The recent volatility in China’s stock markets, and the untraditional steps taken by Beijing to calm them (including a ban on selling shares), is yet another reminder that China is, well, different.
Though the country has moved dramatically to open its economy to market principles, the Chinese way is still both unique and inscrutable. Westerners, and even most Chinese, are kept largely in the dark on even the basic workings of the Chinese economy. And Beijing seems determined to keep it that way, both when their policies are successful and when they’re not.
But at least so far, the Chinese experiment is still working when it comes to the red-hot information technology market. Even as Europe tries once again to reboot its Internet economy with a new Digital Single Market initiative, China continues to make dramatic progress pursuing its own brand of public-private partnerships. In the last 20 years, China has launched some of the most valuable Internet companies in the world, including Baidu, Alibaba, Tencent and JD.com.
While some of these giants largely serve the enormous local market, Chinese companies such as Foxconn dominate the assembly of computing and consumer electronics devices worldwide. And now Chinese companies are evolving from the manufacture of other companies’ products to become leading-edge designers themselves. Xiaomi and Lenovo, for example, are producing “must-have” new smartphones, often at prices far below what Apple and Samsung charge.
All this in a country where the government’s far-reaching intervention and even policies are shadowy. And where significant parts of the Internet are theoretically (and often actually) cut off from public view.
I recently returned from an extended visit to China with my co-author, Accenture research honcho Paul Nunes, and we were deeply impressed by the passion with which the Chinese have embraced the digital revolution.
At public events promoting our “Big Bang Disruption” book, attendees quoted passages back to us verbatim and asked insightful questions about how to relentlessly disrupt existing markets with better and cheaper new products and services. A two-hour presentation organized by our Chinese publisher and delivered entirely over Tencent’s WeChat text and voice messaging app drew over 10,000 paying participants. (The book has already sold more copies in its recent Chinese translation than it has in the United States)
The commitment to innovation, at least within China’s growing class of entrepreneurs, is genuine. Everyone we met seemed to be involved in at least a few start-ups. From Shenzhen, China’s semi-open Silicon Valley, to Qingdao, a coastal city best-known for its eponymous beer, we met determined entrepreneurs who, from what we could see, mirrored the values and working methods of their Western counterparts.
The Silicon Valley culture, for example, is very much alive at OnePlus, a smartphone start-up with a cult-like following, a charismatic leader, and an international staff of over 400. We spent the better part of the day talking to CEO Pete Lau, who started OnePlus only 18 months ago after serving as vice president for Oppo, one of China’s largest smartphone makers. The company’s first product, the OnePlus One, is a design marvel, with high-end components and a premium form factor, which the company sells worldwide for only about $350 unlocked. (A new model, the OnePlus 2, is due out in the fall.)
Both to minimize cost and maximize customer interaction, OnePlus sells its phones directly to consumers, and, until recently, only through an invitation system that allowed the company to micromanage production scheduling and inventory control. The company sold one million phones its first year, and expects to sell between three and five million in 2015.
Lau, who greatly admires the late Steve Jobs, attributes OnePlus’s early success to its singular focus on clearly understanding and satisfying a young adult market that values high-quality at an affordable price.
“Our motto is ‘never settle,’” Lau told us. “It comes from a conversation I had with a phone user before we had even launched our product. I gave him a phone and asked him what he thought about it. He said it was okay. I asked what he thought about the design and manufacturing and he said, they’re okay.
“In the end he concluded, ‘Buying this phone for $325 is okay for me.’ Now this may sound fine. But I understood that he was settling for just okay. And I knew I could offer him a better product for the same $325 rather than making him settle. You can’t get that kind of insight from a customer survey.”
OnePlus’s embrace of the disruptive innovation philosophy is inspiring, but nowhere near so much as that of Zhang Ruimin, CEO of Haier, the world’s largest manufacturer of durable goods including air conditioners and kitchen appliances, with annual sales close to $11 billion.
Zhang, now 66, was a local government official in 1984 when he was assigned to resuscitate a moribund refrigerator factory in Qingdao. When he arrived, he found workers using the factory floor as both bedroom and bathroom, and famously rounded up defective refrigerators he found in inventory and personally smashed them with a sledgehammer.
From that unconventional beginning, Zhang, a management autodidact who counts Peter Drucker among his many influences, oversaw Haier’s remarkable rise, winning numerous awards for product quality along the way.
Now a revered business visionary in China, Zhang refuses to leave well enough alone, and is in the midst of smashing Haier’s business model once again. Recognizing the disruptive potential of such emerging technologies as the Internet of Things, 3D printing, and embedded software that can reconfigure traditional durable goods such as those Haier produces, Zhang recently undertook to restructure the company as a collection of competing start-ups.
Employees have been grouped into small teams, who work on product design in collaboration with real customers, sometimes racking up millions of social network communications in a matter of months. Lower-level employees who believe they have better ideas than the leader can take over the team, and all employees share in the success of new product launches.
In 2014, for example, a 15-person Haier team created and launched the iSee mini, an ultraportable Internet-connected projection system that runs on Android. The device, built in response to requests from mothers on one of Haier’s many online forums for a screenless system that children could use to watch videos, is now moving into mass production based on extensive user testing and iterative design.
Over locally-grown tea, Zhang and I shared our admiration for Nobel Prize-winning economist Ronald Coase, who famously wrote in 1937 that companies only existed to overcome inefficiencies in the market. As information technology rapidly erases those inefficiencies, he agreed, the nature of business enterprises — their size, their role, and their longevity — is now very much in flux.
Zhang believes that despite its success, Haier urgently needs to reinvent itself once more, before someone else does it for them. He sees Haier’s future in the cloud, where the company can become a platform for internal and external collaboration, not only with customers but suppliers and entrepreneurs looking for partners with established brands and capacity. Increasingly, Haier’s products will be supplemented with services, and hardware will migrate to software.
CEOs of stalling U.S. industrial giants, in my experience, rarely express Zhang’s level of creativity, humility, or candor. They prefer to dismiss the Internet as irrelevant to their business, or at best as a frustrating source of unfair competition.
I don’t know what will happen to China’s stock market, or whether the country’s hands-on industrial policy and social engineering can really work in the long-term. But Chinese entrepreneurs, new and old, are at least asking all the right questions.
Larry Downes is co-author with Paul Nunes of “Big Bang Disruption: Strategy in the Age of Devastating Innovation” (Portfolio 2014). He is a project director at the Georgetown Center for Business and Public Policy.