At the 3rd Global Forum on Intellectual Property held in Singapore today and tomorrow Prof Peter Williamson of the Judge Business School, Cambridge, UK, presented his interesting view[1] on Chinese costs innovation and how that challenges the main stream, mostly Western, concept of innovation. Prof. Williamson’s thesis is that although we have considered the Chinese threat mainly to be one of low-cost manufacturing, the more apparent threat is he calls “cost innovation”: the ability to exploit their low costs in radically new ways across all parts of the business—including research and development (R&D), marketing, and customer service—to offer customers dramatically more for less. These may not qualify as “innovations” in the traditional sense.
Chinese companies have applied cost innovation into three areas: (1) high technology at low prices; (2) product variety at mass-market prices; and (3) specialty products at low prices. Williamson mentioned a couple of striking examples of Chinese cost innovation. Beijing Aerospace Zhongxing Medical System developed a digital direct X-ray equipment (DDX) product based on a base “line-scanning” technology that acquired from its parent Beijing Aerospace via a Russian partner, which technology was regarded as obsolete by the market leaders in this area, GE and Philips. These companies dominated the global market with their DDX, expensive, products, e.g. heart scans, costing US$400,000. Zhongxing decided to apply the DDX technology in every day applications, like chest X rays. By re-engineering the technology Zhongxing was able to built equipment against a fraction of the prices GE and Philips charge, plugged their products to hospital’s existing IT systems, taking 50% of the Chinese market, causing Philips to withdraw from the segment and GE cutting prices by half.
A second example Prof. Williamson gave, relates to “application innovation”, applying an existing technology mentioned. Builders traditionally used acrylic-acidic based products to seal frames of exterior doors and windows as an alternative for expensive silicone-based sealants. Antas Chemical Co. Ltd. repurposed neoprene base with new formulation and packaging to become a leader in construction applications.
A further example “Prof. Williamson mentions the “Business Model innovation” by restructuring the value chain. Point in case is Guangzhou Port Machinery Industry Co. Ltd. Standard practice is to provide service at harbors remotely supported by scheduled visits for installation, as delays are costly for customers because utilization is critical. GMPC innovated the business model by establishing permanent service presence at major client’s sites. This was initially met with strong resistance from its Finnish partner which had a totally different mindset about cost. The GMPC business model innovation allowed rapid penetration of the market by a relative outsider.
Like Financial Times writes, highlighting recent innovation in emerging markets in soft drinks, “these innovations do not yet involve transformational technological shifts – such inventions remain the preserve of the developed world with its long-established universities and commercial laboratories. But the emerging world is spawning product improvements with commercial implications that are game-changing. They do not win Nobel prizes but they do make money.
Chinese competitors many times do not play by conventional rules. They purposely skirt the existing players and their strategies, and this is what makes this type of competition challenging for incumbents. The Chinese seem to be following their propensity for avoiding direct conflict and following the philosophy of Sun Tzu (2003) by winning battles without direct warfare[2]
[1] Zeng, M. and Williamson P.J. (2007) Dragons at your door: how Chinese cost innovation is disrupting the rules of global competition. Boston, MA: Harvard Business School Press
[2] See: 2007 Project Management and Product Development Book Reviews