[MUSIC PLAYING]
GEORGE S. YIP: OK.
Thanks for coming along to this.
So it's based on this book.
There are still some free copies left up front if you want them.
So I was doing the research on this book when
I was based in China at the top business school there, China
Europe International Business School, from 2011 to 2016.
And the subtitle is really the theme of my talk,
"From Imitation to Innovation."
You used to hear about how China is about imitation, now
it's about innovation.
In the early days, of course, China was just copying.
From 1978 onwards, they were copying products were illegal,
sometimes were called shanzhai which mean mountain bandit.
You see here a product called the Blockberry endorsed
by President Obama, probably without his knowledge.
On the right, something that surprise you,
this is not a cigarette packet pretending to be a cell phone;
it's a cell phone pretending to be a cigarette packet.
Just to show you how different the Chinese can be,
they actually love smoking so much some of them
wanted to pretend their cell phone was a cigarette packet.
So then China starts moving from copying to fit for purpose.
So in the earlier days--
1980s, 1970s-- China was poorer, lower per capita income.
So for practical innovations, such as Guangdong crane
moving from double welded to single welded,
so a lot of process innovations.
China, of course, makes more solar panels than anybody else.
And the critical innovation there, self-cleaning.
Because if you have a dusty solar panel,
then that's a massive problem.
So in the beginning, these are not
rocket science innovations but typical Chinese innovations.
They are pragmatic and profitable.
Then you start to see-- and I'll talk a bit more later on about
Alibaba, Taobao--
these online systems where we start seeing innovation online.
Haier, one of their biggest and probably
the most international company in major appliances, now
the world's biggest major appliance companies.
Lots of initially small innovations, like early on they
found that their washing machines were getting
clogged up in rural areas.
They discovered it was because the farmers were
using them to wash potatoes, rather than just clothes.
Now, a Western response might have
been put a label saying, do not wash crops.
Instead, their innovation was they changed the filter system
and added a label saying, suitable for both clothes
and crops.
Refrigerators, when they first moved to the US market,
they went at the lower end, such as college dorm rooms.
And they realized that college dorms were small,
so they added a folding tabletop to double up
as a desk, a trivial innovation.
Today they have a more significant innovation,
technical.
They have innovated the world's first three temperature
compartments refrigerator.
The third compartment is designed
to store the food that is the most important to Americans.
What food is that?
No, not pizza.
Anything else?
Ice cream.
What's wrong when you take the ice cream out of the icebox?
It's too hard.
And Americans don't like to wait.
So it took a Chinese company to have
this insight and then typical of Chinese innovation
to invest the R&D money and to be able to manufacture it
in an economical way.
So this is a typical innovation.
But they are now moving beyond this.
They're moving toward waterless washing machines, for example.
So genuine technological innovations.
Chinese are very customer-focused, as well.
I'll just talk about the bottom ones.
We visited a number of start-ups.
So Suzhou Nano-Micro, world class nanoproducts; SVG
Optronics, they make security films over ID cards
and so on that are higher than the quality you find in the USA
or in the European Union.
I'll talk about some of these other companies in a moment
as well.
The entire ecosystem for Alibaba I'll talk more about.
GoodBaby makes 80% of the world's baby carriages.
A typical innovation now, you hold the baby
in one arm and one button that you press folds
up the baby carriage.
Again, a typical Chinese innovation.
You have to invest in it, requires
significant manufacturing capability.
Now they start to make things that are a bit more technically
advanced, so Tencent, social networking, instant messaging
service, online gaming, and so on.
Medical devices are very big in China, aging population.
And then the intersection of online and medical devices
are going to be a very big sector in China as well.
Xiaomi, the mobile phone company,
sends out software upgrades every week
based on input from its millions of customers.
And then the bottom, Newsoft, an example
of integrating medical devices and information technology.
And these are organized to relate to each other.
So of course, with the solar panels,
we have the wind energy.
The third one, they're now experimenting
with roads using solar power to recharge
the bus as it drives along.
That also is a typical Chinese innovation
in that it requires a top-down government
to put in that kind of innovation.
Can you imagine trying to do that
in the streets of Cambridge, Massachusetts,
putting in a system like that?
On the top right, Huawei, the telecoms company,
now the largest telecoms equipment company in the world,
genuine innovation, creating a product
that ran 2G, 3G and 4G in one product.
Again, typical Chinese orientation to the customer
because this was more practical for the customer
to have only one machine.
And now investing more and more in R&D.
It has R&D centers around the world.
For example, outside Milan, Italy,
it has a microwave research technology center
hiring Italian scientists, keeping them
in the local ecosystem.
The middle row, high-speed trains, of course
initially copied.
The Chinese train company was sued by Siemens and Hitachi
but has breezed through that.
China, of course, has more high-speed rail tracks
than anywhere else in the world.
I don't think the US has a single mile of high-speed rail,
nor does the United Kingdom.
And of course, this means they also
build more trains that they're now innovating with and selling
all over the world.
In the middle, aerial drones.
China did not invent the aerial drones,
but most aerial drones are now manufactured in China.
And this is a product that's classically
suited for Chinese innovation in that innovation
for this product happens better next door to the factory.
Why?
Because innovations are to add more rotors,
to change the carrying capacity, make it bigger,
make it smaller.
There's now a Chinese one that can carry a person.
Good luck traveling in that yourself one day.
And this is opposed to say something like a mobile, a cell
phone, where you do the innovation in California
and you have it manufactured in China.
So also, this is a product that is based on metal, plastics,
and some electronic combination, again
ideal for the lower cost Chinese engineers and scientists.
And on the right, this is the mid-sized jet
that China has just test flown.
It's going to go up against Boeing and Airbus.
Why is it able to do that?
Because China buys more new jet aircraft
than any other country in the world.
It already has 500 advance orders before it is proven.
And of course, most of those advance orders
are coming from Chinese airlines who
have to buy from this state-owned manufacturer.
Initially copying, but with innovations
that they're going to add and with enforced technology
transfer from the West, which is why
we have this tariff war that's just started in the last week
or so.
Now, the internet-based innovations are different.
The traditional innovations in China
are based on low cost engineers for both R&D
and for manufacturing.
While that is less the case with internet-based companies,
or at least my interpretation, and you know more about it
than I do, is that internet-based innovation
comes from experimentation with large numbers of customers.
So China has more internet users than any other country
in the world, so this is now a great advantage for them.
And toward the end, I'll show you some visuals
about the internet ecosystems.
I won't go through them all, as I said.
You can just look at the PDFs yourself.
So our sort of model, our theory of how this happened,
is that we have four drivers, the ones in red and pink,
and we have three phases in yellow that I'll go through.
The first driver, customers.
Initially, the customers were poorer
so Chinese companies and Western companies
had to innovate in China in order to develop products
that were cheap enough.
The other thing we find is that Chinese customers
are quite different in many of their tastes from the West.
So again, different types of products needed.
Culture.
We have the entrepreneurial culture of Chinese executive,
and we include under culture the drive of the government.
The Chinese government really wants innovation now,
and the word innovation has reached the top line
of the latest five-year plan.
And the Made in China 2025 initiative
is all about innovating in China,
rather than just manufacturing.
On the right, over time, firms enhance their capabilities
to innovate, learning from Western partners
and also as they became more profitable,
investing the cash that they generated in R&D.
And two other uses of the cash are setting up foreign R&D
centers and thirdly, buying foreign companies
for their technology.
And I'll show you some examples of that.
So with this, they moved from the phase one,
copying to fit for purpose, to moving from being followers
to world standard products.
And in the third phase, global expansion,
including acquisitions.
Early acquisitions were resources
like oil fields, property.
But more and more, they're making
acquisitions for knowledge.
So here are some famous Chinese acquisitions.
Of course, the first one was by IBM's personal computer
business.
Then another example, Volvo, bought
by a mid-level Chinese company most of you
have never heard of called Geely.
One of the reasons they were able to buy Volvo
is that the Chinese government designated them
as the only Chinese car company allowed to bid for Volvo.
They beat off the non-Chinese competitors.
When they won, the CEO of Geely said,
it's like a Chinese peasant marrying a Hollywood movie
star.
And of course, they're starting to learn technology from Volvo.
Putzmeister, a leading construction equipment company
in Germany, bought by now the world's largest construction
equipment company, China's Sany.
They've even bought Club Med, which
I think is for the large, evolving leisure
market in China.
Most controversial, in the middle, Kuka.
In 2016, a Chinese medical device company, Midea,
bought one of Germany's leading robotics companies.
For the first time, the German government
said, really, perhaps we shouldn't let this go.
And the German prime minister asked a German consortium
to outbid them, but they were underbidding 20%
and it went to China.
Only on the right, finally, last year
was one German acquisition blocked, Aixtron,
under US pressure because it makes semiconductors, some
of which goes into defense.
So the US got Germany to block that acquisition.
But there will be many more such acquisitions
because the Chinese have a lot of money.
Google is probably safe for now.
So the entire Chinese innovation ecosystem is growing.
In fact, the Chinese now have more scientific publications
than the USA.
Of course, so far it's quantity rather than quality,
but the quality will follow.
And of course, it is the US and the West
that is training ethnic Chinese scientists.
So if you go into STEM program-- science, technology,
engineering, mathematics--
huge numbers of ethnic Chinese.
And China now has special government programs
to lure them back.
Also, the market is luring them back.
We visited one company that makes flexible display screens,
replacing something a millimeter thick,
replacing the entire dashboard of a car,
started by a Chinese PhD in electrical engineering
from Stanford.
But he goes back to China to start the company because cars
are being manufactured in China and it's the biggest car
market in the world.
So everything in the ecosystem is on the up.
And here is the scariest sight I've ever come across.
It was presented at Oxford about a year
and a half ago by someone representing
the Chinese Academy of Science.
22 strategic science and technology initiatives
that China is pursuing.
I'll just read out some of them.
Dark matter and dark energy; controlling the structure
of matter; artificial life and synthetic biology;
nano science; space science exploration;
ubiquitous sensing based informationized manufacturing
systems.
So they're actually going for everything, pretty much.
China certainly has the world's largest supercomputers,
for example.
All right.
So summarizing our research, we found
that there were 10 major ways in which Chinese company
innovation is different from Western innovation.
And you might think about how this is the same or different
at Google, as well.
I've got a slide or two on each one of these.
The first one is a greater focus on local needs and customers.
Now, all companies do that, but the Chinese are really
focused on local customers.
So on the left, Chinese like soy products, so
Joyung makes a soy milk cooker.
On the right, that's myself with my co-author.
We're at TCL, the world's largest consumer electronics
company.
They created a dual TV that two people can sit side
by side watching two completely separate TV
programs full screen.
You just have to wear these dark glasses with the earpieces.
And my theory is that they designed
this for a special Chinese need, which is the single child
policy.
The single child has grown up selfish
and doesn't know how to share.
So when they get married, they don't want
to share TV programs either.
So this product is designed to reduce the divorce
rate in China.
Apologies to the Chinese in this audience.
Oh, and again, a typical Chinese innovation
is that it's expensive to design and it's
expensive to manufacture but Chinese companies
can afford to do that.
Initially, number two, acceptance
of good enough standards.
This was the first mass market car in China, Cherry QQ,
under $5,000 US.
It was famous for its thousands of defects,
but the Chinese accepted it.
And if this had happened in the West, the brand would be dead.
Cherry is still a respected brand in China.
So the Chinese are more forgiving,
at least initially, because they're still
moving up the ladder.
But they didn't stop there.
So by participating in global supply chains,
they learned, and furthermore, because
the competitive situation is so fierce,
they're like Alice in Wonderland with the Red Queen.
They've learned to run very fast and stay in the same place.
So we now this concept of Red Queen competition, and this
is what happens in China as a way of enhancing
their capabilities.
Third one, incremental, not radical, innovations.
When I visited the head office of Haier,
they showed me their new range, Casarte, pretending not even
to be Chinese called Casarte.
The main innovation is that they've
embedded Swarovsi crystals on the fronts of the cabinets.
So the Chinese are not embarrassed to do anything
that will sell a product.
Another example of this, of incremental, Braun,
which starts out making gas-fired air conditioners,
has now gone into pre-fabricated buildings.
So I was in one of the buildings that was being built.
Notice they sell it like they actually talk about LEGO--
you can buy this shape, that shape, fully sealed,
air conditioning systems.
When I stayed at their on campus hotel,
you couldn't open the windows and there were no controls
for the air conditioning.
So super energy efficient, very fast to put up,
and much cheaper.
So that's, again, typical Chinese innovation.
Willingness to supply special needs.
A TV company called Hisense has a big share of the TV market
in Africa because in Africa, many villagers are too poor
and can afford only one TV set, which sometimes
has to be shown outdoors for bigger audiences,
such as for a football match.
This means that you need to make the screen brighter.
So Hisense was willing to invest in a switch and a capability
to make the screen brighter for outdoor use
and again to manufacture it.
So a typical Chinese innovation.
Using large numbers of staff.
One of our students at CIBS started a security vehicle
company.
Now, first, security vehicles seemed
to be the opposite of what's suitable for the Chinese
because the Chinese approach is to find a global product that's
the same all over the world, manufacturing it
in large quantities, standardized at home,
and ship it around.
Well, the problem with security vehicles, highly regulated
market so they're very different in different countries
and small numbers batch production.
So what the CEO did, he assigned 100 engineers
to spend a year studying needs all over the world.
At the end of the year, they came back and said,
you know what, for each component-- the doors,
the windows, the engines--
there are only about three or four variations.
So what he does now, he manufactures the three or four
variations of each component centrally
and then ships them around the world for final assembly.
So he has used large numbers of engineers
to turn a multi-local industry into a global industry.
Six, they work their stuff much harder.
There is no work-life balance in China.
I love some of these comments from the CEO of Huawei.
"Huawei people are destined to work hard for a lifetime
and to suffer more than others."
How's that for a recruiting slogan?
And boot camp, not much Google-iness
in Chinese companies.
And you know what's underneath the?
Desk the sleeping roll.
7th-- oh, by the way, I know about them working hard.
Well, I'll give you an example of that.
Fast trial and error, very pragmatic.
So Dung Xiaoping, the leader, talked about crossing the river
by feeling the stones.
The CEO of GM China talks about failing
in a government-sponsored direction, electric vehicle.
By the way, I predict that China, of course,
will be the first country in the world
to be serious about electric vehicles.
They have the need because of their pollution problem,
they need a lot of vehicles, and they're
going to solve the chicken and egg problem of the charging
stations because with a top-down government
they are installing charging stations are over the country
and they'll have forced incentives
to make people buy electric vehicles, rather
than gasoline-based ones.
Less formal, faster processes.
We found that everything in China was faster.
A specific example, we're working
with a major European multinational who
bought a Chinese company in one of its sectors,
and we helped them compare the length of the innovation
process.
The European process was 24 months,
the Chinese process was 12 months.
So we then helped them converge on an 18-month process
to convince headquarters to allow them to go from 24 months
to 18 months.
They couldn't go to 12 months because the Chinese
took too many shortcuts.
Or Tencent's WeChat the gray release
one million user experiment so that they're able to do again,
large numbers in China.
More intervention by the boss.
As you know, China's very boss-oriented.
In the West, it's 90% process and 10% boss;
in China, it's 30% process and 70% boss.
On the right the CEO of BROAD.
He actually said to me, "I'm responsible for 95%
of the innovations at BROAD."
That was an astonishing statement.
One, if it's true; and two, that he should say it.
Even Steve Jobs wouldn't have said that.
And I know Chinese bosses.
My father was a Chinese boss.
He once said to me, "Son, you should never contradict me,
especially when I'm wrong."
But interestingly, for those of you who are not Chinese--
even for myself, I'm from Hong Kong originally--
you may think of the Chinese as being very obedient.
Well, Chinese are obedient only under some circumstances.
Chinese are very obedient when they
are observed by a superior, whether in a company
or in a family setting.
In a family, there's always a relationship of superiority,
your parents, et cetera.
So when they're not supervised, the Chinese
are very disobedient, hence the saying, [SPEAKING MANDARIN],,
"the mountain is high and the emperor is far away."
And if you think about other cultures,
there are some cultures where people
are very obedient whether or not they're observed.
These are the cultures, for example,
where people stand at a red light
when there are no cars around, classic examples being
Japan and Germany.
And there are other national cultures
where people are very disobedient whether or not
they're observed, and these are economic basket cases.
I don't even need to name the countries,
you can figure them out for yourselves.
But China is on one diagonal.
And indeed, there are some other cultures
that I've experienced where people are obedient if you
don't observe them too much and they become disobedient
if they feel you are watching them too much.
And I found that to be true of the Netherlands
and other Scandinavian cultures.
Which is Google?
Is it more like the Scandinavian culture where
you like to be left alone?
Right.
So the Chinese are the exact opposite.
Closer to government, of course.
So Chinese companies benefit from having
a lot of government support.
So if we summarize this, China has a triple threat winning
trifecta.
They have the manufacturing capability,
which India doesn't have, even though India has the second one
scientific and technical capacity.
China has more of that, as well.
So China now, on the second point,
can pretty much absorb most new technological and scientific
developments.
Yes, they're still behind the US,
but there is a rapid catch-up, particularly in digital,
for example.
And a huge domestic market, as a result
of which they can start and improve
at home before going global without necessarily bringing
out world class products to start with.
And they can challenge any global incumbents,
as I've shown in the case, say, of the commercial aircraft.
Even Japan could not go up against Boeing and Airbus,
but the Chinese state-owned company is doing that.
This has happened only twice before in history.
Which countries have these advantages?
First of all, it was the British empire--
not Britain on its own, but the entire empire--
[INAUDIBLE] the market.
And then, of course, the United States
after the Second World War.
Now it is China's turn to have these three advantages.
If we now look at it from the viewpoint of Western companies,
we talk about why learn from China?
Because China is an emerging lead market; China's customers
are young and extreme, you know the concept
of learning from extreme users.
In China, they'll try anything.
So for example, the way the Chinese
learned to drink wine, initially the Chinese mixed wine
with Coca-Cola to get used to it.
And particularly in food, we see all kinds
of innovations like that.
But they're now increasingly sophisticated or even leading
demand.
There are now a lot of very wealthy young Chinese,
and you will see them around the streets of Boston,
as well, the fuerdai, the second generation rich.
They're probably not working at Google,
but they are the ones who are buying
the most expensive fashions.
China's pressing need for solutions,
such as in pollution, starting to lead the world now
in environmental solutions.
As I said before, they're more forgiving
because most people there are first generation
or second generation consumers, so they'll try things,
they don't have to buy what their parents bought,
and if you get something wrong they'll move on and forget.
Market reasons.
Among the world's biggest and most categories,
biggest for cars, biggest for trains, biggest for airplanes,
and so on.
And high diversity in differences,
even more so than in the United States
because of the temperature differences,
climactic differences.
A specific example, Sany, the construction company said,
a Western construction company might
have two or three models per product,
such as crawler-loaders.
But because of the diversity of soil conditions in China
and because of so many different building projects,
we'll have seven or eight different products instead,
so more innovation.
Because of the size of the Chinese market,
the niche in China can be a whole market
in some Western countries.
And then reverse innovation, when
you invent something for the Chinese market
but it could be sent back to the developed world.
So the most famous example of that
is General Electric's ultrasound equipment, initially
a $150,000 machine that was too expensive and complicated
for Chinese hospitals.
So GE put together a team to create a handheld device that
was about $20,000.
So it succeeded in China, but it's
been reversed back to the US not to displace
the $150,000 machine but for new uses such as in doctor's
offices and in ambulances.
Thirdly, competitors.
Very intense competitors breeding winners
and they're starting to go global as well.
So competition in China is fiercer even than in the USA.
So we summarize this by saying that Western companies must
learn some capabilities from China.
The first one, bold experimentation
and rapid iteration.
This is particularly true, say, for Europe,
where companies have become too conservative, too
much regulation.
They need to go to China to relearn bold experimentation.
Secondly, innovation through creative adaptation,
adapting to create new products, new product categories,
lean value.
I mean, all companies focus on lean value,
but even more so in China, where it's more important.
And the fifth one, that we're quite surprised by,
is that while, say, Japan wasn't much use for developing
foreign managers because it was so ethnocentric,
China is very open to foreign managers.
So if you send someone there, they
get the chance to manage Chinese people, people
from other countries.
So we now have a saying, to paraphrase Frank Sinatra's
song, Shanghai, Shanghai, if you can manage there,
you can manage anywhere.
So I'll just go through a few brief slides on e-commerce.
China now has a bigger share of e-retail
than anybody else in the world and by 2020,
it's predicted to have 60% of global e-commerce
because Chinese live on their mobile phones, cell phones
much more than other countries.
I mean, I think Koreans are more,
but it's a much smaller country.
Selected percentage of countries who
have bought something in the past 12 months.
China 68%, way ahead.
I mean, you know some of these statistics
because it's your business.
So a surge in internet and mobile payments,
third party mobile payments, transaction value,
incredible speed of growth of this.
Some statistics on the types of products that they're buying.
And Apple made a late entry into this
and is not doing that well, compared with the incumbents.
There's a comparison here between Alipay and WeChat.
WeChat is starting to catch up with Alipay, the green line
below.
There's a comparison that you can look at.
And the last three sides, three emerging disruptions.
This was created by one of my colleagues at CIBS.
Rapid rise of connected on-demand mobility
and digital mobility.
So digital mobility very important in China.
Again, something you might expect because
of the cities being so crowded.
The link between hardware innovation and the economics
of the digital ecosystem.
China is more ready for this.
And then thirdly, data-driven insight.
So Chinese service businesses really mine their data.
And there are emerging service companies
that are disrupting, for example, the automobile
services.
So won't go through this, but you
can see that at least in mobility,
a lot of things going on.
And you study this at your leisure.
As most of you know, Uber lost out
in China, defeated in China by the incumbent company,
and they ended up selling their stake
to the Chinese company in exchange
for a share in the combined business.
One of the interesting mistakes that Uber made
was that it was possible for the drivers to cheat Uber.
Because if they got a friend to book a ride and then the friend
canceled the ride, the driver still
got a percentage of the fee, which was really dumb of Uber.
Because if in China there is a way for someone to cheat you,
they will.
And the last slide, the famous BAT,
if you've ever heard that phrase, Baidu, Alibaba,
Tencent.
This last slide is about the ecosystems
that they have built up.
So we have 15 to 20 minutes for questions.
Thank you for listening to this.
[APPLAUSE]
AUDIENCE: So you were just talking about data mining.
I had a question about that.
How do the privacy policies of the Chinese
compare to Western countries?
GEORGE S. YIP: What's privacy?
AUDIENCE: Ability--
GEORGE S. YIP: No, no.
No, I'm serious.
The Chinese word for privacy has negative connotations.
It implies something a bit shameful that you want to hide.
My wife, who's English, learned this
when after we'd been married we went to Hong Kong.
So there's much less of the concept of privacy.
And of course, the government in China
is entitled to look at any of your data.
All right.
It's just like Facebook.
So privacy is much less.
Well, I mean, do you guys know about the new development
in China of the good citizen index?
China is working to create a good citizen index--
that's not the exact phrase--
but based on your behavior.
And after that, you will be blocked
from buying airline tickets, renting cars jobs, et cetera
because you have a bad citizen behavior rating.
So no privacy.
AUDIENCE: I think I read somewhere
that part of the reason for China's expansion
on like mobile payments is because they
don't have the existing infrastructure of credit cards.
Are there any other examples where China kind of skips
past something into innovation?
GEORGE S. YIP: Yeah.
I mean, that's the best example.
Not only do they not have the credit card infrastructure,
they don't have the banking infrastructure.
So many Chinese, a very high percentage,
don't have bank accounts.
So they jumped straight to mobile.
So that's a big advantage for them.
Yeah.
I mean, a related example of this is bike rentals.
I don't know how much there are in the US,
but in London and Paris we have these bike rental services,
but they have docking stations.
So Chinese companies invented bikes without docking stations.
It's done entirely digitally.
It locks the bike so you can leave a bike anywhere.
Now, there have been huge problems
because they then get these mountains of discarded bikes.
But again, that's a different Chinese solution.
No infrastructure so they come up
with a new solution where you can take the bike anywhere.
So these are some of the examples
of the leapfrogging because they don't have
the previous infrastructure.
AUDIENCE: So your slides show kind of the ecosystem in China,
but there's a lot of technology that is forcibly not in China.
For example, lots of restrictions
on Google in China and we can't really have a presence due
to the government.
Have you looked at kind of the global usage
by Chinese users of different technology sets?
GEORGE S. YIP: Well, I mean, the reason why
Google is blocked in China--
I mean, there are two reasons why Google is blocked in China.
One is that China wanted to protect
its incumbent companies.
And then secondly, because Google
was trying to protect the privacy of its users,
and China doesn't like that.
That's the main thing.
Now, yes.
Not your exact question, but it is a problem
for Chinese researchers.
Because of the blocks on access to the internet,
they cannot access everything they need to do.
So one of the solutions they have
is that Chinese companies will open a research office
in Hong Kong, where there are no blocks,
and then they do the internet search that way.
For a while, researchers, including business school
professors, used--
I just blanked out--
there's a technology where you can get past this.
Now, China's what is it called the--
AUDIENCE: VPN.
GEORGE S. YIP: Yeah, VPN.
But now China's blocking that again
and it's illegal to have VPN.
So I mean, the astonishing thing when the internet started
was that people said, there's no way China can control this.
But I think there's up to a million people
working on controlling the internet.
So again, this is use of the large numbers.
AUDIENCE: So you mentioned that oftentimes, Chinese students
will come to the US to get educated
and then there's incentives for them to go back to China.
And I've heard some people have the perspective,
why should we educate if they're just
going to take education and go back to their country
and not stay here and contribute?
How would you respond to that and what's your stance
and thoughts on that?
GEORGE S. YIP: I, mean that that's a complicated policy
issue.
And luckily, I'm not a politician
so I don't have to make these decisions.
I mean, what we've found through history
is that you usually improve relations with a country
if you educate people.
They go back with very views of the country.
Although interestingly, 20 years ago,
the Chinese would deliberately give very small living grants
to the students.
They wanted them to experience the worst of the USA, not
the best of USA.
Think about it.
They wanted them to live in the poorest places in the US
and not become too fond of the US.
I mean, Chinese students are now richer.
More of the ones who come out often have wealthy parents.
So we often see these policy items the other way around.
Why are countries like the UK and the US throwing out
these students after we've invested in them
and we want to keep them?
So it's a difficult solution.
Donald Trump hasn't gone off of that yet, I think,
of blocking Chinese students.
But who knows.
AUDIENCE: I think many people would
argue that the long-term viability of China's innovation
is threatened by the increasing gap in social inequality
and even those three huge companies sucking up
all of the ecosystem, whereas perhaps others would
argue that Western economies have more room for innovation
because of less regulation.
So I guess could you comment on the future of China's
innovation and then also how you see
a growing divide in the rich in China and the poor in China?
GEORGE S. YIP: The income inequality
is triggered by what's called the Hu code
system, the residency system, where you're not
allowed to live in a city without getting
a special permit.
And in general, the cities block that because once you're
allowed, then you can access all the services--
medical services, education, et cetera.
So a lot of the lower level jobs in China
are done by people who are nonresidents
who are there semi-illegally.
And sadly, their children cannot go to school.
So they have to leave the children back
in the countryside be brought up by their grandparents.
So this is actually a massive problem
that they literally don't know how
to solve right now affecting maybe 100 million people.
But I don't think that's necessarily
going to block innovation per se because the innovation is
happening at an upper level, the scientists and the engineers.
Secondly, the nature of China is that it
is state-driven innovation, but there are lots
of private companies as well.
So many of the most innovative companies like Alibaba;
Royole, which I mentioned, the flexible displays, these
are strictly private companies that
are sort of benefiting from the Chinese innovation ecosystem.
And the question I haven't heard yet,
but people often ask me is, well,
if China is like controlling people,
doesn't that stop innovation?
Well, China doesn't care so long as you do not
seek to overthrow the Communist Party.
If you're just innovating and making money,
they're happy to support you.
So I really don't necessarily see that as a problem.
Or even by the dominance of a few companies.
I mean, if you look at the history
of the US, many industries like the automobile industry
from the 1930s onwards, have been dominated by two or three
major companies.
In fact, in China the problem isn't too many monopolies,
it's too many competitors.
We actually have coined a phrase in our next book
with some different co-authors about swarm innovation.
We have an article coming out soon about that.
There are swarms of Chinese competitors.
So there aren't too few Chinese competitors,
there are actually too many of them.
AUDIENCE: What do you think are some of the challenges that
are facing China in this space and what
are their leaders worrying about the most?
GEORGE S. YIP: Well, if I just talk about innovation,
education system is inferior.
The education system, top down, traditional.
Of course, that doesn't stimulate so much innovation.
The PhD student will do the work of the professor, et cetera.
So they're aware of this.
And guess what, they're paying the USA
to help them solve the problem.
So Duke University has a program in China
to teach Chinese university lecturers
how to teach their students to be
innovative like the Americans.
So once again, America is teaching China
how to compete with America.
So that is probably the biggest problem.
A secondary problem is the Chinese language, which also
affects the education system.
It's hard for other people to learn,
it takes up so much time and brain space of children.
I have my own personal prediction
that mobile phones are helping to solve this problem
because more and more now, people
are using the cell phones to spell for them.
Actually, older people are complaining about this.
I could see this being outsourced to cell phones.
AUDIENCE: One area where the US lags pretty severely
behind the rest of the developed world
is the health care system.
And you've mentioned kind of in passing
kind of the innovations in medical technology and health
in China, and I'm wondering what can the US learn,
what can the US take from that?
GEORGE S. YIP: Well, China doesn't have a great health
care system, either.
It's surprisingly private.
People have to pay a lot.
So the whole state health care system
has kind of withered away post-communist economic system.
So you can get some services, but for example, people
have to pay doctors on the side to get any serious treatment.
There's a terrible incentive in that doctors make money
by selling medicines, so they over prescribe their medicines.
But again, going back to the technology part,
they may start to leapfrog this by digital, et cetera,
and making it faster.
I did have one experience myself.
I had to go through a health check.
And a typical Chinese approach, it was like a production line.
Whereas in the West, I'd have gone
you know from floor to floor to the x-ray department,
to the blood department, and so on, here it
was a small building with a corridor.
First room, chest x-rays; second room, blood test;
third room, eye test.
So it was like production line and the whole thing
cost $100 US, which would cost you $1,000 in the US.
AUDIENCE: We all know China has the largest market
in the world for many things.
So many Western companies tried to enter the market
without much success.
What's your view on the top reasons why Western companies
often fail in the market?
GEORGE S. YIP: Good question.
But to be fair, many companies have also succeeded.
So reasons for failure.
If you go into a sector where China
is trying to develop its own competitors,
they will make life very difficult for you.
They have hidden regulations they can pull out
to make it difficult for you.
So long as you are contributing something
that China doesn't have, such as the Western auto companies
over the last 30 years, they're happy to welcome you.
I mean, I teach international business.
It's the same principle.
You've got to bring something to the country
that they don't have.
So if you have that, then they will welcome you and not
make life too difficult. Then partners--
for a long time, you needed a Chinese partner.
Some were good partners, some were bad.
There's a Chinese saying, [SPEAKING MANDARIN],, same bed,
different dreams.
So sometimes the partner was a nightmare, so to speak,
following that analogy.
So that's a reason why it could go wrong.
But really, I think Google's case,
you actually came right up against a central policy
of the government, which is the privacy issue,
and that's why you've been banned from China.
Plus secondarily, other companies like eBay--
the privacy issue-- they wanted to protect their emerging
companies.
That's why.
So there are still opportunities,
but not in areas like that.
AUDIENCE: So one thing that I've noticed about competition
in China is that it's a very free-wheeling
from of competition.
If you have an idea, there will be a million competitors
doing the same thing, maybe better, maybe not.
That's a very hard situation for external companies
because here in the US, for example, there
is a strong law field of patents and IT protection.
So how can anyone think of getting to the market in China
in such a situation where there is a feeling that everything
will be stolen?
GEORGE S. YIP: Yes.
Actually, what Western companies are doing more and more
is that instead of selling products,
they're now selling business models.
So if you're going to embed the product in a business system,
that is much harder to imitate against.
So selling the service based on the product, rather than
the product itself or rapidly innovating
to keep ahead of the imitators or having superior technology.
There are ways to protect your intellectual property
so that it can't be fully imitated.
Interestingly, the auto companies
are still ahead in China.
This may be a good item to finish with, actually.
I was told by one of the German automotive companies,
they said, the reason we're still ahead
is that in the West, the auto engineers grew up
being taken to repair garages by their father
or their grandfather.
So they've had this since childhood,
these automotive engineers.
In China, the automotive engineers are first generation.
They don't have this deep background.
And cars are this very complex combination
of being a consumer product and being a highly engineered
technical product.
So actually, they're going to have more difficulty in cars
than they have, say, in commercial jet aircraft.
And in fact, interestingly in cars,
they don't particularly want the ultimate driving machine,
like a BMW; they want the ultimate mobile living room
because that's a different kind of experience
that they want in China.
There's a great story about BMW, which is that in China--
this will be my last comment--
there was a dating TV program in China,
just to show you again Chinese culture.
And a young woman on the TV program
was asked by a young man, he said,
I'm not very rich so would you go on a date with me
just on a bicycle?
And she rejected him and said, I'd
rather cry in the back of a BMW than smile on top of a bicycle.
So that's Chinese culture.
Thank you very much.
[APPLAUSE]