What you need to know about innovation in China

Today, any Chinese person knows that the future of the economy of his state lies with innovations. But it was not always so. The industrial miracle that has lifted 700 million people out of poverty over the past half century was not about technological innovation. At first, bulk copy was the primary driver. Using an almost endless supply of cheap labor – hundreds of millions of energetic baby boomers – China pushed on to innovate elsewhere. The region, which did not know industrial revolutions, thus managed literally in 10-20 years to get acquainted with the most advanced achievements of the whole world. It is logical that he became famous for his desire to copy and borrow everything.

But times have changed. Boomers are being replaced by millennials born during the one-family-one-child policy, officially announced in 1979, to bring fertility below replacement levels. It worked, but created a new demographic reality: Millennials and Gen Z are too few to fill the dwindling ranks of baby boomers. According to the National Bureau of Statistics, by 2030, there will be 81 million fewer working Chinese people than in 2015, and after this milestone, the country will begin to lose an average of 7.6 million citizens annually. This cannot be ignored. In order to continue to grow and support an aging population as the number of young workers declines, the PRC has changed tactics. Copying has given way to innovation.

 

But is China capable of innovation? Can it compete internationally with developed countries that have built their economies on technological innovations for many decades? Many observers doubt this. In recent years, they note, hundreds of technologies and inventors have appeared in the West, while in China there are relatively few of them. In March 2014, HBR published an article “Why China Can’t Innovate” (Regina Abram, William Kirby, Warren McFarlan), which captured the prevailing opinion. At that point, the authors’ arguments seemed reasonable and valid. But now China, which has been talked about for a long time that it only knows how to copy, has become home to many of the fastest startups, reaching a valuation of $ 1 billion worldwide.

This is startling information for a country that ranked only 14th in the Global Innovation Index in 2020. Chinese firms seem to be pushed up by an invisible spring that traditional criteria for evaluating innovation cannot detect. Often we pay attention to people and companies that are throwing out powerful ideas – charismatic, daring, dynamic hero-thinkers.  But over the past 5 years, as the “cold war of innovations” developed between the two superpowers, the PRC has reached a kind of parity with the United States – moreover, the driving force behind its success may not be innovators at all.

To understand what is driving the global growth of Chinese companies, we must admit that it has a unique resource at its disposal: a gigantic population that has experienced unprecedented change and developed an incredible ability to absorb innovation and apply it at record speed and in record volume.

It is this aspect of the innovation ecosystem – hundreds of millions of hyper-adaptive and open-minded consumers – that makes China so competitive today. Ultimately, the value of innovation is determined by the willingness of people to apply it. And here China has no rivals.

Most often, he can be found in the tourist area near the Gu Lou subway station: for many years local passers-by threw him coins and small bills. However, in 2015, his life changed dramatically: people suddenly stopped carrying cash with them. In almost one day, all Chinese people downloaded apps like WeChat Pay and Alipay and switched to mobile payments.

For Ian, these changes could be deadly: his entire existence depended on cash. The old man began to look for a way out of the crisis. I scraped together money for the cheapest Xiaomi smartphone. Then he managed to print a poster with the QR codes of his wallets on WeChat Pay and Alipay. With all this goodness, he returned to his original place, hung the poster around his neck, connected his smartphone to the Wi-Fi metro and waited.

Do you think old man Yang survived in the new “cashless” China? Not only survived, but also became much richer! Today, in order to give alms, passers-by no longer go into their pockets for change – they open a mobile application on their phone, scan the code on the old man’s poster and transfer him a few yuan. At the same time, the average donation has grown from 1-2 to 3-5 yuan – almost 300%! This is what a competent transition to digital means.

In Chinese mobile payment apps, there is no lower or upper limit for the amount – and restrictions on use. In 2015, while in Chengdu, I paid from my phone for a laptop of a famous brand, and when I left the store, I saw a woman making sandwiches over coals on a makeshift brazier from a trash can – and paid for breakfast through the same app.

Neither old Jan, nor the computer store owner, nor the sandwich woman are innovators. Our criteria for the innovativeness of global economies will not find much value in their work. But what happens when the rapid adoption and adaptation of new products becomes the norm for more than 900 million Internet users of all walks of life? An economic force is emerging that is changing the framework of global competition.

The story with mobile payments is especially telling, since the technologies supporting them appeared in the United States and China almost simultaneously. Due to this, their comparative innovation and primacy (who copied from whom?) Did not play a role here.

Both the time of implementation and the technologies are similar, but the speed of propagation is fundamentally different. In early 2019, Apple announced with great fanfare the activation of Apple Pay on 383 million phones worldwide – but at that time only 24% of iPhone users had tried the technology. More to the point, prior to that year, the most used mobile payment app in the US was not Apple Pay, but Starbucks, a coffee shop.

It is the level of penetration that explains the fact that in 2018 1.2 billion transactions per day were carried out through WeChat Pay, and 1 billion per month through Apple Pay. And that is why in 2019 the total volume of mobile payments in the PRC (347 trillion yuan, or about $ 54 trillion) was 551 times more than in the United States ($ 98 billion).