What’s the biggest economic risk from China? A GDP growth crash? A bond price meltdown? Low-cost knock-off competition? Copyright theft and counterfeiting? Actually it is quite likely that the answer is none of the above. The biggest risk from China is competition, but not the sort of cheap-and-cheerful competition that Western companies have grown used to. It’s something much more scary than that.
Here’s just one clue as to what is to come. Earlier this year Bloomberg had this headline: “Xiaomi Confronts Counterfeits as Fake Products Eat Into Sales.”
Now Xiaomi is not another Western company complaining about Chinese competitors ripping off its technology. Chinese Xiaomi is in fact one of the world’s biggest three smartphone manufacturers, and the most valuable technology startup in existence. It has been called the ‘Counterfeit Apple’ – but then Apple would say that, given that Xiaomi is close to overtaking Apple in the smartphone business in global revenue terms. And Xiaomi – like any company with technology to protect – is fighting as hard as anyone to defend itself against copying by low-cost rivals, whether in China or elsewhere. Xiaomi is just one of a fast-growing community of Chinese companies that are as jealous of their own designs and inventions as any other global business that trades on intellectual property.
But there is one difference: when it comes to technological innovation, Chinese companies are not doing the same as their Western competitors. They are doing better. The new wave of competition from China is going to come not from the makers of cheap products based on borrowed designs, but from companies that have invested massively in their own technology and their own ability to commercialize it. In short, the Chinese innovators.
Recently the University of Surrey put on a demonstration at its Guildford campus, the home of the 5G Innovation Centre which is the largest research and development organization in the world devoted solely to new generation wireless technologies. It is the only place in the world with an installed 5G network – a ‘test bed’ in the language of the developers – and it is a collaboration centre where companies from all over the world try to create the foundations of what will almost certainly become one of the defining technologies of the future. And the biggest corporate partner in the Centre is Huawei, a Chinese maker of telecommunications equipment.
Huawei exemplifies what Chinese industry can achieve, and at what speed. A quarter of a century ago Huawei was a two-man business operating out of one room in the Chinese city of Shenzhen. Today it is the world’s largest manufacturer of telecommunications equipment, and has annual revenues of over $40 billion – despite the fact that it can sell little in the US, where the government considers it to be a security risk. Rather more important than its raw revenues is the amount of cash that Huawei devotes to technological innovation. The company has over 70 research and development centres worldwide – some of them in markets where Huawei does not even sell – and the company says that almost half of its 170,000 employees are involved in some sort of R&D work.
Huawei is far from being the only large company involved in 5G communications research, although it is one of the biggest and the richest. The reason that the Chinese company is pouring cash into this work is simple: 5G wireless technology is likely be one of the bedrock enabling technologies of the next 30 years. Earlier generations of mobile technology were all about voice communications, with a bit of data thrown in. The current 4G technology that is still spreading around the world’s mobile networks finally tipped the balance in favour of data. The 5G technology will complete that evolution: 5G connections will be anything up to a thousand times faster than today’s mobile networks and will eventually become the preferred medium of communication and control, from streaming HD television to remotely flying a 747, all through a 5G handset.
That, at least, is the potential. Realising the potential of such technologies requires an awful lot of heavy lifting at the research and development stage, and crucially it requires collaboration between a lot of different sorts of organizations – academic, regulatory, and commercial. And if you ask the partners of leading Chinese companies, they are very likely to say that it is exactly in this area that the Chinese excel.
Business experts sometimes say that we have been here before. In the 1980s many companies became obsessed with the ‘Japanization’ of their industries, and indeed some companies did allow themselves to become mere offshore manufacturing platforms for more efficient Japanese companies (in the UK Rover was a case in point, and in the US General Motors came close to the same fate). But despite rumours to the contrary Western companies do have valuable skills and technologies of their own, and the Japanese proved not to be particularly talented at the kind of collaboration that transfers these skills. Joint ventures with Japanese companies turned out to be about learning the Japanese corporate way, but not vice-versa.
Then there were the Koreans, who began to supplant the Japanese as new wave competitors in the late 1990s, while the Japanese economy stagnated and Japanese innovation began to mark time. But if the Japanese were bad at collaboration, the Koreans were abysmal. As a correspondent in Seoul in the late 1990s it was sometimes my job to interview Western companies who were in the throes of technology joint ventures with Korean partners, and the mildest question about what it was like to collaborate with the Koreans would guarantee a sharp drop in room temperature. Furiously driven as they were, the Koreans were the world’s worst collaborators.
Chinese corporate assumptions about research and development tend to be rather different. The Chinese think very long-term: many of the largest Chinese companies (like Huawei and Xiaomi for example) are privately-owned, and don’t have to answer to shareholders about very long-term investment plans. They are very ambitious: academics and companies that work with the Chinese agree that these companies typically want to work on the biggest ideas and don’t let themselves be held back by worries about how easy it will be to implement the results. And as young companies they have none of the ingrained inhibitions of Western companies about collaboration with anyone who can help them realise their ambitions.
Perhaps the best historical comparison is not with the Japanese and Korean waves of competition in recent decades, but with the China of the 14th century and earlier. That was when China was the world’s preeminent technological innovator, ahead of the rest of the world in cartography, clock technology, marine architecture, chemicals manufacture, ceramics … the list goes on. China was the world’s most creative industrial manufacturer and producer of luxury goods for centuries. Many Chinese simply assume that such is China’s natural position; they have been there before, they will be there again. Western companies that believe that China’s fast-growth, low-wage, beg-borrow-or-steal model marks the high point of the Chinese industrial resurgence might be wise to take note.
