Three ways ordinary Chinese companies are driving innovation

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All over China, a growing number of small and medium enterprises, experimenting in entrepreneurship sponsored by the government, are blazing a uniquely Chinese growth path. Not content with the management systems espoused by western business schools, they are determined to blend the latest thinking with traditional Chinese values to not only catch up with, but race ahead of western multinationals. For every success story, there are thousands of copycats that fail. But with a population of over 1.35 billion and US$3.8 trillion in foreign reserves, China can afford to let a thousand flowers bloom before selecting the champion.

In our research in the Jiangsu province in China's east, we identified three major trends that accelerate the growth of startups and SMEs and could make them the next generation of global competitors.  
 
1. Gaining an initial foothold in a market  
Successful newcomers often begin by repurposing their technology for a niche market that eludes potential competitors.  
 
Raycan, a medical device startup in Suzhou New District, specializes in radioactivity detection devices and pioneered positron emission tomography (PET) scanning technology. Despite receiving numerous awards, Raycan had trouble commercializing its technology for human use. It was also a market that international players like GE jealously guarded. Though Raycan was determined to invest aggressively, backers were less enthused by its slow results.  

Then the 2011 Fukushima nuclear disaster happened and Raycan's employees noticed a surge of inquiries about products that could detect radioactivity. Raycan quickly realized its digital PET scanner could be modified into an ultra-portable radioactivity detection device at a lower cost than its competitors.

The move into the portable radioactivity detection device was a boon to Raycan. Outsourcing many of the production activities, Raycan had a finished product in less than 11 months and then started to see orders pour in. After witnessing concrete results, investors and the government became confident about funding PET scanning for human use.

 
2. Developing a uniquely Chinese management system  
Good-Ark Electronics is located 15 kilometers from Raycan next to one of the oldest science parks in China – Suzhou Industrial Park (SIP).  
 
The company provides its employees with an organic farm to grow their own plants. Twice a week, Good-Ark's restaurant prepares only health food and vegetarian dishes. At one table, rather than hard plastic chairs, cushioned seating is provided for pregnant workers who receive special meals to meet their individual dietary requirements. The company is working on a program that would allow new mothers to spend up to two years with their babies. A long table is also reserved for top management to dine with workers from across levels and functions.   

As parental and quaint as some of Good-Ark's policies are, most employees seem happy and see themselves as one big family, treating the company's assets as their own. "When employees are happy, profit will become an inevitable outcome," said CEO Wu Nianbo.  

To learn about cutting-edge concepts in business leadership, Wu immerses himself in the thinking of western scholars. But rather than hiring consultants to turn theory into practice, Wu is determined to build that capability in-house. "It's too dangerous to consign critical thinking to someone else," he remarked.   

A common observation about Chinese companies is their unwillingness to spend big money on executive education or management consulting. Affordability may be one cause, but we have observed that it is the translation process between theory and practice that concerns Chinese companies most deeply.  

 
3. Creatively harnessing state sponsorship beyond financial support  
One concern that observers have for mid-size Chinese companies is their inability to raise capital to fuel growth because the traditional banking system channels funding exclusively to large state-owned enterprises (SOEs). Since this could stall innovation in the private sector, many argue that China must reduce its reliance on SOEs and refocus on mid-size companies to generate growth across a broader spectrum. Upon closer examination, we see that progress is emerging. Within science parks, local entrepreneurs are not only receiving seed capital, rent-free premises and tax reductions, they are also wielding government-funded infrastructure to bring new products and services to the market.
 
Land High-Tech, 15 minutes from Raycan, is a movie studio that provides online tools for independent filmmakers. It delivers 3D software such as AutoDesk as a cloud-based service, and provides a platform for crowdsourcing solutions or outsourcing tasks.   

Some of the most advanced servers are housed right next to Land High-Tech. They send processing to Tianhe-1, the National Supercomputing Center, one of the world's most powerful supercomputers, developed by the University of Defense Technology. Its successor, Tianhe-2, was recognized as the world's top system in 2013.   

Movies in 3D have increasingly been capturing the public's imagination. Previously, rendering films to 3D was prohibitively expensive and time-consuming due to processing speed. Making a 3D version of "Titanic" cost US$18 million and took a year. "Our simulation showed it would take a few weeks for Tianhe to process everything at a fraction of the cost," a Land High-Tech employee explained.  

Indeed, 3D-rendition proved to be the firm's most popular service. Its profit is split with software design houses and Tianhe. "Tianhe is a basic research endeavor; we found an application for them," an employee remarked. In less than three years since its development, Land High-Tech registers revenues of about RMB 30,000 per day.   

Small and medium-sized companies working with the government are driving innovation in China, although it might take some years before the country can truly become a knowledge-driven economy.  

Howard Yu is Professor of Strategic Management and Innovation at IMD, where he teaches on the following programs: the EMBA, Advanced Strategic Management (ASM), Building on Talent (BOT), Breakthrough Program for Senior Executives (BPSE), Strategic Marketing in Action (SMA) and Orchestrating Winning Performance (OWP). 

Xue Feng is Investment Manager with Suzhou New and Hi-tech Industrial Development Zone. 

Hunter Shen is Chief Consultant at Jianghai Partners, a Chinese investment advisory firm.