World Class Innovation and Domestic Consumption

As I travel around China, whether on a business trip with one of our clients or to speak at large scale conferences, events and expos, I can’t help but notice the rapid development in the two areas which keep China buzzing: World Class Innovation and Domestic Consumption. 

During my travels, I’ve met with Chinese entrepreneurs and business leaders who are focused on innovation and moving up the value chain and are keen to work with western businesses which can give them access to premium skills, experience, technology and/or products. They believe this will help them stand out from their competition in China. What does this mean for you and the rest of the world?

Innovation: an important moment for China

When I started leading executive study tours to China in 2005, China was known as “the world’s factory” and a very cheap place to buy clothes, electronics and fake handbags, causing many of our delegates to buy extra suitcases to make room for the stash of goods that they gleefully bought at cheap prices in flea markets. The locals found it amusing to see foreigners buying these cheap copies (whilst at the same time complaining about China’s lack of respect for IP protection) whilst they saved up their money to travel to Europe to buy the real thing.

Today, China is determined to dominate the world in high-tech manufacturing and the Government’s “Made in China 2025” vision is a blueprint to upgrade the manufacturing capabilities of Chinese industries by leveraging subsidies, mobilising SOEs and acquiring intellectual policy from around the world “to catch up with – and then surpass – Western technological prowess in advanced industries.” The plan focuses on high-tech fields including the pharmaceutical, automotive and aerospace industries, which are presently dominated by foreign companies. Their goal is to increase the Chinese-domestic content of core materials to 40% by 2020 and 70% by 2025. 

Instead of talking about Artificial Intelligence (AI) as some kind of future phenomenon (as portrayed in sci-fi movies) in China it is referred to as a catalyst for the growth of new industries, with jobs being replaced by robots and new products and services emerging to meet the new demand created by extra leisure time and an appetite to explore new travel destinations. With 18,000 new Chinese companies being created every day, mainly internet, AI and big data companies, and with the 5G network expected to be fully functional in China before the end of 2020, we’re going to see some enormous changes in just the next 18 months.

These are just some examples of Chinese innovation and, with China’s ability to innovate at scale and engage the users of over 700 million smartphones which are in almost constant use, Chinese companies are already designing, defining and creating the future. Foreign entrepreneurs and business leaders who own, or have access to, new technologies, systems, capabilities and intellectual property which can be commercialised and scaled up in China, have a once-in-a-lifetime opportunity to export their innovations to China and participate in this alluring innovation story.

Domestic Consumption: a big turnaround

Back in 2008, at the height of the global financial crisis with the very real fear that, in the absence of the US consumer, China’s export led economy would plunge into recession (resulting in unimaginable chaos and poverty), many respected and well known international commentators predicted it could take up to 30 years before Chinese consumption would be strong enough to maintain a positive growth rate for the overall economy. How wrong they were.

In 2019, China’s domestic economy is booming and you can track the start of this growth to around 2008, when the likes of Alibaba, Tencent and Fosun, three of the big names I visited earlier this year, really got going. Whilst China continues to welcome foreign brands to enter their market, particularly if they offer something unique and different (eg British heritage, French sophistication, German engineering, Australian kangaroos) you get the feeling that time is running out.

China’s economy today is driven by domestic consumption. In 11 of the 16 quarters since 2015, consumption has contributed more than 60% of GDP growth and, in addition to becoming the world’s biggest market for online retail, the country now represents more than 30% of global market in luxury goods, automotive, consumer appliances, mobile phones, and spirits. After 20 years as a global manufacturing hub (think Apple smartphones, Samsonite suitcases and Barbie dolls) there isn’t much that China can’t design and produce themselves, and so their focus is on the domestic consumer rather than worrying about the rest of the world (a point that was highlighted to me earlier this year by a senior executive at Alibaba HQ in Hangzhou when I asked him about their global expansion strategy)

In 2019, it is predicted that 80% of China’s GDP growth will be generated by domestic consumption, a remarkable turnaround and a fair indication that the window of opportunity for foreign companies to enter the market is narrowing.

Ticking the boxes

Now that China’s domestic consumption has reached a level of (almost) self-sufficiency, and the focus is on innovation, IP and moving up the value chain, it’s got me thinking about how to evaluate a foreign business proposition for the China market and measure its chances of success.

I think that a proposition for China needs to include some or all of the following:

• Something innovative, creative and/or design focused which stands out for being ‘world class’, ‘premium’ and superior to anything that exists in China at the moment
• Ideally in the key sectors of opportunity, especially food, healthcare, education or tourism
• Preferably with an environmentally-friendly angle e.g. including energy efficiency, accessing new sources of energy, pollution control/reduction/monitoring etc.
• With some kind of innovative/technology angle, especially AI, robotics, 5G, smart algorithms, big data, app enabled for smart phones etc.
• Something that will particularly appeal to “Chinese Millennials” (see below)
• A transformational opportunity that, if successfully commercialised in China, will allow them to become (or at least offer the potential of becoming) a global player with all the associated IPO and other capital-raising opportunities

If a product, service or capability can at least tick some of the above boxes, it must have a real chance of success in China and would be worth pursuing, researching and/or evaluating. That’s where I come in.

Of course, that’s the easy part. The hard part comes later when you begin the difficult job of finding a way to stand out and attract attention amongst all the noise and competition. And find a suitable partner, agent or distributor and start building a long term relationship. But at least you’re starting from the right place. In the words of the great philosopher, Lao Tzu, “A journey of a thousand miles begins with a single step”

Case Study: Starbucks

The growth of Starbucks in China, a country known for its obsession with tea (‘all the tea in China’) is nothing short of amazing. 

Starbucks now has about 3,800 outlets in China – more than in any other country outside America. When I first heard that Starbucks was planning to open a new store in China every day for the next five years, I started worrying about whether there was enough coffee in the world to satisfy the growing demand in China.

And then came Luckin, the fast rising competitor, which listed on the Nasdaq last week, is already trading at 20% above its list price and ‘has nearly 2,400 stores compared to Starbucks’ 3,500, but it has plans to more than double that number by the end of the year as it seeks to become the country’s coffee king’. Can that really be possible?!

The average Chinese still only drinks five cups per year. That is just 1.3% of the amount consumed by the average Japanese or American. But coffee has become fashionable among the middle class. An amazing and real example of the domestic consumption story.

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