The question comes back year after year: how innovative are Chinese firms?

Coming up with a meaningful answer is far from easy. It requires first to define what we mean by innovation - it can take many forms, from disembodied technology to a new product or process - and what we mean by Chinese firms - for instance, do we include joint ventures. It then requires to find a measurement “tool”. Patents filed are often used as a proxy.

Statistics computed by the World Intellectual Property Organization (WIPO) both at the country and firm level tell us that China ranks 5th in 2009 (behind the US, Japan, Germany and South Korea). With 7946 patents filed, China has seen a surge of 29.7% over the past 12 months.

At the firm level, Huawei comes second worldwide with 1847 patents filed. In other words Huawei accounts for more than 20% of all patents filed by Chinese firms abroad. A paltry though in comparison to the 580000 patents delivered by the China State Intellectual Property Office. ZTE, another telecom equipment manufacturer, beats Huawei at the domestic patenting race.

Some firms are more innovative than others, some file more patents domestically than internationally but the trend is there: a limited number of firms have set their goals on becoming leaders in innovation.

“Middle East countries have oil, and China has rare earths. Let us export rare earths to increase our foreign exchange reserves.”
Deng Xiaoping

Yttrium, lanthanum, neodymium, promethium…. While not part of your daily vocabulary you will certainly find these rare earth elements (REE) in your close environment: wind turbines, iPods, hybrid vehicles, the list of high-tech applications using REE seems without an end.

The bad news? Since the turn of the century, China controls close to 95% of the world’s REE production and possesses 50% of the world’s reserves. There is even a Rare Earth Industry Development Plan.  The Chinese government has imposed increasing export duties and quotas on the rare earths industry. There are even some rumours that the most valuable of these elements will be prohibited from leaving China or restricted to companies located on its soil.

The good news? Europe, Japan and the United States seem to have suddenly woken up to the strategic nature of REE and, akin to oil, are considering setting up strategic reserves. In addition, rare earths are not as rare as their name suggests. Alternative supply sources exist (e.g. in Vietnam or Australia) so in the end it may just be a question of pricing.

Will Chinese high-tech firms take incumbents multinationals by storm? Not impossible if one is to believe Zeng and Williamson, authors of “Dragons at your door: how Chinese cost innovation is disrupting global competition“.

The authors’ central argument is that China’s real competitive edge is not [only] low cost but rather cost innovation. Chinese companies leverage low-cost R&D resources to deliver high-technology at mass-market prices by focusing on process innovation to breathe new life in technologies that Western companies have written off as obsolete or uneconomical, by developing innovative products at a fraction of the cost of their global competitors by recombining existing technologies in new ways, by riding the wave of open architecture to bypass traditional barriers to innovation, and by successfully rendering established Western competitors’ assets and experience obsolete by betting on low-cost, alternative technologies.

A number of questions come to mind:
- Can Chinese firms apply the [product] cost innovation to services?
- How much does cost innovation allow Chinese firms to be innovative?

Not need to look further than Huawei to have the beginning of an answer…

Some 15 years the management literature unearthed coopetition, a concept coined right before World War I. For those who had just got used to this contraction time has come to learn a new one: collaboratories. In a nutshell, the idea is to bring down the walls so that researchers can perform their job without regard to geographical location. So far, nothing revolutionary you may think.

But for some companies, it actually implies a radical change in strategy. For instance, IBM is making collaboration with outsiders an essential piece of its research strategy. The company has been working with China Telecom and China Mobile, two of the biggest operators in the world, applying data analysis technologies to the huge (and growing) databases of subscriber and service information. The sheer scale of the Chinese telecommunication market allows researchers to play with billions of records, a unique chance to test and improve data mining algorithms.

Big Blue is even taking the concept of collaboratory a step further in China. It has partnered with the city of Shenyang to create an eco-city collaboratory, combining transportation, water, energy and food with the aim to define what a smart city would be.

What is the link between EVE (a producer of lithium batteries) and Aier (a chain of eye hospitals)? Both have just made their debut on ChiNext, the newly-launched Shenzhen-based stock exchange for innovative firms.

For now, 28 companies are listed. Hundreds have been reported to be lining up for listing, still a paltry in comparison to the 3700 firms trading on the American board. But then, it has been around for almost 40 years.

The NASDAQ-styled stock exchange still hopes to fill an important gap in China: funding small and mid-sized enterprises (SMEs). While accounting for 60% of China’s economic output (and 80% of employment), SMEs only received 36% of total loans.

Price-to-Earning ratio (P/E) was at 96 after one week, compared with 35 on the Nasdaq and 33 on the Shanghai index. A good alternative for those bored with Macau’s casinos but probably not exactly what ChiNext would need to succeed in the long-run: patient and long-term investors, something that the neighboring Hong-Kong Growth Enterprise Market (GEM) has learnt the hard way.

In addition to the attempt to standardize the Internet of Things,  the Chinese Internet [community] is also paying attention to the regulation of search engines.

Baidu - the leading Chinese search engine and potentially most formidable competitor for Google in the long-run - has joined the Internet Society of China and the China Communications Standards Association to publish a set of search engine marketing regulations aimed at “developing the sector as a reliable source of news and business”.

Officially, the idea is to drive out disreputable companies who tarnish the reputation of search engine marketing in China. Something of a twist since this comes one year after Baidu came under fire for blocking searches containing words associated with the melamine milk scandal or having accepted money from fraudulent medical companies to figure prominently in search results!

What if this self-enligthened effort at self-regulation was to spread outside of China?  And, more importantly, will Google join the bandwagon?

Ever heard of Symbian? It is, for the time being, the leading operating system for smart mobile devices and soon to become completely open-source. But competition from Apple’s iPhone may seriously jeopardize its position.

That’s when China Mobile steps in. The Chinese operator promises to offer technology support to the Symbian Foundation - in return, Symbian will support China Mobile’s construction of TD-SCDMA 3G network. And with close to 500 millions subscribers, it is not an insignificant endorsement.

China Mobile’s support is naturally not devoid of interest. Between the battle for an OS and the iPhone’s entry in the Chinese market, the trial of strength between the operator and the manufacturer is far from over.

For those who thought that WIMAX was dead in China, you can think again! China’s State Administration of Radio, Film and Television (SARFT) and the Ministry of Industry and Information Technology (MIIT) announced several WIMAX trial networks in August. This can come as a surprise since MIIT had outlawed WIMAX in 2008 on the grounds that it interfered with the uptake of the domestic 3G standard TD-SCDMA.

Part of the explanation may lie in the fact that the Chinese WAPI (Wireless Authentication and Privacy Infrastructure) standard was given the green light to reapply for international recognition by the ISO - it had been rejected before on two counts. Part may also come from the fact that ISO has been encouraging China and the IEEE to work together to make WAPI compliant with existing international standards for local area networks.

Now that the horse-trading is finished, let’s see what the market will choose, provided there is no further “interference” in the process.