The following is an article, slightly expanded for a non-Chinese audience, which originally appeared in Global Times.
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The recent period has seen important progress by some of China’s leading companies in globalization and enhancing their brands. Haier has now become the world’s largest producer of domestic ‘white goods’ goods such as refrigerators. Huawei has become the world’s second largest telecommunications equipment producer after Ericsson and is on course to become number one next year. ZTE has entered the world’s top five mobile phone manufacturers. Lenovo has overtaken Dell and Acer to become the world’s second largest personal computer manufacturer.
These advances are not simply in scale. The Financial Times, a publication with a clearly ‘upmarket’ audience in mind, recently reviewed new notebook computers from Apple, Lenovo and Acer. It concluded Lenovo was the best engineered and number two in design to Apple – both ranking clearly ahead of Taiwanese Acer.
Such companies are significant because of their technological level. These are medium and high technology industries, far removed from the textiles and similar products with which Chinese companies entered the world market at the beginning of its economic reform.
Naturally there should be no exaggeration. China’s government rightly stresses that despite being the world’s second largest economy, China is still a developing and not a developed country. China’s GDP per capita is less than 10 per cent of that of the US. Given this disparity it is unsurprising that in the latest list of the world’s 100 most valuable brands, produced by leading brand consultancy BrandZ, China has only 12 such companies compared to 43 for the US. But the upward momentum of China’s brands, as shown by this recent progress by its top companies, is palpable.
Such development destroys factually the argument that used to be deployed against China’s companies that they were incapable of producing global ‘brands’. This argument was always invalid as it took no account of China’s relative stage of economic development. In terms of percentage comparison to the US’s current per capita GDP, China’s level of development is still only equivalent to Japan before 1960 or South Korea in 1976. Neither Japan before 1960, nor South Korea in 1976, had a significant number of famous international brands either!
Instead the development of high brand values by Japanese and South Korean companies, such as Toyota or Samsung, came from the 1970s in Japan and the 1990s in South Korea. That level is where, on present growth trends, China will be in the next 10-20 years’ time. In terms of recent brand successes China is probably slightly ahead of where you would expect it to be given its stage of economic development.
Taking another key indicator, expenditure on R&D, China’s current progress and stage of development is also clear. Analysis of the US, the world’s most advanced economy, confirms that innovation is a result of the application of resources and money. It thoroughly confirms Thomas Edison’s famous observation that his own greatest invention was not the microphone, the light bulb, the gramophone, or electric power transmission but ‘the ideas factory’, that is the industrial research laboratory.
Zoltan Acs classic Innovation and the Growth of Cities, found that almost nine tenths of the difference between US states in their number of commercial innovations was accounted for by the amount of research spending in the state. Furthermore it was the quantity of research spending, not the type of institution which carried it out, that was crucial. The difference was that US states with high proportions of R&D spending by companies tended to have more innovations by large companies, whereas states with high proportions of R&D spending by universities tended to have a higher proportion of innovations by small companies.
This itself carries important lessons for China. The majority of R&D spending by a highly developed economy such as the US is carried out by large companies. But small company innovation, including the famous ‘start ups’, do not spring out of nowhere but from association with very large well-funded research institutions. The most famous example is California’s Silicon Valley and its relation to Stanford University - out of which emerged dominant US technology companies such as Google, HP, Cisco etc.
It is therefore instructive to compare current R&D spending in China and the US. China has made great strides in increasing the percentage of R&D spending in GDP. The OECD’s international comparisons show the percentage of China’s R&D spending in GDP has tripled since 1995. But China’s spending on R&D in 2011 will only be 1.4 per cent of GDP, $154 billion, compared to 2.7 per cent of GDP, $405 billion, for the US. That is, China’s R&D spending will only be 37.9 per cent of the US.
This is why recent international attempts to denigrate China for ‘not having a Steve Jobs’ were completely unintelligent. Apple, that is Steve Jobs, is the world’s most valuable company because it is based in the country with the world’s highest research spending not only in technology but in design. Apple is the US’s greatest commercial success to date in this field. As people in China and the US are equally intelligent no one who thought about the matter seriously would find it surprising that China’s companies cannot yet compete with the highest product of the world’s most advanced research based economy while China’s R&D spending is still less than half that of the US! For the same reasons not only China but also South Korea does ‘not have a Steve Jobs’, Germany ‘does not have a Steve Jobs’, France ‘does not have a Steve Jobs’, India ‘does not have a Steve Jobs’ etc. The reality is that the present rapid progress being made by China’s brands shows that as China moves towards the same levels of economic development and research spending as the US it is developing brands and innovations just as you would expect.
To follow China’s company developments in globalization and branding is therefore particularly illuminating while teaching in Antai College of Economics and Management, in Shanghai’s Jiao Tong University as this university contains not only one of China’s top business schools but also one of its top engineering departments. Teaching ‘globalization’ to Chinese and international students it is possible to see the sharp acceleration in progress being made in this field by China’s companies precisely in combining business, engineering and design. Particularly fascinating is to see how China’s top companies internalize international experience and fit it to their own strategies.
Three years ago China’s companies, in my experience, saw R&D too narrowly in terms of technology and insufficiently also in design terms. But many of the most iconic and commercially successful globalized companies with the highest brand values - Sony in the 1980s, Samsung from the 1990s, and Apple today - achieved that position through the integration of design with technology. In only a few years the shift in thinking by Chinese companies, such as Huawei or Lenovo, is clear as they pour large resources into international design departments linked to their growing engineering development.
But such globalization techniques are being integrated into specifically Chinese strategies. Lenovo provides is a classic case. In 2005 the company experienced problems after a misexecuted step in globalization – buying the PC division of IBM, which the latter sold because of its decline. Lenovo let its focus slip from China. Globally it was overtaken by Acer and internal crisis led to management and strategy changes. Lenovo refocused on China and greatly strengthened itself in developing markets – a strategy also followed by companies such as Huawei and which has been described in Mao Zedong’s famous formula as the economic equivalent of ‘using the countryside to surround the cities’. Lenovo then added a stronger focus on design. It has now emerged as the number two PC producer in the world with a realistic chance of becoming number one. Many individual international techniques were used by Lenovo but its overall strategy was wholly Chinese.
The latter development, indeed, may be taken as the ultimate expression of the new strengthening of China’s brand positioning. A brand is something which is unique – this distinguishes it from a low value copy. That China’s brands are visibly, in measurable fashion, beginning to strengthen their globalized positions is linked to the fact that China’s top companies are increasingly confident in integrating techniques which originated in international markets into their own approaches. Not only in branding but in company strategy China’s companies are therefore developing distinctive positions - the two developments being inextricably linked.
@John
The $154 billion for China and the $405 billion for the US refers to the size of R&D spending, not the size of GDP - so China's R&D expenditure is 37.9% of the US.
Posted by: John Ross | 24 January 2012 at 10:21
China's R&D spending of 2011 compared with that of US = 1.4%X154/2.7%X405=19.7%. Hpw did you get 37.9%?
Posted by: john | 24 January 2012 at 00:37