global Innovation 1000: Why Culture Is Key,” strategy+business, Winter 2011, www.strategy-business.com/article/11404?gko=dfbfc.
3

About the Authors Steven Veldhoen is a partner with Booz & Company based in Beijing and head of its consumer and retail practice in China. He is the co-leader of the firm’s global innovation practice and co-leads the firm’s China innovation practice. Anna Mansson is a principal with Booz & Company based in Shanghai. She is the leader of the firm’s Greater China operations practice, principally working with companies in the engineered products, consumer, and retail sectors. She also co-leads the firm’s China innovation practice. Bill Peng is a principal with Booz & Company based in Beijing. He is the leader of its engineered products and services practice for Greater China, principally working with clients in the automotive, machinery, and manufacturing sectors. George Yip is a professor of management and co-director of the Centre on China Innovation at CEIBS. He is co–executive editor of Chinese Management Insights. His current research concerns innovation, strategic transformation, and managing global customers. Bruce McKern is a professor of international business at China Europe International Business School (CEIBS) and co-director of the CEIBS Centre on China Innovation. His research interests are innovation and the globalization of firms from rapidly developing economies.

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