Not Just Copycats

The time is long gone when tech unicorns, digital disruptors, and celebrity entrepreneurs came exclusively from Silicon Valley,” Mark J. Greeven, George S. Yip, and Wei Wei assert in their new book, Pioneers, Hidden Champions, Changemakers, and Underdogs: Lessons from China’s Innovators. “A new generation of Chinese entrepreneurs includes the many elite entrepreneurs who return from overseas studies and establish technology ventures as well as young digital natives who are disrupting the world of industry incumbents, creating hero entrepreneur identities, and relentlessly pursuing growth.”

Aiming to dismantle the stereotype of the Chinese copycat entrepreneur, the authors of Pioneers offer a different perspective. They argue that China’s innovators will change the global innovation arena and suggest that foreign governments, companies, and academics should pay more attention to them instead of believing the stereotype that copycats prevail in China and that Chinese companies do not innovate—only steal.

The book first addresses the question of what makes innovation in China a long-term necessity. Although a regime that is weak on intellectual property rights strongly inhibits innovation in China, two factors provide the continuous impetus for Chinese-native creativity: a rising middle class desiring a better life, and a strong geographic diversity that requires products and services tailored for different customers. These two factors not only motivate Chinese companies to innovate in order to seize the expanding global market, but also produce four distinct groups of innovators that can address the differentiated tastes and needs of customers from different social strata and different local regions.

The groups are distinguished by their market focus (mass market and niche market) and market position (incumbent and newcomers). The first group consists of “pioneers,” the giant companies that have been very successful in the Chinese market for decades, such as multinational electronics companies Huawei and Haier, and the multinational tech company Lenovo. The authors maintain that “contrary to popular opinion, these companies have been aware of the importance of innovation since their founding. These pioneers emerged as market leaders because they have had an innovation mindset from day one.” That is, they realized how important it was to continuously provide innovative products to customers, often without adopting a low-cost strategy. Their first-mover advantages have gained them market-leader positions in China and have also equipped them with unique innovative capabilities to compete in the global arena.

Compared with this group of innovators, “hidden champions” and “underdogs” are the companies that are lesser known because they maintain a low profile. Hidden champions are market leaders in specialized niche markets mainly operating in manufacturing sectors, such as wind energy, laser equipment, and medical technology. They remain hidden for a variety of factors, such as having low-profile founders, being located in second- or even third-tier cities, and also having a strategic intention to stay under the radar.

Underdogs are quickly moving newcomers created by elite entrepreneurs—educated and trained abroad—who harness cutting-edge technologies. They are relatively young and small companies, yet they are fasting growing by definition, compared with the older companies.

The last group of innovators that Greeven and his coauthors identify is the “changemakers,” which are “unicorns” or privately owned startups backed by international and domestic venture capitalists. They operate in sectors that deal with end customers directly, hence they are highly visible and attention seeking. Companies valued at more than $1 billion—like the transportation network company DiDi Chuxing Technology Co. and the e-commerce social platform Pinduoduo—
disrupt the existing markets (for example, DiDi Chuxing’s ride-sharing apps that upend taxi systems) or simply create a new market segment (such as the bike-sharing system Mobike or the credit card fintech startup 51 Credit Card).  

Driven by the differentiated needs of customers, these four groups of innovators evolve with different capabilities and competitive advantages. However, together these groups share distinct characteristics that make up a unique innovation model in China. Pioneers has identified some of these characteristics in the context of how Chinese companies innovate compared with those in Silicon Valley. For example, Silicon Valley companies tend to develop differentiated technology and to compete by offering products that are different from those of existing companies. However, Chinese innovators tend to follow the “swarm,” a collective innovation process in which hundreds of companies engage in the same area to compete until a limited number of companies survive at the end. In this process, collective efforts and wisdom have been devoted to sharpening the business model and technology, making the surviving companies competent and technologically advanced even by global standards. Another unique feature of Chinese innovators is that they tend to adopt centralized decision making with strong leaders. This runs contrary to the Western ideas of innovation and creativity that are based in decentralized thought and decision-making processes. Rapid changes in market situations and regulatory uncertainties in China, Greeven and his coauthors assert, require companies to make quick decisions and to respond to changes just as quickly. Therefore, a centralized structure and decisive leaders are essential to the speed of innovation.

Although the authors substantively address why China needs innovation, Pioneers is relatively weak in analysis in several areas pertaining to the causes that have shaped both Chinese entrepreneurs and innovation.

First, the reasons why the hidden champions and underdogs are relatively unseen by the public require more contextual unpacking. The book speculates about several
possibilities, such as that “they have low-profile founders, they seek limited media visibility, they are geographically hidden, and they have a strategic intention to remain hidden.” However, one noticeable difference in visibility between the hidden champions and the underdogs, compared with the pioneers and changemakers, is that the former operate in the business-to-business sector, and the latter serve consumers directly. For example, companies such as Hikvision and ZPMC, categorized as hidden champions, operate in smart surveillance camera and port machinery, respectively. In comparison, pioneers such as Haier and Lenovo sell home appliances and electronics to individual customers. The case of Huawei is even more interesting because its visibility increased after it expanded into the mobile phone industry. In light of their respective industries of operation, the differences in media and public visibility do not mean the same thing. The authors also mention that there are strategic benefits of remaining under the radar. But what exactly are these benefits? Or, maybe there are conditions under which the strategic benefits of being hidden vary. If so, what are the conditions?

Second, the effect of leadership style and organizational structure on innovation is somewhat counterintuitive. Research finds that a decentralized structure that grants employees more freedom and organizational participation rights is conducive to innovation. But Pioneers suggests that firms need to adopt a centralized leadership structure to facilitate fast decision making in environments with rapid changes and uncertainties.

However, there is not always a positive correlation between fast decision making and innovation. The quality of both depends on many factors, such as the continuous supply of original ideas, freedom of thought and criticism, organizational diversity, and a company culture that focuses on long-term planning instead of short-time gains. The authors observe that a common feature of Chinese innovators is their use of a flat organizational structure. Yet, they do not explain how those decisive leaders are able to receive new ideas from their employees or how they prevent themselves from being obsessed with holding power, which may threaten their growth.

The third area concerns the notion that Chinese companies are engaging in swarm competition and may modify existing competition theory. The authors could have made their argument stronger if they had analyzed the kinds of institutional and economic environments that contribute to this pattern. In my hunch, the low awareness of intellectual property rights and the weak enforcement on IP protection may play a fundamental role. This is because companies tend to imitate existing business models if they are not aware of the fact that such imitation may potentially violate copyright. As a result, as the IP regime is further strengthened in China, the extent to which the swarm competition is still effective is an open question.

Fourth, dynamic analyses are needed about the relationships between the three giant companies—Baidu, Alibaba, and Tencent
(BAT)—and the unicorns regarding the long-term outcomes of innovation and social welfare. In China and the United States, when the dominant tech giants such as BAT in China and Facebook in the United States acquire every promising tech startup and monopolize cutting-edge technologies and business models, can an entire society benefit from such monopolization and keep innovating? If the final success of young innovators is measured by acquisition and high financial returns, does that change the ultimate purpose of pursuing innovation?

Finally, the book’s dual economic and strategic perspective overlooks China’s political environment, especially since the government significantly shapes companies’ innovation processes. The book argues that the government’s support is one of the driving factors in stimulating innovation in China. However, more research is needed on how the four groups of innovators respond to the government’s initiatives and how they benefit from its support.

Pioneers reveals the world of Chinese companies and how they innovate. Yet, deeper analyses are needed to address the broader economic, social, and political conditions that shape the characteristics and effectiveness of innovation in China.