China's Next Strategic Advantage | George S. Yip | Talks at Google

[MUSIC PLAYING] GEORGE S. YIP: OK Thanks for coming along to this So it’s based on this book There are still some free copies left up front if you want them So I was doing the research on this book when I was based in China at the top business school there, China Europe International Business School, from 2011 to 2016 And the subtitle is really the theme of my talk, “From Imitation to Innovation.” You used to hear about how China is about imitation, now it’s about innovation In the early days, of course, China was just copying From 1978 onwards, they were copying products were illegal, sometimes were called shanzhai which mean mountain bandit You see here a product called the Blockberry endorsed by President Obama, probably without his knowledge On the right, something that surprise you, this is not a cigarette packet pretending to be a cell phone; it’s a cell phone pretending to be a cigarette packet Just to show you how different the Chinese can be, they actually love smoking so much some of them wanted to pretend their cell phone was a cigarette packet So then China starts moving from copying to fit for purpose So in the earlier days– 1980s, 1970s– China was poorer, lower per capita income So for practical innovations, such as Guangdong crane moving from double welded to single welded, so a lot of process innovations China, of course, makes more solar panels than anybody else And the critical innovation there, self-cleaning Because if you have a dusty solar panel, then that’s a massive problem So in the beginning, these are not rocket science innovations but typical Chinese innovations They are pragmatic and profitable Then you start to see– and I’ll talk a bit more later on about Alibaba, Taobao– these online systems where we start seeing innovation online Haier, one of their biggest and probably the most international company in major appliances, now the world’s biggest major appliance companies Lots of initially small innovations, like early on they found that their washing machines were getting clogged up in rural areas They discovered it was because the farmers were using them to wash potatoes, rather than just clothes Now, a Western response might have been put a label saying, do not wash crops Instead, their innovation was they changed the filter system and added a label saying, suitable for both clothes and crops Refrigerators, when they first moved to the US market, they went at the lower end, such as college dorm rooms And they realized that college dorms were small, so they added a folding tabletop to double up as a desk, a trivial innovation Today they have a more significant innovation, technical They have innovated the world’s first three temperature compartments refrigerator The third compartment is designed to store the food that is the most important to Americans What food is that? No, not pizza Anything else? Ice cream What’s wrong when you take the ice cream out of the icebox? It’s too hard And Americans don’t like to wait So it took a Chinese company to have this insight and then typical of Chinese innovation to invest the R&D money and to be able to manufacture it in an economical way So this is a typical innovation But they are now moving beyond this They’re moving toward waterless washing machines, for example So genuine technological innovations Chinese are very customer-focused, as well I’ll just talk about the bottom ones We visited a number of start-ups So Suzhou Nano-Micro, world class nanoproducts; SVG Optronics, they make security films over ID cards and so on that are higher than the quality you find in the USA or in the European Union I’ll talk about some of these other companies in a moment as well The entire ecosystem for Alibaba I’ll talk more about GoodBaby makes 80% of the world’s baby carriages A typical innovation now, you hold the baby in one arm and one button that you press folds up the baby carriage Again, a typical Chinese innovation You have to invest in it, requires significant manufacturing capability Now they start to make things that are a bit more technically advanced, so Tencent, social networking, instant messaging service, online gaming, and so on Medical devices are very big in China, aging population And then the intersection of online and medical devices are going to be a very big sector in China as well Xiaomi, the mobile phone company, sends out software upgrades every week based on input from its millions of customers

And then the bottom, Newsoft, an example of integrating medical devices and information technology And these are organized to relate to each other So of course, with the solar panels, we have the wind energy The third one, they’re now experimenting with roads using solar power to recharge the bus as it drives along That also is a typical Chinese innovation in that it requires a top-down government to put in that kind of innovation Can you imagine trying to do that in the streets of Cambridge, Massachusetts, putting in a system like that? On the top right, Huawei, the telecoms company, now the largest telecoms equipment company in the world, genuine innovation, creating a product that ran 2G, 3G and 4G in one product Again, typical Chinese orientation to the customer because this was more practical for the customer to have only one machine And now investing more and more in R&D It has R&D centers around the world For example, outside Milan, Italy, it has a microwave research technology center hiring Italian scientists, keeping them in the local ecosystem The middle row, high-speed trains, of course initially copied The Chinese train company was sued by Siemens and Hitachi but has breezed through that China, of course, has more high-speed rail tracks than anywhere else in the world I don’t think the US has a single mile of high-speed rail, nor does the United Kingdom And of course, this means they also build more trains that they’re now innovating with and selling all over the world In the middle, aerial drones China did not invent the aerial drones, but most aerial drones are now manufactured in China And this is a product that’s classically suited for Chinese innovation in that innovation for this product happens better next door to the factory Why? Because innovations are to add more rotors, to change the carrying capacity, make it bigger, make it smaller There’s now a Chinese one that can carry a person Good luck traveling in that yourself one day And this is opposed to say something like a mobile, a cell phone, where you do the innovation in California and you have it manufactured in China So also, this is a product that is based on metal, plastics, and some electronic combination, again ideal for the lower cost Chinese engineers and scientists And on the right, this is the mid-sized jet that China has just test flown It’s going to go up against Boeing and Airbus Why is it able to do that? Because China buys more new jet aircraft than any other country in the world It already has 500 advance orders before it is proven And of course, most of those advance orders are coming from Chinese airlines who have to buy from this state-owned manufacturer Initially copying, but with innovations that they’re going to add and with enforced technology transfer from the West, which is why we have this tariff war that’s just started in the last week or so Now, the internet-based innovations are different The traditional innovations in China are based on low cost engineers for both R&D and for manufacturing While that is less the case with internet-based companies, or at least my interpretation, and you know more about it than I do, is that internet-based innovation comes from experimentation with large numbers of customers So China has more internet users than any other country in the world, so this is now a great advantage for them And toward the end, I’ll show you some visuals about the internet ecosystems I won’t go through them all, as I said You can just look at the PDFs yourself So our sort of model, our theory of how this happened, is that we have four drivers, the ones in red and pink, and we have three phases in yellow that I’ll go through The first driver, customers Initially, the customers were poorer so Chinese companies and Western companies had to innovate in China in order to develop products that were cheap enough The other thing we find is that Chinese customers are quite different in many of their tastes from the West So again, different types of products needed Culture We have the entrepreneurial culture of Chinese executive, and we include under culture the drive of the government The Chinese government really wants innovation now, and the word innovation has reached the top line of the latest five-year plan And the Made in China 2025 initiative is all about innovating in China, rather than just manufacturing On the right, over time, firms enhance their capabilities

to innovate, learning from Western partners and also as they became more profitable, investing the cash that they generated in R&D And two other uses of the cash are setting up foreign R&D centers and thirdly, buying foreign companies for their technology And I’ll show you some examples of that So with this, they moved from the phase one, copying to fit for purpose, to moving from being followers to world standard products And in the third phase, global expansion, including acquisitions Early acquisitions were resources like oil fields, property But more and more, they’re making acquisitions for knowledge So here are some famous Chinese acquisitions Of course, the first one was by IBM’s personal computer business Then another example, Volvo, bought by a mid-level Chinese company most of you have never heard of called Geely One of the reasons they were able to buy Volvo is that the Chinese government designated them as the only Chinese car company allowed to bid for Volvo They beat off the non-Chinese competitors When they won, the CEO of Geely said, it’s like a Chinese peasant marrying a Hollywood movie star And of course, they’re starting to learn technology from Volvo Putzmeister, a leading construction equipment company in Germany, bought by now the world’s largest construction equipment company, China’s Sany They’ve even bought Club Med, which I think is for the large, evolving leisure market in China Most controversial, in the middle, Kuka In 2016, a Chinese medical device company, Midea, bought one of Germany’s leading robotics companies For the first time, the German government said, really, perhaps we shouldn’t let this go And the German prime minister asked a German consortium to outbid them, but they were underbidding 20% and it went to China Only on the right, finally, last year was one German acquisition blocked, Aixtron, under US pressure because it makes semiconductors, some of which goes into defense So the US got Germany to block that acquisition But there will be many more such acquisitions because the Chinese have a lot of money Google is probably safe for now So the entire Chinese innovation ecosystem is growing In fact, the Chinese now have more scientific publications than the USA Of course, so far it’s quantity rather than quality, but the quality will follow And of course, it is the US and the West that is training ethnic Chinese scientists So if you go into STEM program– science, technology, engineering, mathematics– huge numbers of ethnic Chinese And China now has special government programs to lure them back Also, the market is luring them back We visited one company that makes flexible display screens, replacing something a millimeter thick, replacing the entire dashboard of a car, started by a Chinese PhD in electrical engineering from Stanford But he goes back to China to start the company because cars are being manufactured in China and it’s the biggest car market in the world So everything in the ecosystem is on the up And here is the scariest sight I’ve ever come across It was presented at Oxford about a year and a half ago by someone representing the Chinese Academy of Science 22 strategic science and technology initiatives that China is pursuing I’ll just read out some of them Dark matter and dark energy; controlling the structure of matter; artificial life and synthetic biology; nano science; space science exploration; ubiquitous sensing based informationized manufacturing systems So they’re actually going for everything, pretty much China certainly has the world’s largest supercomputers, for example All right So summarizing our research, we found that there were 10 major ways in which Chinese company innovation is different from Western innovation And you might think about how this is the same or different at Google, as well I’ve got a slide or two on each one of these The first one is a greater focus on local needs and customers Now, all companies do that, but the Chinese are really focused on local customers So on the left, Chinese like soy products, so Joyung makes a soy milk cooker On the right, that’s myself with my co-author We’re at TCL, the world’s largest consumer electronics company They created a dual TV that two people can sit side by side watching two completely separate TV programs full screen You just have to wear these dark glasses with the earpieces

And my theory is that they designed this for a special Chinese need, which is the single child policy The single child has grown up selfish and doesn’t know how to share So when they get married, they don’t want to share TV programs either So this product is designed to reduce the divorce rate in China Apologies to the Chinese in this audience Oh, and again, a typical Chinese innovation is that it’s expensive to design and it’s expensive to manufacture but Chinese companies can afford to do that Initially, number two, acceptance of good enough standards This was the first mass market car in China, Cherry QQ, under $5,000 US It was famous for its thousands of defects, but the Chinese accepted it And if this had happened in the West, the brand would be dead Cherry is still a respected brand in China So the Chinese are more forgiving, at least initially, because they’re still moving up the ladder But they didn’t stop there So by participating in global supply chains, they learned, and furthermore, because the competitive situation is so fierce, they’re like Alice in Wonderland with the Red Queen They’ve learned to run very fast and stay in the same place So we now this concept of Red Queen competition, and this is what happens in China as a way of enhancing their capabilities Third one, incremental, not radical, innovations When I visited the head office of Haier, they showed me their new range, Casarte, pretending not even to be Chinese called Casarte The main innovation is that they’ve embedded Swarovsi crystals on the fronts of the cabinets So the Chinese are not embarrassed to do anything that will sell a product Another example of this, of incremental, Braun, which starts out making gas-fired air conditioners, has now gone into pre-fabricated buildings So I was in one of the buildings that was being built Notice they sell it like they actually talk about LEGO– you can buy this shape, that shape, fully sealed, air conditioning systems When I stayed at their on campus hotel, you couldn’t open the windows and there were no controls for the air conditioning So super energy efficient, very fast to put up, and much cheaper So that’s, again, typical Chinese innovation Willingness to supply special needs A TV company called Hisense has a big share of the TV market in Africa because in Africa, many villagers are too poor and can afford only one TV set, which sometimes has to be shown outdoors for bigger audiences, such as for a football match This means that you need to make the screen brighter So Hisense was willing to invest in a switch and a capability to make the screen brighter for outdoor use and again to manufacture it So a typical Chinese innovation Using large numbers of staff One of our students at CIBS started a security vehicle company Now, first, security vehicles seemed to be the opposite of what’s suitable for the Chinese because the Chinese approach is to find a global product that’s the same all over the world, manufacturing it in large quantities, standardized at home, and ship it around Well, the problem with security vehicles, highly regulated market so they’re very different in different countries and small numbers batch production So what the CEO did, he assigned 100 engineers to spend a year studying needs all over the world At the end of the year, they came back and said, you know what, for each component– the doors, the windows, the engines– there are only about three or four variations So what he does now, he manufactures the three or four variations of each component centrally and then ships them around the world for final assembly So he has used large numbers of engineers to turn a multi-local industry into a global industry Six, they work their stuff much harder There is no work-life balance in China I love some of these comments from the CEO of Huawei “Huawei people are destined to work hard for a lifetime and to suffer more than others.” How’s that for a recruiting slogan? And boot camp, not much Google-iness in Chinese companies And you know what’s underneath the? Desk the sleeping roll 7th– oh, by the way, I know about them working hard Well, I’ll give you an example of that Fast trial and error, very pragmatic So Dung Xiaoping, the leader, talked about crossing the river by feeling the stones The CEO of GM China talks about failing in a government-sponsored direction, electric vehicle By the way, I predict that China, of course, will be the first country in the world to be serious about electric vehicles They have the need because of their pollution problem, they need a lot of vehicles, and they’re going to solve the chicken and egg problem of the charging

stations because with a top-down government they are installing charging stations are over the country and they’ll have forced incentives to make people buy electric vehicles, rather than gasoline-based ones Less formal, faster processes We found that everything in China was faster A specific example, we’re working with a major European multinational who bought a Chinese company in one of its sectors, and we helped them compare the length of the innovation process The European process was 24 months, the Chinese process was 12 months So we then helped them converge on an 18-month process to convince headquarters to allow them to go from 24 months to 18 months They couldn’t go to 12 months because the Chinese took too many shortcuts Or Tencent’s WeChat the gray release one million user experiment so that they’re able to do again, large numbers in China More intervention by the boss As you know, China’s very boss-oriented In the West, it’s 90% process and 10% boss; in China, it’s 30% process and 70% boss On the right the CEO of BROAD He actually said to me, “I’m responsible for 95% of the innovations at BROAD.” That was an astonishing statement One, if it’s true; and two, that he should say it Even Steve Jobs wouldn’t have said that And I know Chinese bosses My father was a Chinese boss He once said to me, “Son, you should never contradict me, especially when I’m wrong.” But interestingly, for those of you who are not Chinese– even for myself, I’m from Hong Kong originally– you may think of the Chinese as being very obedient Well, Chinese are obedient only under some circumstances Chinese are very obedient when they are observed by a superior, whether in a company or in a family setting In a family, there’s always a relationship of superiority, your parents, et cetera So when they’re not supervised, the Chinese are very disobedient, hence the saying, [SPEAKING MANDARIN],, “the mountain is high and the emperor is far away.” And if you think about other cultures, there are some cultures where people are very obedient whether or not they’re observed These are the cultures, for example, where people stand at a red light when there are no cars around, classic examples being Japan and Germany And there are other national cultures where people are very disobedient whether or not they’re observed, and these are economic basket cases I don’t even need to name the countries, you can figure them out for yourselves But China is on one diagonal And indeed, there are some other cultures that I’ve experienced where people are obedient if you don’t observe them too much and they become disobedient if they feel you are watching them too much And I found that to be true of the Netherlands and other Scandinavian cultures Which is Google? Is it more like the Scandinavian culture where you like to be left alone? Right So the Chinese are the exact opposite Closer to government, of course So Chinese companies benefit from having a lot of government support So if we summarize this, China has a triple threat winning trifecta They have the manufacturing capability, which India doesn’t have, even though India has the second one scientific and technical capacity China has more of that, as well So China now, on the second point, can pretty much absorb most new technological and scientific developments Yes, they’re still behind the US, but there is a rapid catch-up, particularly in digital, for example And a huge domestic market, as a result of which they can start and improve at home before going global without necessarily bringing out world class products to start with And they can challenge any global incumbents, as I’ve shown in the case, say, of the commercial aircraft Even Japan could not go up against Boeing and Airbus, but the Chinese state-owned company is doing that This has happened only twice before in history Which countries have these advantages? First of all, it was the British empire– not Britain on its own, but the entire empire– [INAUDIBLE] the market And then, of course, the United States after the Second World War Now it is China’s turn to have these three advantages If we now look at it from the viewpoint of Western companies, we talk about why learn from China? Because China is an emerging lead market; China’s customers are young and extreme, you know the concept of learning from extreme users In China, they’ll try anything So for example, the way the Chinese learned to drink wine, initially the Chinese mixed wine with Coca-Cola to get used to it And particularly in food, we see all kinds of innovations like that But they’re now increasingly sophisticated or even leading

demand There are now a lot of very wealthy young Chinese, and you will see them around the streets of Boston, as well, the fuerdai, the second generation rich They’re probably not working at Google, but they are the ones who are buying the most expensive fashions China’s pressing need for solutions, such as in pollution, starting to lead the world now in environmental solutions As I said before, they’re more forgiving because most people there are first generation or second generation consumers, so they’ll try things, they don’t have to buy what their parents bought, and if you get something wrong they’ll move on and forget Market reasons Among the world’s biggest and most categories, biggest for cars, biggest for trains, biggest for airplanes, and so on And high diversity in differences, even more so than in the United States because of the temperature differences, climactic differences A specific example, Sany, the construction company said, a Western construction company might have two or three models per product, such as crawler-loaders But because of the diversity of soil conditions in China and because of so many different building projects, we’ll have seven or eight different products instead, so more innovation Because of the size of the Chinese market, the niche in China can be a whole market in some Western countries And then reverse innovation, when you invent something for the Chinese market but it could be sent back to the developed world So the most famous example of that is General Electric’s ultrasound equipment, initially a $150,000 machine that was too expensive and complicated for Chinese hospitals So GE put together a team to create a handheld device that was about $20,000 So it succeeded in China, but it’s been reversed back to the US not to displace the $150,000 machine but for new uses such as in doctor’s offices and in ambulances Thirdly, competitors Very intense competitors breeding winners and they’re starting to go global as well So competition in China is fiercer even than in the USA So we summarize this by saying that Western companies must learn some capabilities from China The first one, bold experimentation and rapid iteration This is particularly true, say, for Europe, where companies have become too conservative, too much regulation They need to go to China to relearn bold experimentation Secondly, innovation through creative adaptation, adapting to create new products, new product categories, lean value I mean, all companies focus on lean value, but even more so in China, where it’s more important And the fifth one, that we’re quite surprised by, is that while, say, Japan wasn’t much use for developing foreign managers because it was so ethnocentric, China is very open to foreign managers So if you send someone there, they get the chance to manage Chinese people, people from other countries So we now have a saying, to paraphrase Frank Sinatra’s song, Shanghai, Shanghai, if you can manage there, you can manage anywhere So I’ll just go through a few brief slides on e-commerce China now has a bigger share of e-retail than anybody else in the world and by 2020, it’s predicted to have 60% of global e-commerce because Chinese live on their mobile phones, cell phones much more than other countries I mean, I think Koreans are more, but it’s a much smaller country Selected percentage of countries who have bought something in the past 12 months China 68%, way ahead I mean, you know some of these statistics because it’s your business So a surge in internet and mobile payments, third party mobile payments, transaction value, incredible speed of growth of this Some statistics on the types of products that they’re buying And Apple made a late entry into this and is not doing that well, compared with the incumbents There’s a comparison here between Alipay and WeChat WeChat is starting to catch up with Alipay, the green line below There’s a comparison that you can look at And the last three sides, three emerging disruptions This was created by one of my colleagues at CIBS Rapid rise of connected on-demand mobility

and digital mobility So digital mobility very important in China Again, something you might expect because of the cities being so crowded The link between hardware innovation and the economics of the digital ecosystem China is more ready for this And then thirdly, data-driven insight So Chinese service businesses really mine their data And there are emerging service companies that are disrupting, for example, the automobile services So won’t go through this, but you can see that at least in mobility, a lot of things going on And you study this at your leisure As most of you know, Uber lost out in China, defeated in China by the incumbent company, and they ended up selling their stake to the Chinese company in exchange for a share in the combined business One of the interesting mistakes that Uber made was that it was possible for the drivers to cheat Uber Because if they got a friend to book a ride and then the friend canceled the ride, the driver still got a percentage of the fee, which was really dumb of Uber Because if in China there is a way for someone to cheat you, they will And the last slide, the famous BAT, if you’ve ever heard that phrase, Baidu, Alibaba, Tencent This last slide is about the ecosystems that they have built up So we have 15 to 20 minutes for questions Thank you for listening to this [APPLAUSE] AUDIENCE: So you were just talking about data mining I had a question about that How do the privacy policies of the Chinese compare to Western countries? GEORGE S. YIP: What’s privacy? AUDIENCE: Ability– GEORGE S. YIP: No, no No, I’m serious The Chinese word for privacy has negative connotations It implies something a bit shameful that you want to hide My wife, who’s English, learned this when after we’d been married we went to Hong Kong So there’s much less of the concept of privacy And of course, the government in China is entitled to look at any of your data All right It’s just like Facebook So privacy is much less Well, I mean, do you guys know about the new development in China of the good citizen index? China is working to create a good citizen index– that’s not the exact phrase– but based on your behavior And after that, you will be blocked from buying airline tickets, renting cars jobs, et cetera because you have a bad citizen behavior rating So no privacy AUDIENCE: I think I read somewhere that part of the reason for China’s expansion on like mobile payments is because they don’t have the existing infrastructure of credit cards Are there any other examples where China kind of skips past something into innovation? GEORGE S. YIP: Yeah I mean, that’s the best example Not only do they not have the credit card infrastructure, they don’t have the banking infrastructure So many Chinese, a very high percentage, don’t have bank accounts So they jumped straight to mobile So that’s a big advantage for them Yeah I mean, a related example of this is bike rentals I don’t know how much there are in the US, but in London and Paris we have these bike rental services, but they have docking stations So Chinese companies invented bikes without docking stations It’s done entirely digitally It locks the bike so you can leave a bike anywhere Now, there have been huge problems because they then get these mountains of discarded bikes But again, that’s a different Chinese solution No infrastructure so they come up with a new solution where you can take the bike anywhere So these are some of the examples of the leapfrogging because they don’t have the previous infrastructure AUDIENCE: So your slides show kind of the ecosystem in China, but there’s a lot of technology that is forcibly not in China For example, lots of restrictions on Google in China and we can’t really have a presence due to the government Have you looked at kind of the global usage by Chinese users of different technology sets? GEORGE S. YIP: Well, I mean, the reason why Google is blocked in China– I mean, there are two reasons why Google is blocked in China One is that China wanted to protect its incumbent companies And then secondly, because Google was trying to protect the privacy of its users, and China doesn’t like that

That’s the main thing Now, yes Not your exact question, but it is a problem for Chinese researchers Because of the blocks on access to the internet, they cannot access everything they need to do So one of the solutions they have is that Chinese companies will open a research office in Hong Kong, where there are no blocks, and then they do the internet search that way For a while, researchers, including business school professors, used– I just blanked out– there’s a technology where you can get past this Now, China’s what is it called the– AUDIENCE: VPN GEORGE S. YIP: Yeah, VPN But now China’s blocking that again and it’s illegal to have VPN So I mean, the astonishing thing when the internet started was that people said, there’s no way China can control this But I think there’s up to a million people working on controlling the internet So again, this is use of the large numbers AUDIENCE: So you mentioned that oftentimes, Chinese students will come to the US to get educated and then there’s incentives for them to go back to China And I’ve heard some people have the perspective, why should we educate if they’re just going to take education and go back to their country and not stay here and contribute? How would you respond to that and what’s your stance and thoughts on that? GEORGE S. YIP: I, mean that that’s a complicated policy issue And luckily, I’m not a politician so I don’t have to make these decisions I mean, what we’ve found through history is that you usually improve relations with a country if you educate people They go back with very views of the country Although interestingly, 20 years ago, the Chinese would deliberately give very small living grants to the students They wanted them to experience the worst of the USA, not the best of USA Think about it They wanted them to live in the poorest places in the US and not become too fond of the US I mean, Chinese students are now richer More of the ones who come out often have wealthy parents So we often see these policy items the other way around Why are countries like the UK and the US throwing out these students after we’ve invested in them and we want to keep them? So it’s a difficult solution Donald Trump hasn’t gone off of that yet, I think, of blocking Chinese students But who knows AUDIENCE: I think many people would argue that the long-term viability of China’s innovation is threatened by the increasing gap in social inequality and even those three huge companies sucking up all of the ecosystem, whereas perhaps others would argue that Western economies have more room for innovation because of less regulation So I guess could you comment on the future of China’s innovation and then also how you see a growing divide in the rich in China and the poor in China? GEORGE S. YIP: The income inequality is triggered by what’s called the Hu code system, the residency system, where you’re not allowed to live in a city without getting a special permit And in general, the cities block that because once you’re allowed, then you can access all the services– medical services, education, et cetera So a lot of the lower level jobs in China are done by people who are nonresidents who are there semi-illegally And sadly, their children cannot go to school So they have to leave the children back in the countryside be brought up by their grandparents So this is actually a massive problem that they literally don’t know how to solve right now affecting maybe 100 million people But I don’t think that’s necessarily going to block innovation per se because the innovation is happening at an upper level, the scientists and the engineers Secondly, the nature of China is that it is state-driven innovation, but there are lots of private companies as well So many of the most innovative companies like Alibaba; Royole, which I mentioned, the flexible displays, these are strictly private companies that are sort of benefiting from the Chinese innovation ecosystem And the question I haven’t heard yet, but people often ask me is, well, if China is like controlling people, doesn’t that stop innovation? Well, China doesn’t care so long as you do not seek to overthrow the Communist Party If you’re just innovating and making money, they’re happy to support you So I really don’t necessarily see that as a problem Or even by the dominance of a few companies

I mean, if you look at the history of the US, many industries like the automobile industry from the 1930s onwards, have been dominated by two or three major companies In fact, in China the problem isn’t too many monopolies, it’s too many competitors We actually have coined a phrase in our next book with some different co-authors about swarm innovation We have an article coming out soon about that There are swarms of Chinese competitors So there aren’t too few Chinese competitors, there are actually too many of them AUDIENCE: What do you think are some of the challenges that are facing China in this space and what are their leaders worrying about the most? GEORGE S. YIP: Well, if I just talk about innovation, education system is inferior The education system, top down, traditional Of course, that doesn’t stimulate so much innovation The PhD student will do the work of the professor, et cetera So they’re aware of this And guess what, they’re paying the USA to help them solve the problem So Duke University has a program in China to teach Chinese university lecturers how to teach their students to be innovative like the Americans So once again, America is teaching China how to compete with America So that is probably the biggest problem A secondary problem is the Chinese language, which also affects the education system It’s hard for other people to learn, it takes up so much time and brain space of children I have my own personal prediction that mobile phones are helping to solve this problem because more and more now, people are using the cell phones to spell for them Actually, older people are complaining about this I could see this being outsourced to cell phones AUDIENCE: One area where the US lags pretty severely behind the rest of the developed world is the health care system And you’ve mentioned kind of in passing kind of the innovations in medical technology and health in China, and I’m wondering what can the US learn, what can the US take from that? GEORGE S. YIP: Well, China doesn’t have a great health care system, either It’s surprisingly private People have to pay a lot So the whole state health care system has kind of withered away post-communist economic system So you can get some services, but for example, people have to pay doctors on the side to get any serious treatment There’s a terrible incentive in that doctors make money by selling medicines, so they over prescribe their medicines But again, going back to the technology part, they may start to leapfrog this by digital, et cetera, and making it faster I did have one experience myself I had to go through a health check And a typical Chinese approach, it was like a production line Whereas in the West, I’d have gone you know from floor to floor to the x-ray department, to the blood department, and so on, here it was a small building with a corridor First room, chest x-rays; second room, blood test; third room, eye test So it was like production line and the whole thing cost $100 US, which would cost you $1,000 in the US AUDIENCE: We all know China has the largest market in the world for many things So many Western companies tried to enter the market without much success What’s your view on the top reasons why Western companies often fail in the market? GEORGE S. YIP: Good question But to be fair, many companies have also succeeded So reasons for failure If you go into a sector where China is trying to develop its own competitors, they will make life very difficult for you They have hidden regulations they can pull out to make it difficult for you So long as you are contributing something that China doesn’t have, such as the Western auto companies over the last 30 years, they’re happy to welcome you I mean, I teach international business It’s the same principle You’ve got to bring something to the country that they don’t have So if you have that, then they will welcome you and not make life too difficult Then partners– for a long time, you needed a Chinese partner Some were good partners, some were bad There’s a Chinese saying, [SPEAKING MANDARIN],, same bed, different dreams So sometimes the partner was a nightmare, so to speak, following that analogy So that’s a reason why it could go wrong But really, I think Google’s case, you actually came right up against a central policy of the government, which is the privacy issue, and that’s why you’ve been banned from China

Plus secondarily, other companies like eBay– the privacy issue– they wanted to protect their emerging companies That’s why So there are still opportunities, but not in areas like that AUDIENCE: So one thing that I’ve noticed about competition in China is that it’s a very free-wheeling from of competition If you have an idea, there will be a million competitors doing the same thing, maybe better, maybe not That’s a very hard situation for external companies because here in the US, for example, there is a strong law field of patents and IT protection So how can anyone think of getting to the market in China in such a situation where there is a feeling that everything will be stolen? GEORGE S. YIP: Yes Actually, what Western companies are doing more and more is that instead of selling products, they’re now selling business models So if you’re going to embed the product in a business system, that is much harder to imitate against So selling the service based on the product, rather than the product itself or rapidly innovating to keep ahead of the imitators or having superior technology There are ways to protect your intellectual property so that it can’t be fully imitated Interestingly, the auto companies are still ahead in China This may be a good item to finish with, actually I was told by one of the German automotive companies, they said, the reason we’re still ahead is that in the West, the auto engineers grew up being taken to repair garages by their father or their grandfather So they’ve had this since childhood, these automotive engineers In China, the automotive engineers are first generation They don’t have this deep background And cars are this very complex combination of being a consumer product and being a highly engineered technical product So actually, they’re going to have more difficulty in cars than they have, say, in commercial jet aircraft And in fact, interestingly in cars, they don’t particularly want the ultimate driving machine, like a BMW; they want the ultimate mobile living room because that’s a different kind of experience that they want in China There’s a great story about BMW, which is that in China– this will be my last comment– there was a dating TV program in China, just to show you again Chinese culture And a young woman on the TV program was asked by a young man, he said, I’m not very rich so would you go on a date with me just on a bicycle? And she rejected him and said, I’d rather cry in the back of a BMW than smile on top of a bicycle So that’s Chinese culture Thank you very much [APPLAUSE]