Xiaomi or Apple – two innovation strategies for China

By John Ross
0 Comment(s)Print E-mail China.org.cn, April 13, 2015
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Far from Xiaomi to be criticized for the similarity of its product launches to Apple, it illustrates the company's strategic strength – everything about a Xiaomi phone is as good as an IPhone but the price is 50 percent cheaper. But if Xiaomi marketers' job is to maintain the high quality image, its engineers' job is to keep the price down while maintaining the quality. Xiaomi's huge success rests on two different strengths: the excellence of its branding in projecting an image of product quality, the excellence of its engineers in ensuring that the product really is of high quality. The overall strategy remains "cost innovation" – Xiaomi is not fundamentally attempting to produce a better product than the iPhone, it is attempting to produce a product as good as the iPhone at a much cheaper price.

The reason only "cost innovation" can be the foundation of such a successful strategy as Xiaomi's is because China is no longer a low wage economy. The Economist calculates China's average factory worker earns $27.50 per day, compared with $8.60 in Indonesia and $6.70 in Vietnam. China can no longer compete on price through low wages; instead it must rely on keeping price down through innovations in technology, management, logistics etc.

This contrast between Xiaomi and Apple exemplifies the necessary strategic direction for innovation in China's economy as a whole, because which innovation strategy is more effective cannot be separated from the overall level of a country's economic development.

China's per capita GDP in 2014 under the IMF Purchasing Power Parity (PPP) calculation was 24 percent of that of the U.S. This means, in approximate terms, that the productivity of China's overall economy was slightly under one quarter of that of the U.S. Even with the most correct policies in China, and despite the recent overall slowing of the U.S., it will evidently take China several decades to close that gap. Therefore for several decades, China, on average, will be behind the "technological frontier" set by the most productive and advanced economies.

Thus, China's strategy must necessarily focus on cost innovation – to produce the same, or more precisely a qualitatively comparable, product but at a lower price.

Xiaomi is therefore successful because it has a very skillfully executed strategy in line with China's economic fundamentals. The alternative strategy, "product innovation," the attempt to compete by producing a phone which is qualitatively better than the iPhone, could not succeed in China. To avoid misunderstanding it should immediately be clarified that this is an average. It does not mean China cannot introduce any new products, and China's companies have become extremely skilled at incremental improvement even of leading products. It merely entails that product innovation cannot be the dominant form for China's successful competition.

To illustrate this historically, China's per capita GDP in 2013 was 21 percent of that of the U.S. – the "technology frontier" economy. This is equivalent, relative to the U.S., of the position of Japan in 1951 or South Korea in 1982. At those times, Japan and South Korea, as with China today, were no longer dominated by agricultural populations but had evolved into upper middle-income economies. In the next decade after these dates, Japan and South Korea led the world in steelmaking, shipbuilding, construction equipment and similar mid-technology industries – exactly industries where China is becoming dominant today. But Japan and South Korea at that time did not equal the U.S. in "product innovation," due to the huge gap in per capita GDP, and it is similarly utopian to believe China can.

The outstanding successes among Chinese companies – Huawei, Wanxiang, CIMC, Xiaomi, for example – involve those that have mastered cost innovation, and that should continue.

China's rising wages mean innovation is the key to its economic development. But China's macro-economic fundamentals determine that it will be "cost innovation" not "product innovation" which will be decisive for China's companies for several decades.

The writer is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/johnross.htm

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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