China's coming two decades of innovation
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One of the more ill informed criticisms of China's economy is its alleged low level of innovation. China's critics forget that in just three decades Japanese companies progressed from manufacturing plastic toys to producing America's best selling luxury car. In the same timeframe, South Korea developed from a textile exporter to the world's leading TV designer and manufacturer, with style icons like Samsung. These examples are a guide to what will happen in China in the next two decades.
Current criticisms of China for "insufficient innovation" take no account of the country's present stage of economic development. According to figures from the world's leading expert on long term economic growth, Angus Maddison, China today is at the same stage of economic development as Japan in 1967 and South Korea in 1986. Back then those countries were enjoying success in heavy industries such as steel and ship building, and low priced electronics and household goods. In short, Japan and South Korea were successful in exactly the same industries as China is today!
Toyota's first successful car, the Crown, was introduced in Japan in 1955. Its quality was so low that when it was introduced in the U.S. in 1957 it was withdrawn within three years because its drastic overheating problems threatened to ruin the company's reputation. Toyota's first internationally saleable car, the S40, appeared in 1962 and was a cheap copy of the Ford Falcon. It was 1969 before Toyota clocked up a cumulative total of one million exports and annual domestic production of one million units a year. It was another 20 years before Toyota introduced the Lexus – the car that replaced the Cadillac as the US's best selling luxury model. If, in 1957, someone had told the General Motors CEO that Toyota would one day not only overtake his company to become the world's largest car producer but also defeat his luxury car division, he would have laughed out loud. But that is exactly what happened.
It was a similar story with South Korea's premier company, Samsung Electronics. In the late 1970s, Samsung was still importing all key components from Japan. Its home-produced transistors were of such poor quality that its own business divisions tried to refuse to use them. Samsung was at the same stage of development as Toyota had been – lacking real product quality for international markets.
But within 20 years Samsung became the world's largest producer of dynamic random access memory (DRAM) chips, and within 30 years it was the world's largest manufacturer of colour TVs in every market sector.
There is nothing mysterious about Toyota and Samsung's rapid progress from the bottom of the value curve. From the outset they relied on huge investment in capital equipment and labour. Japan and South Korea's rate of investment during their periods of rapid growth was almost twice that of the United States. This allowed the Japanese car industry to overtake the U.S. with superior production techniques and, by using robots, to improve quality and flexibility. Samsung doubled the number of its development projects, designing new generations of DRAMs and overtook its rivals. Both companies spent vast amounts on R&D.
China is just entering this process. Its capital investment is high. But the big increase in R&D spending is only just beginning.
The Table below shows the latest available OECD data on R&D. China has more than doubled its R&D spending as a percentage of GDP in 12 years – far more rapidly than any competitor. But it is starting from a low base. As a percentage of GDP, China's spending is still only a little over a half that of the U.S., and less than half that of South Korea and Japan. Advanced R&D relies on inputs of highly qualified labour; engineering and physics PhDs are its raw material. So China's progress in catching up with its competitors will be gradual but steady. The country's huge financial resources and the increasing allocation of funds to education and research ensure it will get there.
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Research and Development Expenditure |
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|
|
% of GDP |
||
|
|
1995 |
2005 |
2007 |
|
Sweden |
3.3 |
3.9 |
3.6 |
|
Finland |
2.3 |
3.5 |
3.5 |
|
Japan |
2.9 |
3.2 |
3.4 |
|
South Korea |
2.4 |
3.0 |
3.2 |
|
U.S. |
2.5 |
2.7 |
2.7 |
|
Germany |
2.2 |
2.5 |
2.5 |
|
China |
0.6 |
1.3 |
1.5 |
|
OECD Total |
2.1 |
2.3 |
na |
|
Source: OECD Factbook 2010 and Dunning and Lundan, Multinational Enterprises and the Global Economy |
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The history of Toyota and Samsung indicates the timeline to expect. Indeed in some hi-tech industries – for example, high speed trains – China is already technologically far ahead of Japan or South Korea at the equivalent stage of growth. Huawei, one of China's biggest spenders on R&D, is already world number two to Erickson in telecoms equipment. Business Week's ranking of the world's 50 most innovative companies already includes four Chinese firms – BYD ranked 8, Haier ranked 28, Lenovo ranked 30 and China Mobile ranked 44. Alibaba and Tencent might well also have been included.
It took Samsung 20 years to progress from assembling TVs from imported components to establishing itself as a leading brand, and 30 years to become the world leader. It took Toyota 20 years from producing its first decent car to becoming a major force in the automobile industry, and 30 to produce the world's best selling luxury car. There was nothing magic about the process. It was all about marshalling huge amounts of finance, and devoting massive resources to R&D.
China's government has understood the point very well. Every Chinese leader's speech on economic policy stresses innovation and R&D. It is only a question of money and time. Those who claim China "cannot innovate" are the same as those who, in the 1960s and 1980s, said Japanese and South Korean companies could not innovate – but were merely good for producing ships and steel.
Those who don't understand what is going to happen are going to be as astonished as the CEO of General Motors, as his Cadillac division was overwhelmed by a "low quality" Japanese manufacturer.
The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/node_7080931.htm
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