The China wave

Date: 11-09-2014
Source: The Economist: Schumpeter

Chinese management ideas are beginning to get the attention they deserve

MANAGEMENT thinkers have paid surprisingly little attention to how Chinese firms are run. They routinely ascribe those firms’ rapid growth in recent years to their copious supply of cheap labour, or to generous financial backing from the state, rather than inventiveness. They have much more time for India, particularly its knack for frugal innovation, with all those colourful stories of banks putting cash machines on bikes and taking them into the countryside, and companies building water purifiers out of coconut husks.

However, it seems unlikely that China’s companies have come as far as they have just by applying lots of labour and capital. It is also hard to imagine that the huge expansion of China’s education system and its technology industries is not producing fresh management thinking. Western companies knew little about Japan’s system of lean production until its carmakers gobbled up their markets. The danger is that the same will happen with Chinese management ideas.

There are, however, signs that these are now getting the attention they deserve. The MIT Sloan Management Review devotes much of its current issue to examining innovation and management lessons from China. Peter Williamson and Eden Yin of Cambridge University’s Judge Business School contribute a fascinating essay on “Accelerated Innovation: the New Challenge from China”. The latest issue of the Harvard Business Review has a piece on “A Chinese Approach to Management” by Thomas Hout of the Monterey Institute of International Studies and David Michael of the Boston Consulting Group.

The first article suggests that the Chinese, like the post-war Japanese, have been doing a great deal of innovation under the radar. The second demonstrates that they are becoming more creative as they seek to solve the problems of a rapidly advancing consumer economy.

Messrs Williamson and Yin focus on the way that many Chinese companies are using mass-production techniques to speed up not just the manufacture but also the development of products. They break up the innovation process into a large number of small steps and then assign (often sizeable) teams to work on each step. For example, WuXiAppTec, a drug company, divided the search for a new treatment for chronic hepatitis C into eight steps, assigning dozens of people to each. The firm also adapted German software that was designed for managing assembly lines to co-ordinate the innovation process. Whereas a Western software firm typically releases an early “beta” version of a product only to a select group of guinea-pigs, Chinese firms are more likely to launch theirs straight into the market: they use consumers as co-creators, seeking their feedback and then rapidly adjusting their products.

This sort of accelerated innovation may not generate stunning breakthroughs. But that is not what it is for. China’s success has depended on its ability to be a “fast follower”, copying foreign ideas and turning them into mass-market products. Messrs Williamson and Yin argue that the Chinese can now apply accelerated innovation in lots of areas; and that the technique helps them make better use of one of the country’s most important resources—a pool of competent but unexceptional technicians.

Messrs Hout and Michael are also struck by Chinese companies’ emphasis on speed, and their willingness to throw things at the market. Goodbaby, which makes prams and car seats, introduces about 100 new products each quarter. Broad Group, a construction firm, puts up buildings rapidly by breaking them up into modules, fabricating those modules in factories, pre-loaded with utilities, and then plugging them together: an idea long talked about in the rich world but not much implemented.

However, their paper’s focus is broader—on how Chinese entrepreneurs are coping with the speed at which technology-related industries are changing. They note that even big companies delegate lots of authority to preserve flexibility: Haier, a home-appliances giant, consists of thousands of mini-companies, each of which reports directly to the chairman. That is an interesting contrast with Japanese firms’ obsession with seniority and consensus-building.

Messrs Hout and Michael also highlight the creativity of some Chinese companies when faced with the need to build entire ecosystems out of thin air, from supply chains to labour pools. Hai Di Lao, a hotpot restaurant chain, deals with one of its biggest problems—recruiting and retaining young people to train as branch managers—by offering them housing, schooling for their children and trips abroad. This sort of imaginative thinking on how to attract good workers will increasingly be needed now that China has used up most of its surplus rural labour.

Quick as well as cheap
In two technology-based industries that China is especially keen to develop—making cars and civil aircraft—there is little sign as yet that domestic firms are closing the gap with the best foreign ones. However, in a range of other industries they are succeeding in doing so. Therefore, Western companies must react to, and learn from, Chinese firms’ ability to accelerate product development. There are signs that this is starting to happen. The innovation centre that PepsiCo established in Shanghai in 2012—its largest outside North America—was given a mandate to speed consumer testing and get products to market faster, rather than to cut costs.

In all, what these studies show is that there is more to the rise of Chinese companies than simply an ability to do things on the cheap. They are developing management techniques that help them create things faster, and they are proving adept at reacting quickly in rapidly changing markets. These are skills that will help them cater to the middle classes, not just serve the poor; and to conquer new markets far beyond their home turf.

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