China rising from low-cost manufacturer to innovator

It might be a bad time for Chinese manufacturers as the economic slowdown and restructuring squeeze their profit margins. It could also be good for them too, if they can embrace innovation to move up the value chain.

The good old days for China's low-cost manufacturers are gone. They now feel the pinch due to factors including mounting excess capacity, rising labor costs and increasing international competition.

"We found that China's industrial revolution was less technologically innovative compared with Britain and the United States," said Nobel Prize Laureate Ronald Harry Coase at the ongoing Boao Forum for Asia (BFA) 2014 Annual Conference.[Special coverage]

"This was disturbing and unfortunate, particular since the modern economy has become more and more knowledge-driven," said Coase, one of ten delegates who questioned over 40 Chinese entrepreneurs on their innovation willingness and capability at the forum.

MOVING UP THE LADDER

For Chinese iPhone fans, they may lament as their smartphone screens are made by overseas manufacturers. But they may feel a little relieved if they know that the super glass walls of some Apple stores are made by a Chinese glass manufacturer.

"The market for ordinary glass is getting smaller with increasing competition and decreasing margins. The only way to survive is to move up the value chain through innovation," said Dou Qinghe, vice president of AVIC Glass, a specialist glass maker in south China's Hainan Province.

Like Dou, more Chinese entrepreneurs are racing to catch up with international competitors using expertise, talent and financial firepower.

"The speed of innovation is much higher than that in the west. Just think about how China looked 30 years ago, now you see first-class technical universities cooperating with Chinese industries to further innovate," said Ernst Ulrich von Weizsacker, co-President of the Club of Rome.

According to a report released by the World Intellectual Property Organization in March, China ranked third in total international patent applications to the Patent Cooperation Treaty, with over 20,000 applications, up 15.6 percent year on year.

"China is very responsive and receptive to innovative ideas and sectors, such as e-commerce and Internet finance. The embrace for such innovations in turn facilitate further reforms by helping nurture a multi-tier and freer capital market," said Gregory D. Gibb, Chairman and CEO of Shanghai Lujiazui International Financial Asset Exchange Co., Ltd.

"I believe some sectors may even outperform the United States and Europe in three to five years thanks to their innovation-driven growth," Gibb added.

FREER, FAIRER MARKET EXPECTED

However, Chinese entrepreneurs have mixed feelings about innovation. Some accept the necessity to upgrade themselves through technical and operational reform to gain a steadier foothold, but some complain feeling shackled due to unfavorable conditions.

Small-and-medium sized enterprises (SMEs) have the loudest complaint. Subsidies to support R&D are unfairly distributed to state-owned enterprises (SOEs) and markets in energy, financial services and telecoms are not fully open to private firms.

According to Nobel Prize Laureate Edmund Phelps' observation, one result of the differentiated treatment towards SMEs and SOEs is the unbalanced talent flow.

"It's a pity that so many young people graduating from universities are going into jobs they see as more secure in the public sector instead of startups, the most energetic cradle of innovation," Phelps said.

It takes a segmented and completely competitive market to foster innovation. If the market is not open to fair competition and resources are mainly relocated by government administrative approvals instead of personal competence of each company, then few are willing and capable to invest in new products or services, said Gao Jifan, Chairman & CEO of Trina Solar, Ltd.

The Chinese leadership vowed last year to reduce over one third of 1,700-plus administrative approval items during their stewardship. More than 300 items have been relinquished or delegated to lower governments. The country is gradually opening traditionally monopolistic sectors to all market players and is promoting mixed ownership to combine financial strength with technological advantages.

What the government should do is to invest more in basic research and development to aid enterprises, said Zhang Yaqin, vice president of Microsoft.

STRONGER IPR PROTECTION NEEDED

Another major concern is the country's weak intellectual property rights (IPR) protection regime.

China is implementing an indigenous innovation strategy, promoting the development of technological innovation in domestic firms, eventually leading to the ownership of their own core IPR.

Entrepreneurs, especially from foreign firms and start-ups, worry that registering patents and proprietary information would open the door to theft and competition from lower-cost manufacturers.

China may not face talent shortages in its innovation drive, but lack the right environment, or to be more specific, IPR protection to encourage innovation, said Leo Melamed, Chairman Emeritus, Chicago Mercantile Exchange.

Efforts are stepping up to shore up IPR protection. China will try to set up a special court for IPR cases, according to the Supreme People's Court's work report for 2014. The practice, which is common in some developed countries, is believed to improve the efficiency and accuracy of dealing with IPR piracy cases.

In addition to economic and legal policies, experts argue it is critical to nurture an innovation-friendly culture.

High innovation requires people with the right culture, or the right values. It is critical to encourage skepticism, curiosity and exploration in society, Phelps said.