(Chinese Version)

Editor’s Note:

With the rapid growth of China’s innovative economy, Fortune Global 500 enterprises are losing their power on China’s private companies. 2013 was an important turning point. And in today’s market, we can easily notice that the enormous energy stored in entrepreneurship and innovative economy is bursting out and boosting the economy.

Manufacturing industry is the most important pillar industry for China. The country has been docking foreign capital for a long time. What has it done to the development of Chinese manufacturing industry? This article, written by Wang Yuquan, co-founder of Haiyin Fund, attempts to offer some insights on this matter to us.

The global manufacturing industry is undertaking fundamental transformations. The historical confluence of the new technological revolution and global industrial revolution is reshaping the international industrial division pattern.

To stay strong in this new era, Chinese manufacturing companies have to get rid of lots of outdated ideas and old rules. For instance, you can remove more and more Fortune Global 500 enterprises from your list of strategic partnerships and start working with seemingly not-so-famous small companies. Why? Because they are the future!

1. Why small companies are the future?

Why did we prefer to work with big firms in the past?

It’s simple. Generally, big firms had better innovative capability and greater say in the market.

Looking back, the fundamental incentive for almost every productivity change and overturning market power change is technological breakthroughs.

However, big firms were leading the technological transformation process from lab samples to products for sales because they possessed abundant financial support and manpower. This helped them run big research centers they owned and quickly turned research achievements into real products.

Take Bell Laboratory for example. It produced important products that fundamentally changed the life of mankind, including transistor, laser device, solar battery, digital converter, communication satellite, cellular mobile communications, long distance TV transmission and so on.

It was a long period. Big firms like Bell Laboratory were a lot.

However, the trend has been changing in recent years. Emerging middle and small-sized companies are replacing Global 500 enterprises as the main body of innovative transformation, including electric vehicle company Telsa Motors, Illumina, the world’s largest gene sequencing company and Haiyin funded WiTricity which possesses the world’s largest number of magnetic resonance technology patents.

In this new trend, innovative tech companies can transform themselves from small companies to big firms that cover the sales of global market, making previous transnational enterprises lose their advantages in technology and market in a short time. It no longer takes a long time to transform from a start-up company to a leading enterprise, or even to monopolize the entire industry. Maybe within a decade, or even in a few years, a company can complete its transformation.

2. How did this transformation happen?

This transformation originated from the Bayn-Dole Act of 1980 and Federal Technology Transfer Act of 1986 in America.

Before these acts were enacted, technology patents achieved by government-funded scientific research projects were government-owned. These patents were seldom transferred to private sections due to the complicated, tiresome procedures for examination and approval. By 1980, less than 5 percent of these technology patents were transferred and commercialized in industry field.

However these two acts state that inventors are entitled to share patent licensing revenues, and small-sized companies can get preferential rights to transfer and license.

This is the American-style mass innovations and open private capitals.

These two acts made it hard for big firms to monopolize technological innovations. Without financial support or enough manpower to build their own laboratory, middle and small sized companies can directly transfer universities’ scientific achievements to products for sale. Thus America’s technological innovation welcomed an explosive growth.

An experienced, credible businessman or a serial entrepreneur, along with experts in innovative technology, are enough to start a middle or small-sized company.

Nowadays, a lot of American middle or small-sized companies get patent authorization from university research organizations, then develop new products and launch them into market.

Not long ago, people had witnessed the success Internet and mobile Internet created. Apple, Facebook and Uber are perfect examples. In fact, all these success and accomplishments have deeper implications. This is actually a wave of innovation that covers the entire technology industry. Transformations also overspread the seemingly traditional fields, including materials, energy and agriculture.

Currently, the integration between a new generation of information technology and manufacturing industry has triggered a far-reaching industrial revolution. New production mode, industrial form, business model and new sources of economic growth have begun to form.

One may find that every nation is adding investments in technological innovation, prompting breakthroughs in different fields, such as 3D printing, mobile Internet, cloud computing, big data, bio engineering, new energy and advanced materials.

Intelligent manufacturing, based on cyber-physical system, including smart devices and intelligent factory, is leading the transformation in production methods.

Network crowdsourcing, collaborative design, large-scale personalized customization, precision supply chain management, life-cycle management and e-commerce are reshaping the industry.

Smart terminals, such as wearable devices, smart household electrical appliances, and smart automobiles, are expanding new areas in manufacturing industry.

A lot of innovative companies are booming in the convergence zone of information economy and traditional manufacturing industry.

3. What kind of catastrophic consequences this transformation might bring to Chinese companies?

Yes, I am talking about “catastrophic consequences”.

Manufacturing industry is the main body of a country’s national economy. It is the foundation of a nation, the tool for rejuvenating a country and the base of a powerful nation. Industrial civilization started in the middle of 18th century. Since then the world history and Chinese history have proved again and again that the prosperity of a nation lies in the power of manufacturing industry.

However, it’s known to all that the current slow increase in China’s real economic development is due to the decline in its manufacturing industry. Although Chinese government has already launched a lot of measures to spur economic growth, the predictable decline is still on the way.

Why “MADE IN CHINA” is in recession?

One reason is global economy’s on-going downturn. But a more important reason is the domestic one. With the significant adjustments in the structure of global industrial competition, the position of Chinese manufacturing industry in the global market has dropped and is doomed to face huge challenges.

Developed countries have started re-industrialization after international financial crisis, aiming to reshape manufacturing industry’s advantages in the new era and accelerate the formation of a new pattern in global investment and trade. Several developing countries also speed up layout and planning process, actively participate in global industries’ reintegration, undertake industry relocation and capital transfer and expand international market.

Meanwhile, China’s economic development is stepping into a new stage. The restrictions in resources and environment tighten, labor costs rise, investment and export growth slow down. The extensive development model that relies highly on resources investment and scale expansion is no longer sustainable.

Developed countries and other developing countries are posing severe challenges to China. Chinese manufacturing industry has to react immediately. It needs immediate structure adjustment, transformation and upgrading, quality and effectiveness improvement.

However, Chinese enterprises that were in the transformation and upgrading stage lost their chances to be the pioneers in technological innovation.

China’s economic achievements in the past 30 years should be attributed to the reform and opening-up policy. China attracted foreign enterprises to enter into its domestic market through the trade-technology-for market strategy. China ended up gaining a powerful production capacity.

Back then, Fortune Global 500 enterprises, especially big firms from Europe and United States, were Chinese companies’ major partners. Their advanced technologies, management capacity and unfailing orders helped China build up a complete manufacturing ecosystem, making China the world’s factory.

However, innovative capacity and market are shifting to emerging companies. Big firms’ market shares are being encroached or even overthrown. Their revenues and business are dropping. Pressures caused by the change are naturally passing on to Chinese manufacturing industry.

But Chinese companies didn’t respond to the changes. They stood where they were and went nowhere.

Those innovative companies have been experiencing rapid development. Chinese manufacturing industry didn’t participate in the early developmental stage. Thus they were not aware about how the entire ecosystem operates, including standards setting, technological innovation and large-scale production.

When innovative companies have grown mature enough to replace previous industrial tycoons, it is already late for China to start learning from them.

Take electric vehicle company Telsa Motors for example. Telsa is a type of all-electric automobile. Its structures are different from traditional gasoline internal combustion engine cars. A lot of parts in the car need exclusive designs that require continuous adjustments in production process. However, due to the low profits and limited production in Telsa Motors’ early stage, China decided not to be a part of their supply chain.

When Model S motor was launched into market, it was found that among thousands of suppliers from different countries, such as Germany, America, Brazil, Japan, and China was not one of them.

When Chinese suppliers are finally ready for cooperation, China has no say in business negotiations. There are not so much profits left for them.

4. How can Chinese manufacturing industry become an indispensable part in global innovation system?

The answer is simple. Partnership focus changes from Fortune Global 500 enterprises to middle or small-sized innovative technological companies.

These companies can’t afford completing the entire production line on their own due to rapid growth. With the advantage in innovation, they search for large-scale cooperation with other companies, thus cultivating a collective innovative environment.

This rapid-growing innovation model has a strong need for capital supply, extensive production capacity and sufficient market expectations.

These are the advantages China possesses and can offer to its partners.

After the 2008 financial crisis, China has transformed from a country short of capital and requires foreign investments to the most important capital exporting country in the world. Capital globalization will become a major trend for China’s development in the next two or three decades. Capital exporting aims at pursuing a higher rate of capital return via global resource allocation, thus promoting the transformation and upgrading of domestic companies and improving industrial international competitiveness.

Meanwhile, China has possessed the large-scale production capability, industrial foundation and has fully integrated into global division of labor due to the economic accumulation since the reform and opening-up period. China has been recognized as the world’s factory. Now, it is transforming towards the brand-new industrialization with Chinese characteristics, focusing on the Industry 4.0 intelligent manufacturing.

Besides, with the development of industrialization, information construction, urbanization and agricultural modernization, the greater potential that lies in China’s domestic demands is waiting to be unleashed, leaving a broad market that needs to be fulfilled. 

This is an unprecedented win-win opportunity. Chinese companies possess abundant capital ability, powerful production capability and enormous domestic market while Chinese manufacturing industry’s technological upgrades require lots of advanced technology that are in the hands of middle or small-sized companies.

This means Chinese manufacturing industry should be open-minded, speeds up proactive strategic planning, consolidates its foundation and turns challenges into opportunities, aims at occupying the competitive high ground of global manufacturing industry.

During the process, Chinese companies can treat investments in foreign high-tech companies as means to connect with the foreign market. With China’s high quality but low cost production ability and spacious domestic market, innovative technological companies will have a chance to develop themselves and change China’s shrinking manufacturing industry, while jointly expanding global market and realizing a win-win result.

Thus, Chinese manufacturing industry will realize the transformation from “Made in China” to “Designed in China”, from high speed to high quality, from Chinese products to Chinese brands. The strategic mission for Chinese manufacturing industry to expand and become stronger will succeed. This will also be a precious opportunity for China to integrate into the global innovation system.

5. What are the risks that lie behind this opportunity? How to avoid them?

Technology is a capital-intensive industry. High-risk investments come along with its potentially profitable financial returns, especially when cooperating with the cutting-edge middle or small sized innovative companies overseas.

First, overseas markets are bewilderingly changing all the time. It’s not rational to blindly invest or cooperate with other companies unaware of local policies or market environment and without any connections.

Second, we are surrounded by innovations in this era. All kinds of technologies are emerging. Top deception tricks can remain unrecognized among cutting-edge high technology. Your judgments on the profitable prospect of one technology can fool you since nobody can accurately predict the possible transformation that lies in the trend of an entire industry.

Third, fundamental innovations and radical innovations are different from China’s most common micro-innovations or application innovations. Their access threshold and barriers are rather high, thus possessing a higher value. It’s important to get intellectual property and to cooperate with core companies which have clear patents and research capability when introducing a foreign company into Chinese market. Otherwise, it is irrational and blind.

Then how to grasp opportunities as well as hedge risks?

First, rely on government’s power for risk filtration. In adherence to the reform and opening-up policy, government can tactically adjust its policy to attract businesses and investment from Fortune Global 500 enterprises to middle or small-sized high-tech companies, thus Chinese companies can greatly reduce their risks in doing business.

Second, converge powers of all fields to hedge risks. Investing in only one firm has rather high risks. However, with the help of professional investment houses, incubators and other cooperative platforms, if Chinese companies could make systematic and large investments following the trend of future industrial development, it’s likely to achieve the goal of low-risk-high- returns.

However, China didn’t do very well previously. Now the situation is improving.

This administration of Chinese government straightens to realize its strategic goal of building a manufacturing strong country based on national conditions and current situations, by keeping to the new path of industrialization with Chinese characteristics. It has launched China Manufacturing 2025, the guidelines for government action for the first decade.

The innovative cooperation system for China to open up to the world can be expected to be more common and more mature, boosting the overall upgrade of technology in Chinese manufacturing industry and Chinese economy’s sustainable prosperity.

Chinese capital and companies should grasp this precious opportunity to comprehensively connect with foreign innovative technologies and make layouts for America’s frontier technology. Haiyin Fund is putting a lot of efforts in this area. I’m open to communication and discussion on this topic. I also look forward to sharing ideas with investors who pay attention to overseas innovative investments.

[The article is published and edited with authorization from the author @Wang Yuquan, please note source and hyperlink when reproduce.]

Translated by Selma Xu(Senior Translator at ECHO), working for TMTpost.