Chinese Innovation to Fuel Global Competition: McKinsey

A CEO’s guide to innovation in China and three sector snapshots lay out the landscape

As China's vice president and heir apparent, Xi Jinping, visits Washington, McKinsey & Co. is taking note of a massive surge of innovation throughout Chinese companies and manufacturing plants.

New patents have doubled in China since 2005, and as innovation gains steam there, the stakes are rising for domestic and multinational companies alike, reports McKinsey in the latest issue of its business journal.

In a wide-ranging CEO’s guide to innovation in China, McKinsey supplies a road map for navigating the intensifying competition that lies ahead, noting that innovation prowess will yield ideas and products both internally and on the international stage. Plus, three snapshots of Chinese innovation from McKinsey show how Chinese innovation is evolving in diverse ways across a range of sectors, including cars, pharmaceuticals and semiconductors.

And make no mistake–the competition from China will be fierce, say McKinsey analysts Gordon Orr and Erik Roth.

“The Chinese have traditionally had a bias toward innovation through commercialization–they are more comfortable than many Western companies are with putting a new product or service into the market quickly and improving its performance through subsequent generations,” Orr and Roth write. “It is common for products to launch in a fraction of the time that it would take in more developed markets.”

(Video: Xi Jinping's wife, noted Chinese folk singer Peng Liyuan, sings "Ode to Coral.")

They point to product home-grown product innovation that stays in China, and hasn’t yet made an appearance in the global markets because the domestic market is so large that Chinese companies have little incentive to adapt successful products for sale abroad.

For example, Suning Appliance, a large Chinese consumer electronics retail chain, now offers an Android-enabled television complete with an integrated Internet-browsing capability and preloaded apps. These take users straight to popular Chinese Web sites and digital movie-streaming services, and the picture quality and industrial design are comparable to those of high-end televisions from South Korean competitors, according to Orr and Roth.

Further, Chinese business-to-business sectors are establishing a track record of innovation domestically and globally, according to the McKinsey report. The Chinese communications equipment industry, for instance, is a peer of developed-world companies in quality, and in the Pharmaceuticals sector, more than 20 chemical compounds discovered and developed in China are currently undergoing clinical trials.

So what’s Orr and Roth’s takeaway? While China hasn’t yet experienced “a true innovation revolution,” it will over time evolve from a country of incremental innovation based on technology transfers to one where breakthrough innovation is common.

“The government will play a powerful role in that process, but ultimately it will be the actions of domestic companies and multinationals that dictate the pace of change–and determine who leads it,” they say.

Read China ETF: Foot in the Door to Foreign Investing at AdvisorOne.com.

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