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2 Mar, 2012

How China is Shifting From Manufacturing to Innovating

McKinsey Quarterly

Patents. Local designs. New business models. “Made in China” morphs into “Created in China.”

Chinese companies are innovating across a range of industries. In communications equipment, they are now peers in quality with international counterparts. In wind and solar power, they are major suppliers of key components. And they are expanding in businesses such as pharmaceuticals as well: 20 chemical compounds discovered and developed in China are currently in clinical trials.

China still lags in delivering breakthroughs, as opposed to incremental advances. But its big and expanding domestic market—combined with rising technical skill—should allow it to continue to gain strength in new areas ranging from semiconductor fabrication to online retailing. Innovation prowess is becoming a critical differentiator inside China and a source of products and ideas that can compete internationally too.

Drawing on the insights of McKinsey consultants and executives on the ground, McKinsey Quarterly set out to explore China’s innovation push. “A CEO’s guide to innovation in China” examines the trends that underlie Chinese innovation and the strategies that companies can use to tap into it. “Three snapshots of Chinese innovation” offers ground-level views from the automobile, semiconductor, and pharmaceutical industries (with insights from executives at General Motors and AstraZeneca).

Some highlights:

  • Not only has the Chinese government placed greater emphasis on local innovation in its latest five-year plan, but the growing sophistication of China’s market is creating a powerful economic rationale for local designs and products. This is even the case in sectors such as semiconductors, where global players have dominated the high end of the value chain.
  • Commercialization lies at the heart of many Chinese innovation efforts. In industries ranging from automobiles to renewable energy, Chinese companies put new products and services into the market quickly and improve performance over subsequent generations.
  • Some Chinese companies also create interesting twists on Western business models. Examples include Tencent’s QQ instant-messaging service; Sina Corporation’s microblog, Weibo; and Alibaba’s Web-based trading platform, Taobao. Deep, analytically driven customer insights are often at the heart of such innovation.
  • Organization and talent issues loom large for local companies and multinationals alike. Chinese companies struggle to promote collaboration and the internal collision of competing ideas that sometimes yields surprising new directions.