China is fast closing the innovation gap.

In recent years, a handful of Chinese companies garnered a great deal of attention on the global stage. As such, there has been a dramatic change in outside perceptions of the country’s capacity for innovation: what was once a question of whether China can innovate, has now become one of how it is innovating.

In lieu of Innov8rs Shanghai (26-27 June 2019), we speak to Luuk Eliens, Head of Innovation at XNode, about what is particularly surprising and pertinent to know about this hotbed for growth, as well as the valuable lessons he’s learned about corporate innovation in China.

First, we’ll examine on a macro level what the innovation landscape looks like: where is it happening, and who are the people leading these breakthroughs?

Then, onto the considerations for corporations looking to collaborate with innovation leaders in China.

Lastly, what differences can we draw between China’s corporate innovation ecosystem and the West's perspective on how innovation should be done? How can this help us to move past our own sometimes-stale mindsets, approaches, and methodologies, to succeed in new markets?

What’s happening?

Start-ups and corporates combine forces

Big names such as online retail giant Alibaba, appliance maker Haier, search and data technology provider Baidu, and Tencent, the social communication and gaming ecosystem, are challenging the R&D strategies of foreign companies to keep up with the pace in China. They’re providing valuable lessons on how to make ideas commercially viable.

But there’s another, less obvious force to be reckoned with:

‘Very often, multinationals are interested in Chinese startups. They’re growing rapidly, developing innovations ahead of the rest of the world, and corporate partners are asking for a piece of the action through Corporate Venture Capital, or sometimes starting a separate corporate innovation effort.’

With the pace of change quickening and creating exponential pockets of growth, Luuk sees particular shifts from core business-to-consumer innovation towards major B2B unicorns emerging, as well as high-tech and hardware.

And much of China’s corporate investment follows suit.

How to work?

A start-up culture of widespread risk

China’s investment focus is in no small part due to government incentives: national resources have been pooled to achieve significant breakthroughs in business, with mandates created to promote entrepreneurship, foster a more favorable environment for entrepreneurs, and better protect their legal property and interests.

‘Chinese entrepreneurs are risk-takers’ says Luuk.

‘Because China is the next powerhouse of innovation, anything is possible, so rationality takes a backseat to opportunism. Realities change on a weekly basis, and for this reason, there is less emphasis on long-term vision and strategy as you’d find in the US or Europe - and more focus on… well… not focusing.’

These emerging entrepreneurial talents are sometimes difficult to identify, spreading themselves thinly across multiple markets in order to experiment rapidly and find their sweet spot - or sweet spots.

The goal is to swallow up as much market share as possible, and quickly. This results in a growing number of powerful incumbents, which in themselves can act as ecosystems comprising various verticals and value propositions.

How do you structure and offer support in this ‘wild west’ scenario, as corporates with a clear pathway seek trigger-happy start-up talent?

‘This is something we focus on educating multinationals about. Let me describe a typical example of different ways of doing business between these two entities: A corporate clearly scopes their need for start-up collaboration. They seek to find a new business model. The Chinese entrepreneur says ‘yes, I’m interested to explore this opportunity with you, but I see 10 other business opportunities which I’d like to explore at the same time.''

Creativity doesn’t just happen within the confines of your own environment: many ecosystems cannot stand alone, and instead, have to grow and collaborate outside of their own walls in order to flourish.

For this reason, it is particularly important to have a compelling case to convince a hot Chinese startup to work with you, rather than with someone else.

What to learn?

There is something to be said for this willingness to diversify outside of comfort zones and away from well-trodden terrain when it comes to corporate innovation.

We can take a sideways glance at China’s much sought after entrepreneurs to see how: risk tolerance, and embracing uncertainty, are the ultimate catalysts for positive change, combined with ruthless and fearless experimentation.

However, it is because China’s status as a thriving hub for innovation is still relatively new, that there is no set playbook for success here; no on-the-line methodology for corporate innovation.

This stick-and-see approach means that there is still some standardization to be introduced, with XNode introducing frameworks to support and streamline the messy innovation process:

‘For Chinese entrepreneurs, there is still a relatively low quality-quantity ratio - i.e. the number of companies created vs. those which succeed. With clearer frameworks for growth, from a macro perspective - the number of successful companies will be much higher.’

But Luuk has also learned that corporate innovation in China requires patience, and conventional wisdom often doesn’t apply:

‘We threw various tools and methodologies out of the window which we would otherwise use because they don’t work here. You need to be open to different approaches.’

How can corporates keep up?

The textbook advice would be to take a portfolio approach to start-up collaboration in China, in order to spread risk: investing in different companies, at various levels of maturity, and choosing a mixture of incremental and disruptive opportunities.

This way corporates can learn, take opportunities quickly, and leapfrog models which won’t work.

But approach with an open mind, and a willingness to invest:

‘When you run an exploration or innovation program with the end-goal of investing in a start-up, you are by definition already invested.

For this reason, corporates find it hard to ‘opt out’.

I remind those in this position that the objective of the program is to assess readiness: if the decision after 3 months is to not invest, then this is also a success - a comparatively fast, cost-effective learning curve.’

A lively ecosystem of opportunity

This is a likely scenario in China: a corporation negotiates with a start-up on Monday; the start-up is less than impressed with the trajectory - and by Tuesday, the corporation has lost them to a better deal.

But if corporates can quickly navigate the risk-seeking opportunism native to Chinese entrepreneurship, act fast, and dedicate a local team to build lasting relationships, they can enjoy the benefits of an open innovation ecosystem rich with diversity:

  • The scale of China’s resource is in many areas insurmountable. Innovators have unparalleled access to engineers, and between 12-15,000 companies are created every day, which spearheads growth like never before
  • The government’s role in steering the agenda for entrepreneurship means incentives and strategic focus on fertile areas such as Artificial Intelligence
  • The availability of capital and the speed of investment means that quick-wins can be used as both a basis for growth and a litmus test for learning

If you’re interested in working with Luuk and his team at Xnode, and in understanding what's happening in Shanghai and China, join Innov8rs Shanghai.

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