China Innovation Introduction (2014)

Innovation about a nation

By: Nicola Davison

Rush hour in Shanghai is no fun for the uninitiated. It has become near impossible to flag down a taxi as passengers have turned in droves to apps, such as Kuaidi Dache (‘quickly hail a taxi’), to secure rides for them. So concerned about the dearth of taxis available for those not in possession of a smartphone, in February the Shanghai Municipal Transport and Port Authority banned the use of apps during rush hour — though there’s little evidence the ruling was effective.

Many terms have been applied to Chinese companies in the past. Seldom is the word “innovative” among them. China instead has been branded as a copycat nation with a penchant for ripping off existing platforms with little due given to intellectual property rights. In advertising and marketing, it is seen as having a “churn and burn” approach. Long-term branding is a vague notion.

Such ideas have been prevalent for so long they have become cliché. They also mask recent shifts in approach — both tentative and, on occasion, radical — from companies who care less about turning a quick profit and more about improving their branding, services and customer engagement. Innovators in China may be more willing to borrow sound ideas from elsewhere. But they’re also remixing and transforming those ideas, creating something new and localised.

Kuaidi Dache, owned by Alibaba, resembles apps in the West such as Uber. But its business model is different. Uber uses a network of drivers in competition with taxi firms. Kuaidi Dache is free for people to use, works in cooperation with licensed taxi drivers and (unlike Uber) doesn’t take a cut of the fare. It makes money instead from commission on the mobile data services cabbies use.

“These kinds of small innovations seem to be cropping up more often,” says Alex Wilson, director, Flamingo Shanghai. “Suddenly something like a taxi app comes along and transforms a monopolised sector into a free market. These kinds of services are interesting because they’re tugging at the limitations that people see every day.” As of May, Kuaidi Dache had more than 100 million registered users.

A combination of forces is urging Chinese companies to rethink their products, services and marketing strategies. China’s astonishing economic growth of the past decade has created a middle class with distinct desires and aspirations. “In China, perhaps even more than the rest of the world, the changing consumer is the strongest driver of innovation,” says Dan Bort, head of strategy, Razorfish China. “The extreme willingness, even eagerness, of the increasingly large population of mass affluent Chinese to try new things and engage with each other, brands and services in new ways has created an environment where businesses are rewarded for being equally willing to experiment and try new things.” In certain areas, Chinese consumers are, Bort adds, “10 years ahead” of their Western counterparts.

This is certainly true of technological dexterity. Chinese are more likely to share their lives through social media, with 625 million people, or 46 per cent of the population, using social channels, compared to the global average of 26 per cent, according to We Are Social Singapore. A GlobalWebIndex study of over 152,000 internet users in 31 markets found that 55 per cent of users in China made a mobile purchase in the last quarter of 2012, making it the country with the highest mobile purchase penetration rate.

It is hardly surprising, then, that China’s digital sector is one of its most dynamic. Tencent’s messaging app WeChat — a pioneer in its category with some 400 million monthly active users — is presenting marketers with new opportunities. More than a messaging app, WeChat is an m-commerce platform, with users able to book taxis (through Tencent’s Didi Dache), top up their phones and buy cinema tickets. A key component of Nike’s ‘Why run’ campaign, launched late last year, is its ‘Nike+ Run Club’ on WeChat, which aims to build a community by providing a platform replete with useful information and tools for runners, such as customised training plans, routes, tips and shoe selection guidelines featuring Nike products.

Such moves are refreshing as mainland marketers have long relied on practices such as discounting or superficial celebrity endorsement, with little regard for consumer engagement at depth. A few notable “made in China” brands, though, are surging ahead of competitors. Xiaomi, the mobile phone maker, didn’t invent the flash sale and “they are not the first technology brand to have a group of diehard supporters waiting with bated breath for each new product release,” says Bort. “But their ability to recombine and transform these techniques within the social ecosystem in China — as well as tapping into a sense of national pride that ‘made in China’ can start to become a badge of honour — has positioned them for incredible success at home, and impending global expansion.”

In the second quarter of 2014, Xiaomi became the leading mobile phone company in China — and one of the top five mobile phone makers in the world — selling 15 million phones in the second quarter of 2014 (compared to Samsung’s 13.2 million), representing a 240 per cent year-on-year rise.

“I have to admit that social apps like WeChat and Weibo are forcing all of us to become more clever and disruptive,” says Bryce Whitwam, managing director, Wunderman Shanghai. “It’s the best thing that’s happened to the industry in years.” Part of Xiaomi’s ascent has been its command of social channels. “Brands in China are rethinking their social media strategy, to one that is more interactive, engaging, and drawing consumers from online to offline spaces.” To celebrate Xiaomi’s fourth anniversary in April the company held a Mi Fan Festival, or its biggest flash sale yet, selling 1.3 million handsets in mainland China, Hong Kong, Taiwan and Singapore. To stir anticipation Xiaomi launched a game for users to play to win discount coupons, promoting it heavily on Weibo, Facebook and Google+.

Despite notable leaps, doubt about whether China is capable of true innovation persists. When talking with industry insiders about innovative mainland companies, the same names — Lenovo, Xiaomi, WeChat — tend to crop up. “You begin to think, is that the only thing going on?” says Wilson of Flamingo. “You see Xiaomi releasing their latest phone and the guy is dressed all in black with the same projection and font as Steve Jobs and you question whether these things are innovative.”

The crux, says Tom Doctoroff, CEO of JWT Asia-Pacific, is in the definition of “innovative”. There are both cultural and structural barriers to Chinese companies becoming category re-defining innovators. “Confucian culture is backward-looking,” Doctoroff says. “It’s all about the mastery of received wisdom. It is not about challenging convention. This is deeply rooted in Chinese culture and this is why intellectual property rights is a theoretical abstraction.” Innovation, on Chinese terms, is incremental, not mould-breaking.

Meanwhile, powerful state-run companies, such as telecommunications firms, are not structured to encourage innovation. Executives must look after the interests not only of shareholders but the central government, too. Corporate hierarchies are rigid, though optimists posit that the prevailing inefficiency of state-run companies can act as a spur to innovation, with entrepreneurial types itching to improve on existing moribund systems.

Yet, Doctoroff adds, only the internet offers real opportunity. “My theory is that one way to provide access to services in some sectors is to liberate the digital world as a walled garden … to let the government work with behemoth digital outfits like Tencent, Baidu and Alibaba to provide services,” he says. “Whether it be movement on education, or financial services, which is happening on WeChat, I have the feeling the government feels more comfortable having its own national champions, while the digital space provides a window of experimentation.”