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Understanding
China’s Next
Wave of
Innovation
SPRING 2019
ISSUE Three types of emerging innovators in China are making it
increasingly difficult for Western multinationals to compete.
Mark J. Greeven
George S. Yip
Wei Wei
Vol. 60, No. 3 Reprint #60302 https://mitsmr.com/2GdnUWlCHINA
Understanding China’s
Next Wave of Innovation
Three types of emerging innovators in China are making it increasingly difficult for
Western multinationals to compete.
BY MARK J. GREEVEN, GEORGE S. YIP, AND WEI WEI
I
n recent years, a handful of Chinese
companies have emerged as global
innovators and have garnered a lot of
attention. This group includes online
retail giant Alibaba, appliance maker
Haier, search and data technology provider
Baidu, and Tencent, the social communication
and gaming ecosystem. These companies are
challenging the R&D strategies of foreign com-
panies to keep up with the pace in China,1 and
they are providing valuable lessons on how to
make ideas commercially viable.2 But there’s
another, less obvious force to be reckoned with
in China as well: thousands of innovative com-
panies that are quietly disrupting numerous
industries, overtaking incumbents, and devel-
oping new products and new business models.
For a variety of reasons we’ll discuss here,
these emerging innovators are not easy to
identify — yet they pose real threats, often in
unexpected places.
For example, Royole, a Shenzhen-based
startup that develops electronic products ca-
pable of bending and folding, has entered the
automotive market with a superthin flexible
display that can serve as the interface of a car’s dashboard. Backed by an abundance of venture capital,
Royole has also introduced the world’s first bendable smartphone, which can be folded like a wallet.3
By expanding the distribution of their products, some established companies are also catching multinationals
off guard. One such company is Jiangsu Dongcheng M&E Tools, a manufacturer of power hand tools. In the early
2000s, Dongcheng operated at the low end of the local market and was not seen as a serious rival to name-brand
competitors like Bosch and Stanley Black & Decker. However, today it is China’s best-selling power-tool
brand, outselling Stanley Black & Decker 10 to 1 there, and it is competitive in markets all over the world.
Over the past decade, we interviewed hundreds of executives, entrepreneurs, and investors in China and
studied more than 200 Chinese companies. Our goal was to understand how innovation is being practiced in
PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK THAT HAS BEEN INTENTIONALLY REMOVED. SPRING 2019 MIT SLOAN MANAGEMENT REVIEW 75
THE SUBSTANTIVE CONTENT OF THE ARTICLE APPEARS AS ORIGINALLY PUBLISHED.CHINA
China and how it is changing. We identified three phone. Lens Technology now supplies screens to
THE types of Chinese innovators, each of which presents a Apple, Samsung, and other smartphone makers.
LEADING different set of challenges for competitors. We refer to Many of the representatives of hidden champi-
QUESTION
them as hidden champions, tech underdogs, and ons that we interviewed said they faced challenges in
How should
multinational change makers. (See “About the Research” and “Three competing against much larger companies with sig-
corporations Types of Emerging Chinese Innovators,” p. 78.) We nificant technological and resource advantages. But
prepare to will describe them here in detail so companies seek- we found that hidden champions worked hard to
compete with ing to operate in China or compete globally can see make up for their deficiencies by moving fast, con-
China’s new how each type of innovator conducts business and tinually updating their offerings, and keeping their
crop of understand what multinationals may be up against costs in check.
innovators? in the future. Hikvision is another good example of a hidden
FINDINGS champion. In 2002, the company launched a video
*Monitor your com-
petitive landscape
Hidden Champions compressor card for computers based on MPEG-4
for emerging trends Hidden champions4 are highly specialized compa- technology; the next year it released a new set of
to anticipate moves
by potential nies. Typically, they are among the top three players products based on a new video compression stan-
competitors. in their industries in China and globally. But in dard. Hikvision typically upgrades its offerings
*Consider investing contrast to big-name Chinese companies that are multiple times every year, and it views that approach
in new ventures
and participating recognized as market leaders around the world, they as a way to stay ahead of competitors and copycats.
in collaborations
across the business tend not to be well-known and their revenues are One way hidden champions achieve cost advan-
ecosystem.
less than $5 billion. They are driven by a quest for tages over Western competitors is through their
*Deepen your knowl-
edge of your home long-term growth, and they pursue continual inno- recruitment strategies. Unlike better-known Chinese
markets and explore vation in their respective niches in an effort to add
changing customer companies such as Haier and Alibaba — and,
needs. value for their existing customers. We identified indeed, many multinationals around the world —
more than 200 hidden champions in various sec- they don’t focus on candidates’ academic pedigrees
tors, including machinery, chemicals, materials, and and instead concentrate on identifying people who
electronics.5 will bring a certain attitude to the job. Rather than
Companies in this category usually customize specifically recruiting graduates of top universities,
their products to meet the needs of global custom- they look for people who are happy to focus on im-
ers, and they are accustomed to using a rapid proving product value for customers.
trial-and-error approach to testing the market, ad- China’s hidden champions pose three big chal-
justing, and learning. Many of them are tinkerers: lenges to non-Chinese competitors. The first
They develop products, identify new resources, test involves the way they think about technology: As
solutions, and then rebuild. they pursue continuous product innovation, they
Consider Lens Technology, China’s largest often create opportunities for themselves to expand
producer of lens components such as sensor mod- their offerings or enter niche markets. Many of
ules that are used in smartphone cameras. Founded them have leveraged their R&D capabilities and
by entrepreneur Zhou Qunfei, a high school drop- their rapid growth in the domestic Chinese market
out from Hunan province, the company began as a to achieve global market leadership. For instance,
maker of glass screens for digital watches and then Hikvision invests an average of 8% of its revenues in
quickly recognized an opportunity to produce R&D, and about 47% of its employees work in this
screens for flip phones for TCL, a major electronics area of the business.
company headquartered in the city of Huizhou in The second challenge for non-Chinese companies
Guangdong province. At that time, plastic was the is the global competitive threat hidden champions
industry standard material for phone screens, but pose. Even though they do business in a very large
Lens Technology sold TCL on the advantages of home market, most hidden champions look for ways
glass. On the heels of that success, in 2003 Lens to expand internationally within five or 10 years, but
Technology became a supplier to Motorola and they pursue expansion in various ways. For example,
began producing glass screens for its Razr V3 flip Goldwind, a producer of wind turbines, set out to
76 MIT SLOAN MANAGEMENT REVIEW SPRING 2019 SLOANREVIEW.MIT.EDUinternationalize its technology and products by en- ABOUT THE RESEARCH
gaging in a research collaboration with Vensys This article is based on more than a decade of research, teaching, and
consulting experience in China involving more than 200 Chinese companies.
Energy, a German wind energy company, before it es-
Between 2005 and 2017, we interviewed over 350 Chinese entrepreneurs,
tablished a subsidiary and started exporting products. investors, and executives, focusing on the status and development of innova-
For their part, Hikvision and medical equipment tion competence at local Chinese enterprises. During this period, we also
manufacturer Mindray Medical International chose did extensive research on the growth of China’s digital ecosystems, partici-
to expand aggressively overseas by creating dozens pated in forums and conferences on innovation in China, and had frequent
discussions with executives and innovation professionals from more than
of subsidiaries. Nearly half of their revenues now 50 Fortune 500 companies.
come from abroad.
The third challenge for non-Chinese competitors
is how quickly hidden champions can make deci-
sions and grow. Many became domestic and global to use relevant patents. This partnership, in combi-
market leaders in about a decade, significantly faster nation with Weihua Solar’s internal R&D efforts,
than competitors from countries such as Germany, has led to the development of a light, flexible solar
Japan, and the United States. It’s dangerous for mul- cell that is more efficient than any other solar cell of
tinational companies to underestimate the speed its kind.7
with which these new competitors can emerge. Another notable group of Chinese tech under-
dogs is involved in artificial intelligence. By our
Tech Underdogs count, there were more than 80 AI-driven health
Tech underdogs are small and midsize enterprises care ventures in China in the summer of 2018.
with revenues of less than $60 million. They use their One of them, Beijing-based Huiying Medical
intellectual property to create a stream of innovative Technology, which was established in 2012, had
products. Many of these companies were founded by built a smart medical-image cloud platform. It
people returning to China from overseas, having partners with schools such as Tsinghua University
studied at elite universities in the United States and and Stanford University and collaborates with
Europe. Our analysis suggests there are tens of thou- more than 800 Chinese hospitals to provide AI-
sands of such enterprises in China.6 assisted diagnosis and treatment support. Another
Unlike innovators in Silicon Valley, Chinese en- tech underdog, Malong Technologies, specializes in
trepreneurs work collectively to innovate and push advanced image recognition, enabling commercial
technology and market boundaries. Although equipment to use X-ray technology to see things at
many of the ventures aren’t able to survive, some a microscopic level. This has applications in retail
become viable competitors and even market lead- (for rapid merchandise checkout in unmanned
ers. The large number of players in any given stores, for example), manufacturing (in systems de-
category in China increases the chances that at least signed to detect defects), and security (for baggage
one innovator will be able to break through. scanning). In addition to being available in both
In our research on the solar power industry in public- and private-cloud versions, it can be em-
2016, for example, we identified more than 150 bedded in a system or server appliance, which can
Chinese companies with significant intellectual operate without a public internet connection.
property in photovoltaic technology. Weihua Solar, Like hidden champions, Chinese tech underdogs
for example, was founded in 2010 by three gradu- pose three challenges to non-Chinese multinational
ates of Tsinghua University. One of its founders, companies. First, the sheer number of ventures
Fan Bin, received a Ph.D. from Switzerland’s École makes it difficult for multinationals to know which
Polytechnique Fédérale de Lausanne, studying local companies represent a threat and which do not.
under one of the leading experts in photovoltaic Compared with their Chinese counterparts, multi-
cell technology. In 2013, Weihua Solar and German nationals based outside China tend to have fewer
chemical company Merck entered into an connections with local companies and investors; as a
agreement under which Merck agreed to supply ad- result, they are not part of the conversation about
vanced materials and gave Weihua Solar permission emerging threats.
SLOANREVIEW.MIT.EDU SPRING 2019 MIT SLOAN MANAGEMENT REVIEW 77CHINA
THREE TYPES OF EMERGING CHINESE INNOVATORS
Innovative Chinese companies are posing real threats to non-Chinese multinationals by developing new products and embracing
new business models.
HIDDEN CHAMPIONS TECH UNDERDOGS CHANGE MAKERS
Definition Midsize innovators in niche markets Science- and technology-oriented Successful new companies driven
ventures by digital innovation
Market Niche Niche Mass market
Experience Incumbent Newcomer Newcomer
Size Revenue < $5 billion Revenue < $60 million Valuationi > $1 billion
Examples Lens Technology, Shanghai Zhenhua Weihua Solar, Huiying Medical Toutiao, Ele.me, Didi Chuxing
Heavy Industries, Hikvision, Tecsun, Technology, Malong Technologies
Jiangsu Dongcheng M&E Tools
Challenges • Solid R&D capability enabling • Too many to count •H
ard to see them coming, often
Posed to continual product upgrades • Cutting-edge technology, often from other industries
Non-Chinese • Global players regardless of large science-driven •D
igital business models applied to
Multinationals home market traditional industries
• Little or no media presence
• More agile than Western companies •U
ser-centered; not product- or
tech-driven
SOURCE: AUTHORS’ RESEARCH
Second, tech underdogs launched after 2000 Toutiao has been able to provide coverage of topics
tend to be based on cutting-edge technologies (more not generally featured in the mainstream media. As
than earlier Chinese ventures), and the founders long as it stays away from content that’s critical of
are getting more and more sophisticated. The com- the state or goes against state interests, it is able to
panies are targeting increasingly advanced fields, disrupt state-controlled media, which tends to be
including genetics, solar technology, AI, new mate- less responsive to user needs. By July 2018, Toutiao
rials, and agri-tech. had more than 120 million daily active users (a high
Third, many of them have little or no media percentage of whom were under the age of 30) and
presence. That lack of visibility can be an advantage was valued at more than $11 billion.8
that enables tech underdogs to catch established Due to the plentiful supply of venture capital
competitors off guard when entering new markets. financing in China (increasingly from foreign
sources), there is no shortage of young people eager
Change Makers to start digital businesses. The online food-ordering
Change makers try to gain advantage from digital service Ele.me, for example, was founded in 2008
disruption. Many of them are funded with large by two students from Shanghai Jiaotong University
amounts of venture capital. They operate in a vari- who got hungry while playing video games at night.
ety of industries, including media and information, (The name Ele.me is inspired by the Mandarin
ride-hailing, and retail. Unlike hidden champions phrase for “Are you hungry?”) Leveraging social
and tech underdogs, change makers are highly visi- media and aggressive marketing, they forged links
ble, and their ranks appear to be growing. with other young customers who wanted nighttime
Toutiao, for example, which uses artificial intel- food deliveries. By 2015, the company’s revenues
ligence to provide mobile customized news had surpassed $1 billion, and in 2018 it was ac-
recommendations, is one of China’s most visible quired by Alibaba.
change makers. Founded in 2012 and supported by Like hidden champions and tech underdogs,
more than $3 billion in venture capital over several China’s change makers pose three challenges to for-
years, Toutiao distributes personalized information eign multinational companies.
to users based on their stated interests and browsing First, they often appear out of nowhere, sometimes
habits in social media. Thanks to its robust funding, drawing on experience from other industries. Indeed,
78 MIT SLOAN MANAGEMENT REVIEW SPRING 2019 SLOANREVIEW.MIT.EDUnobody anticipated that China’s state-controlled European countries.10 And though change makers
media landscape could be upended by a company may be highly visible within their industries, it can be
like Toutiao. But the founder used his experience in tough to see them coming outside those traditional
three previous roles — as an online travel agent, an boundaries.
engineer at Microsoft, and a builder of an online real Take, for example, the Beijing-based ride-hailing
estate platform — to think creatively about solving business Didi Chuxing. When Uber entered China,
consumers’ needs for relevant media and venture it expected to do battle but failed to realize that Didi
beyond the industry’s existing boundaries. Chuxing was closely connected to the mobile pay-
Second, change makers apply digital business ments businesses of Tencent and Alibaba and was
models to a wide variety of industries, such as therefore a complicated rival. Uber ended up sell-
retail, banking, and consumer transportation ing its China business to Didi Chuxing for $1
(which includes bike-sharing and ride-hailing billion in cash and a 17.7% ownership stake. In the
services). Although China lags behind more ad- tools business, Bosch made a similar mistake, fail-
vanced countries such as the United States in ing to recognize that Dongcheng was a serious
internet penetration, mobile internet usage in competitor — a blind spot that prevented Bosch
China is high.9 Being on-demand and mobile is no from mounting a stronger challenge.
longer the standard just for internet companies. By proactively exploring unfamiliar corners of
Increasingly, it’s what’s expected of companies in the competitive landscape, companies can improve
traditional industries too. their chances of spotting emerging trends and pre-
Third, unlike Chinese incumbents and estab- empting moves by potential competitors.
lished multinational corporations with legacy 2. Cast a wide net. Although traditional strategy
products and business models to maintain, change and organizational theory stress the importance of
makers are entirely user-centered. Rather than focus,11 Chinese innovators remind us that casting a
pushing existing products, they continually engage wide net when searching for opportunities can also
with users through social media to adapt products pay off. In some cases, we found that the more orga-
and, as necessary, revamp their business models. nizations functioned as ecosystems (by partnering
with and investing in external companies), the bet-
Lessons for Non-Chinese ter they could respond to new opportunities and the
Multinationals challenges that emerged. For multinational compa-
All three categories of emerging Chinese innova- nies, the key to exploiting this capability is to give
tors include companies that are either competing Chinese subsidiaries more local autonomy than
globally or positioning themselves to do so. This they might offer subsidiaries in other countries.
raises obvious questions about how non-Chinese That’s because it’s difficult to cast a wide net from
rivals should respond. Based on our research and far away — it’s unlikely that headquarters-based
knowledge of Western multinationals, we offer managers would have enough knowledge of the
these recommendations. local ecosystem.
1. Think beyond recognized industry borders. Many multinationals are accustomed to devel-
We found that the list of possible Chinese competi- oping innovations internally, often in the R&D
tors goes well beyond the dozen or so players that centers in China. Although it’s important for com-
international executives in any given industry might panies to pursue continual innovation internally,
be familiar with. Although you need to identify your it’s also critical for them to invest in new ventures
most likely competitors, you must also prepare for and participate in collaborations across the busi-
less-obvious threats from a variety of places. ness ecosystem. That approach not only enables
Tech underdogs can be hard to spot because they companies to expand their revenue streams but
are often small operations run by engineers with also allows them to stay abreast of customer re-
limited marketing experience. Hidden champions quirements, competitive moves, and new wrinkles
tend to be larger but are still typically less well- in technology — and adjust their business models
known globally than similar companies based in accordingly.
SLOANREVIEW.MIT.EDU SPRING 2019 MIT SLOAN MANAGEMENT REVIEW 79CHINA
For example, since being outflanked in the Wei Wei is CEO of GSL Innovation, a consulting firm
Chinese power tools market by Dongcheng, Bosch based in Shanghai. This article draws on insights in
their forthcoming book, Pioneers, Hidden Champions,
has made a concerted effort to connect with local Change Makers, and Underdogs: Lessons From China’s
ecosystems by organizing multiple incubator pro- Innovators (MIT Press). Comment on this article at
grams and investing in Chinese ventures. Bosch http://sloanreview.mit.edu/x/60302.
recently invested $15 million in a network equip-
ment company and is developing an experimental REFERENCES
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Our recommendations point to ways in which
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study the way China’s innovators do business and i. In contrast to hidden champions and tech underdogs,
rethink long-held assumptions about how to inno- for whom the key distinguishing financial metric is reve-
vate successfully in China. nue, the key metric for change makers, whose revenues
fluctuate widely, is valuation.
Mark J. Greeven is a professor of innovation and strat-
egy at IMD, a business school in Lausanne, Switzerland. Reprint 60302.
George S. Yip is a professor of marketing and strat- Copyright © Massachusetts Institute of Technology, 2019.
egy at Imperial College Business School in London. All rights reserved.
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