China's large population base also helps increase the probability of success from "trial and error" experimentation with new solutions. Many grassroots entrepreneurs are able to spot market imperfections and leverage that contextual understanding to create relevant solutions.
Lei Jun is a case in point. Xiaomi's approach to innovation relies on a deep understanding of customer needs and continual feedback to tailor products for specific usage requirements.
Second, organization. Organizations typically resist change when they become successful. As markets mature, market leaders often lose their competitive edge as they fail to anticipate change, typical across numerous global industries.
As we know, China's market changes fast. Many Chinese companies are very young and have a higher risk appetite for opportunities and radical innovations. A well-known case is how Haier Electronics Group Co Ltd achieved significant growth when it introduced a washing machine capable of cleaning not only clothes but also potatoes.
This demonstrates Haier's awareness of indigenous demand from China's lower-tier cities and the company's customer-centric management philosophy.
Entrepreneurial Chinese organizations can be described as hungry, agile and nimble. They continually push for growth because there is no legacy of success to protect. This innovative character results in higher levels of patent activity and investment into research and development.
Third and last is the market. Critics often point to the flaws in China's lack of market-centricity when expressing concerns about the future. These criticisms often dwell on the dominance of SOEs in certain sectors, a lack of transparency, the abundance of government incentives pushing for technological change without oversight mechanisms and the heavy presence of government investment to drive the economy.
SOEs will continue to play a major role in China, but private companies have emerged across multiple sectors (including foreign entities in China) and will become the dominant forces of innovation and economic expansion. In open sectors, competition has become intense as foreign corporations, SOEs and local private companies vie for a piece of the pie. Deregulation has been a major driver for China's growth over the past couple of decades and that will remain the case.
Over the past couple of decades, China's market has experienced unprecedented economic expansion, aided largely by government policies that provided top-down support at national and provincial levels. Tangible benefits include science and R&D parks as well as industry clusters throughout China. The supporting foundation for continued growth and innovation is also falling into place, including fast consumer adoption of the Internet, creation of startup incubators, and increased sources of funding for new businesses from venture capital, private equity and angel investment.
Innovation breeding ground
China is a complex, diverse and dynamic market, characterized by intense competition. Chinese companies are emerging with unique capabilities to win the bases of competition through lower cost, better quality and faster execution.
Innovative Chinese companies such as Baidu Inc, Alibaba, Tencent, Xiaomi, Haier and others have demonstrated unique capabilities and an innovation mindset well-suited to China's unique context. Such businesses have proven capable of building cross-industry ecosystems for collaborative innovation and a willingness to "boundary jump" across traditional industry lines. These ecosystems exhibit "biodiversity", which makes the entire value chain more robust and sustainable; of course, up to certain limits.
The China context can be described as a highly complex, diverse, dynamic and discontinuous environment accentuated by time-space compression. Within this breeding ground, innovative Chinese companies are leveraging this market context to deliver exponential growth.
Authors: Edward Tse is founder and chief executive officer and Bill Russo is managing director of Gao Feng Advisory Co, a global strategy and management consulting firm based in China.
