Learn from China re profitable digital innovation
Chinese companies have long been accused by Western rivals of stealing intellectual property but the West should now copy Chinese firms in adopting digital innovation that generates a sustainable profit stream, says a new article co-authored by Professor Peter Williamson of Cambridge Judge Business School.
“In the digital sphere, China has moved from copycat to innovator,” says the article published in Ivey Business Journal. “While much of the Western world focuses on things about China that threaten other nations, or at least appear to threaten them, we should not ignore the lessons that can be found in China’s remarkable evolution as a marketplace innovator.”
One overriding lesson China can teach the West is in scaling up – given that even before the COVID-19 pandemic pushed more activity online, the mobile payments system in China was 11 times the size of that in the US by value, and now comprise nearly 60 per cent of all non-cash retail transactions in China.
The article then identifies three key lessons to be learned from China’s digital innovation.
Firstly, China has adopted customer mindset and approach rather than being inspired by novel technological visions that can – but only rarely – bring huge breakthroughs.
“The danger with ‘mission-driven’ innovation is an excessive focus on technology and product functionality” that, being high risk, results in “many more failures than success stories like Apple.
“China’s digital innovators have adopted a different approach, one that might be termed ‘user-driven’ innovation. Instead of transformative new technologies and world-changing visions, Chinese success stories usually start with insights into unmet customer needs or user frustrations.
Sometimes they simply let users drive innovation rather than pushing the latest and greatest offering.”
For example, about 86 per cent of China’s population uses Quick Response (QR) code-based payments – the highest penetration in the world. Although this technology (which does not require a point-of-sale device for retailers) has existed for decades, Alibaba’s Alipay and Tencent’s WeChat Pay adopted it in 2011 to enable quicker and easier payments.
“The two companies simply discovered that they could use it in their mobile phone-based payment services, and as a result, they pioneered the use of QR technology in mobile payments,” the article adds.
Chinese firms have also effectively harnessed the potential of users to develop innovative ideas themselves – for example, Tencent users who requested and received reminders about the schedules of computer-game tournaments. “This rapid cycle of ‘launch–engage–innovate’ has now become core to Tencent’s innovation process,” the article says.
Secondly, Chinese companies have moved beyond simply shifting offline activities to online, and focus instead on “creating new services that help users embrace a comprehensive digital lifestyle” that combines shopping, social networking and entertainment.
For example, leading food delivery platform Eleme (which literally asks, ‘Are you hungry?’ in Chinese) rebranded into a ‘digital life services’ platform that offers not only food but also other services ranging from pet care to car washing to home decoration.
So the company’s three million “food-delivery brothers” were instead “romantically promoted as ‘Blue Knights’ standing by to rescue urban residents from daily tasks (blue is Eleme’s trademark colour),” the article says.
Thirdly, Chinese innovators have rejigged their business models to focus not only on expanding the user base to grow advertising, but instead to sell an “ever-increasing portfolio” of products and services.
“Since this approach focuses directly on developing products and services that consumers are willing to pay for, it is arguably less risky than relying on models that offer users a service for free in the hope of generating spill-over revenue and profit streams,” the article argues, noting that online advertising accounts for only a fraction of Tencent and Alibaba revenues.
The article concludes: “When compared to Silicon Valley’s supply-side innovation, China’s approach to innovation can look mundane, especially when new technologies are not involved. But the results that have been achieved speak for themselves.
“By relying less on developing the next ‘killer app’ and breaking free of the user growth treadmill on which many Western digital businesses are caught, Chinese innovators have developed what could prove to be a more effective way to capture the holy grail: a business that generates a sustainable stream of profits by locking in otherwise fickle users and becoming an integral part of their daily lives.
“And that possibility, if for no other reason, makes copying the Chinese approach to innovation something to seriously consider.”
• The article in Ivey Business Journal – ‘Why it‘s time to think about copying Chinese innovators’ – is co-authored by Peter Williamson, Honorary Professor of International Management at Cambridge Judge Business School and Fellow and Director of Studies in Management at Jesus College, Cambridge, and by Zheng Liu, a post-doctoral research associate at the Intellectual Forum of Jesus College, Cambridge. Ivey Business Journal is published by Ivey Business School in London, Ontario, Canada.