18.09.19

Made in China: Leading the way

Made in China image use

‘Made in China’ is often viewed negatively, but as Paul Milligan discovers things are changing. China is now producing products of comparable quality to the rest of the world, is rapidly growing a skilled workforce, and has become the major R&D and innovation hub.

Once a reputation has been established, albeit fairly or unfairly, it can take years or even decades to shift. And that is the current problem China has.

The dominance of Chinese manufacturing, driven by low labour costs, has seen mass- production of goods shift to China. Whilst this has driven down costs it has also seen quality drop too, leading the phrase ‘Made in China’ to become a byword for cheap goods (in both senses of the word). It has also been dubbed ‘copycat China’ because of a relaxed attitude to copyright law, which has seen cheap copies of well-known goods hit the market. Is the stigma around ‘made in China’ fair, or have we moved past that now?

“It’s pretty obvious I think made in China doesn’t evoke a sense of quality,” says Benjamin Joffe, partner at Hax, a VC fund specialising in hardware with offices in San Francisco and Shenzhen. “All Apple products have ‘designed in Cupertino’ written on them but are assembled in China.

“So this type of made in China is fine, but for a product created by a Chinese company and sold overseas I think we are still at the transition moment.”

The stigma has gone says Justin Knox, marketing director from Chinese video processing manufacturer RGBlink, “but there are still some reservations and assumptions about price and quality/performance. I think we can see the leading companies are moving up the value chain in a similar way that other Asian economies have done, however the sheer size of the Chinese market means there is a very wide spread (of companies).”

Christian Czimny, R&D director Europe, from Chinese LED manufacturer Absen feels the stigma is firmly in the past. “We have the same level of quality that we did in the past in Europe. It took time to get to the same level, but everybody knows if we look around depending on the area of subject, that China is moving ahead,” he says.

The Chinese authorities must take some credit for this change, with the Made in China 2025 initiative created precisely for this purpose in 2015. In Christina Larson’s article in Wired Magazine titled ‘From imitation to innovation: How China became a tech superpower’, she describes how it engineered this change.

“China’s leaders decided they wanted the country to be known for a new kind of electronics– not only ‘Made in China’, but ‘Designed in China’. The authorities can’t exactly whip up innovation by decree, but the local government can influence real estate – and through a series of incentives and edicts, it began swapping out tenants. Many of the cheap electronics vendors packed up their boxes, while new technology businesses moved into refurbished office spaces: start-ups, investors and even patent attorneys.”

So are we now entering a phase of ‘designed in China’ rather than ‘made in China’? Is China now becoming a hub for R&D not just for manufacturing? “Made in China 2025 saw the Chinese government recognise the importance of developing IP and patents, not just copying other ideas then reducing the BOM and manufacturing costs,” says Samantha Phenix, VP R&D from Chinese LED manufacturer Leyard.

“Just look at the increase in the number of patents filed: In 2006 there were 1,066 Chinese patents filed with the USPTO, this increased to over 11,000 in 2016. In 2017 China moved into the number two position for filing patents with the WIPO, closing the gap with long-time leader, the USA,” she adds.

For everything electronic China is the major place in the world to make things says Joffe. “When you talk about R&D, sometimes people imagine flying cars and flashy sci-fi type robots. But innovation has lots of shapes and forms, it could be a service innovation, a business model innovation, as much as it could be a scientific breakthrough. Even a company like Apple does a good chunk of its development phase in China, with its suppliers and partners.”

Foxconn, a Taiwanese contract manufacturer which employs over one million workers in China is often held up as the archetypal Chinese electronics factory model (low wages, high productivity), but holds international patents in everything from electrical machinery to AV technology. Foxconn is also developing industrial robotics in Shenzhen and has signed a joint venture with Sharp to build a an $8.8bn plant in Guangzhou to make advanced LCD displays. Shenzhen mobile phone manufacturer Huawei is another spending big on R&D, in fact it spends more than Apple does on it. Fifteen per cent of its revenues are spent on R&D, with 82,000 of its 180,000 employees devoted to R&D. Shenzhen itself spends over 4% of its GDP on R&D, double the mainland average, in Nanshan the share is over 6%. So R&D is absolutely everywhere in China.

One of Shenzhen’s start-ups causing the most buzz is Royole (company slogan: We invent the future), which is expanding the output of the world’s thinnest foldable full-colour touchscreen display. The company, founded by Stanford University engineer- ing graduate Liu Zihong, is currently valued at €3bn and is investing €2bn in a new automated factory and integrated R&D complex.

In the LED world everything is being led by Chinese companies right now says Czimny. “It’s not being driven by a few European companies, or by Japanese companies, it’s now definitely being totally driven by Chinese companies. If we have a look at devices like IMD, micro LED, mini LED or the big actual topics, then it’s all Chinese development.”

Is there a hunger for innovation in China that we don’t see elsewhere? “The excitement of cities like Shenzhen is infectious, there is so much development on all fronts with the city is growing extremely fast - that excitement is providing an environment where people feel the freedom to create and innovate,” says Knox.

Innovation can be found right across all forms for technology in China, for example Huawei is one of the world’s most prolific generators of international patents, and is at the forefront of 5G technology, which will be in every phone in the next two to three years. China is leading the way in cashless systems, in 2016 China’s mobile payment market was 50 times the size of that in the US, according to research firm iResearch. And it’s not Apple Pay or PayPal that Chinese consumers are using, instead it is Chinese companies Alipay and Tencent’s WeChat Pay. China also leads the way in drones, thanks to Shenzhen-based start-up DJI. It controls nearly three-quarters of the consumer drone market, has 1,500 employees just in R&D, is valued at €8bn with 80% of its sales come from overseas.

So now that China is expanding from manufacturing to the creation and design of products does it have the right people to do it? Just how deep are Chinese engineering skills? “Look at the number of engineering graduates, each year 30% of the almost seven million students in China graduate with an engineering bachelor’s degree, compared with 5% in the US, and China produces 46% more computer science and engineering degrees than the US,” says Phenix.

Chinese universities historically have not offered the same educational standards of those in the West, forcing many to study abroad. Indeed, one-third of the 1.1m international students in the US are from China (the number is higher in the UK – 41%). Since Donald Trump became its president the US has tightened rules for Chinese visa holders in some STEM (science, technology, engineering and mathematics) fields, leading Chinese authorities to look inward. The Double World Class Project will select 42 Chinese universities for a project that wants to have all participating schools ranked as ‘world class’ by the year 2025.

Like any part of society, innovation often comes down to money. Because China is seen by many (alongside India) to be the next great emerging economy, is there now the money to invest in new tech and to expand tech companies in China that’s not evident elsewhere? “I think so,” says Phenix.

“And the most important thing for me is that they have the full support of the government. Also, I think there is a recognition they have to innovate to reduce their reliance on the US and EMEA (primarily Germany) in order to address their own growing consumer demands. And there is the threat that their economy will slow down if the traditional manufacturing business is outsourced to other developing countries such as India, Vietnam and Indonesia.”

China has the largest number of unicorns (a privately held start-up valued at over $1bn) outside of the US. It overtook Europe in 2014 as a destination for venture capital, according to PricewaterhouseCoopers. Three of the world’s top five highly valued private companies are Chinese, Didi (China’s Uber) phone maker Xiaomi, and e-commerce firm Meituan- Dianping. “China is the second largest source of venture capital in the world, they invest huge amounts in local start-ups and local companies,” says Joffe.

It’s a measure of how forward thinking the country has become that it is leading the way for tech start-ups, normally the preserve of Silicon Valley. “China is very happy funding start-ups,” says Joffe. “The government is providing some, but there’s also a huge amount of private money going into Chinese start-ups. A lot of early indicators are very encouraging, if you look at the top tech companies in the world, there’s a growing number of Chinese companies at the top. And not just Alibaba and Tencent, more recently you have Didi and Meituan, and a bunch of others, including very deep tech like image recognition or automation or AI.”

Final word goes to Benjamin Joffe: “The desire in China is to build a global company with a global level of quality,” highlights the changing internal attitude to manufacturing and R&D. China is coming make no mistake about it, it always had quantity on its side, now it has quality as well.