Innovation, Not Iteration – How China Overtook Apple and Silicon Valley
Daniel Q. WongSenior Product Owner at McKinsey & Company, Fashion/Luxury Specialist, and User Experience Advocate
Apple’s new iPhone 7 was announced this week. Unlike Jobs-era keynotes, the announcement of this new flagship product was heralded by a long list of iterative changes: slightly lighter, slightly faster, slightly better battery life.
Only two changes are notable. The first is the removal of the headphone jack, a hotly contested decision.
The second is the addition of a second camera.
It’s a brilliant move. A second camera allows the iPhone 7 to use different focal widths and, better still, the digital simulation of bokeh — the fuzzy background you see in photos taken from DSLR and mirrorless cameras.
This is innovation, driven by a visionary leader.
Unfortunately, that visionary isn’t Apple.
Half a year ago and seven thousand miles from Cupertino, Shenzhen-based phone manufacturer Huawei unveiled their newest smartphone. Crafted in collaboration with Leica, a renowned German camera manufacturer, the Huawei P9 boasted one killer feature: a second camera that could digitally simulate bokeh.
It’s been a long time since China only copied the west. Increasingly, Chinese companies are leading the way, leaving their western counterparts iterating on outdated product roadmaps.
Facebook rolled out mobile payments in 2015. How many people do you know who use it?
WeChat, China’s dominant messenger platform, has had mobile payments and digital fund transfers since 2014. As of 2016, over 200 million monthly active users (1 in 4 of its full user base) regularly WeChat payments. Its use is ubiquitous — for colleagues, restaurants, boutiques, and taxis (which you can also book directly on WeChat).
Facebook launched chatbot integration in 2016, allowing businesses to tap into conversational commerce.
WeChat, once again, forged the path. Chatbots have been available on the Chinese platform since 2013, and adoption is so highly successful today that many Chinese start-ups will create a chatbot for customer service before even hiring customer-facing personnel.
How about integrated commerce? Facebook recognizes the opportunity — but most businesses on Facebook today are forced to use third-party check-out apps. Users can’t actually buy a product without this, and Facebook doesn’t capture any of that value.
WeChat — you guessed it — has had stores and integrated checkout available since 2013.
Industry conventions and the media were once abuzz with cries about China’s “copycat culture”. Today, those complaints are still spoken — but seldom by executives who understand the scope of how far Chinese digital innovation has come.
Their world changed, but ours didn’t.
While western companies can’t benefit from all of China’s advantages (most notably, a population that skipped the desktop-era and is mobile-native), there are lessons to learn. Here are three drivers of China’s digital innovation, and some ways today’s leaders can benefit from them.
Leveraging Competitive Advantage
Michael Porter created the idea of competitive advantage in 1985. Since then, the original idea of “the unique advantage we have over our competitors” has been far too often distilled into “what do we do most often”. Kodak is a prime and often-stated example of this. Failing to recognize that they were in the image-creation business, they neglected the digital camera market and lost all relevancy beyond as a near-bankrupt litigation agent.
Chinese companies, many being established in an environment of constant chaos, haven’t forgotten this. Beijing-based electronics manufacturer Xiaomi released its first smartphone in 2011. They rapidly expanded to phone peripherals, smart home products, drones, apps, and in-app purchases. Intuitively, they understood that their competitive advantage wasn’t in phones — it was the entire digital ecosystem of any and all physical devices. By scaling quickly and establishing themselves in a wide range of products, they created a holistic platform that was able to stake a claim on a vast territory. What once looked to outside observers like a haphazard hodge-podge of imitation has revealed itself to be an incredibly ambitious product vision.
Understanding the Population
The underserved masses offer a huge opportunity — for traditional industries, but especially for digital products. There are hundreds of start-ups that target a small segment of consumers. Need hugs? Nails done? Borrow the right dress? There’s an app for that.
Enterprise-scale products are similarly complicit. From app suites from the telecom industry to mono-brand fashion apps, many companies fail to understand the opportunity that lies in understanding firstly user pain points, and secondly, the size of the untapped market opportunity.
Hangzhou Wahaha Group, the largest beverage producer in China with annual revenues of over 13 billion USD, seized upon this with their launch of Nutri-Express in 2008. Nutri-Express, a combination of milk and juice, addressed a major pain point of a vast swath of China’s under-served population: the need for nutrition and vitamins in an easily consumed, reliable package. Health and nutrition have become an increasingly pressing concern as Chinese consumers become more wealthy. The simple pivot from what was once a producer of unhealthy, sugary drinks to address the newly surfaced needs of consumers yielded vast rewards — over 2.5 billion USD in sales in its first year.
Openness to New Ideas
For years, China has approached the west with a spirit of humility and learning. Executives and managers in China have constantly travelled to the west to learn in both academia and the marketplace. Chinese companies start with proven western models and products in the design stage, but then proceed to rapidly iterate and adapt them for the needs of the Chinese domestic market.
Qihoo 360, a leading Chinese security company, started in 2005 by delivering paid anti-virus software. The characteristics of the Chinese market, however, offered far more value in a freemium model paired with online advertising and gaming. Today, they’ve grown from a start-up to an industry leader with a market cap of over 11 billion USD. 67% percent of revenues are from advertising. Software sales, their original flagship, now make up only 1% of revenues.
How did Chinese companies arrive at this approach to learning from others?
It wasn’t easy.
In the 14th century, Imperial China led the world. Chinese achievements in science, economics, and exploration were unparalleled. They shut themselves off from the world, and failed to learn. Countries that they once viewed as laggards overtook them, culminating in the humiliation of the Opium Wars and the occupation of China by foreign powers.
China never forgot that lesson: a country that believes only in its own exceptionalism becomes blind to learning from the strengths of others.
The parallels with the West of today are clear. The lessons are present. Ultimately, today’s leaders will choose whether to view China’s example as a threat or as an opportuni