5Cs of Chinese Innovation

This column illustrates how China is innovating, though in a different way we are used to in the West. It is a guest column written monthly for the Chinese business magazine “China Electronic Business” (invested by Jack Ma of Alibaba) and IT news site Interfax.

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A few weeks ago Plus8Star was involved in bringing a group of 30 Silicon Valley entrepreneurs and investors to Tokyo, Beijing and Shanghai to learn about the state of Asian web and mobile innovations.

During their visit, I contributed a talk about China’s innovation in the digital space. There were many ways to go about this topic as there are many ways to define “innovation”. Does it have to be a first? Does it have to be profitable? Does it have to be a technology or can a business model or process qualify?

First off, I do not think innovation has a nationality. Different environments (IT infrastructure, availability of talent, capital, legacy industries, and culture) can be more or less fertile grounds for different types of innovation. Hence, what could be China’s advantages?

After spending some time thinking about it and 9 years in Asia’s web and wireless industry, I am happy to share with you the result I named the “5Cs of Chinese innovation“. Let’s get started.

1C : Copy
The line between copy and “inspiration”, “benchmark”, “best practice”, “proven model” is thin, and is often in the eye of the beholder. Chinese entrepreneurs are kindred spirits to Facebook and its latest re-design inspired by Twitter. The fact that venture capitalists understand better and fund happily known models surely helps too.

2C : Competition
Would a company innovate as much without competition? Think about government-run monopolies and you might get a hint. China has a handful of local copycats appearing within weeks of a company being featured on TechCrunch (a famous website focused on profiling innovative startups). There are 3 well-known Facebook copycats and a company recently released a service that could be named the “Wordpress of Facebook-like SNS” (Manyou, by Comsenz). Those unable to innovate on top of what they copy do not stay long after they burn the initial investment money.

3C : Combination
People looking at Tencent for the first time are generally underwhelmed by its looks. It combined ICQ messaging with Cyworld-like avatars (Cyworld is Korea’s largest social network) and Hangame-like casual games and virtual goods (Hangame is Korea’s largest casual gaming portal). The company made a billion USD in 2008 and over 400 million USD net profits (see our published report here).

4C : Constraints
Compare “write a romantic message” and “write a romantic message in 140 characters”. Do you feel more creative with the latter? Constraints support creativity. The average income of a Chinese internet user is about 400 USD per month and China does not have a strong online advertising market. In addition to make most web 2.0 ventures doomed from start, this pushed some to experiment alternative revenue models. The Korea-originated micro-transaction model made China the world leader in virtual-goods based online gaming. A mobile couponing company came up with the best business model we have seen so far globally, making it appealing for users to pay small amounts to redeem coupons. When the low-hanging fruits (media and ad revenues) are too small, you might find a juicy harvest if you climb up the tree.

5C : China
So far, none of the above criteria was specific to China. Some are shared by all countries and some mostly by developing economies. Where could be the “China factor”?

1. Scale

300 million Internet users and 700 million mobile users is a lot. Tencent and online game companies make billions literally from gathering cents. Some business models work thanks to this scale.

2. Demography

A consequence of china’s development history and social policies: 70% of Internet users are below 30 (versus 30% in the US), have few entertainment options and generally no siblings (the “one-child policy” began in 1979).

Those elements act as catalysts and orient strongly the development of China’s digital space. Instead of being driven by wealthy techies, it is mass-market and entertainment-focused. The “downside” is that most innovations, so far, are not high-tech.

Could China NOT innovate?

As the world’s factory, China understands clearly that the higher value in the chain is in consumer-facing innovative products. Chinese web and mobile companies are already innovating at home and it is a matter of time before they start to export the most suitable services to foreign consumers in addition to foreign stock markets (Sohu’s game subsidiary Changyou was the first company to list on NASDAQ this year, for over a billion USD, read here our interview by The Economist about it).

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+8* | Plus Eight Star decodes Asian innovation to adds its ADN to your services.