China needs rules-based legal environment that can protect intellectual property

Against a background of slowing economic growth, China's new 10-year plan to upgrade its manufacturing sector was issued by the State Council last month.

The plan targets 10 key sectors, from information technology to computer-guided tools and robotics, to medical devices and agricultural machinery. It also lists nine priority tasks, of which innovation has been cited as the most important by Li Beiguang, deputy head of the planning division of the Ministry of Industry and Information Technology.

The spectacular rise of Chinese manufacturing since the late 1990s has made China the largest producer of manufactured goods. The country has become the center of a huge Asian industrial complex. Chinese labor costs rose at about 15 percent a year in dollar terms between 2001 and 2012, according to the Economist Intelligence Unit, and continue to rise at the same rate.

Low value labor-intensive manufacturing processes are being outsourced to Southeast Asian countries that can beat China on cost. This Asia-wide industrial machine was set up to service China's export markets by companies specializing in sourcing for Western markets, like Li & Fung, a firm based in Hong Kong.

But while exports remain very important to Chinese employment and its economy, China's manufacturers must increasingly look for future growth at home. Since 2010, the main market for China's products has started to shift away from the United States, Europe and other export markets toward China's fast-growing, huge middle class.

Chinese customers are choosy buyers, often traveling overseas in order to shop in developed markets where they can be sure of quality, and where they often receive better service than at home. Meanwhile, other Asian countries have occupied the low-cost manufacturing territory that used to be China's. China's own motor vehicle manufacturers struggle against foreign car brands like Mercedes and BMW, even though the foreign cars may cost several times more. In mobile phones, Chinese consumers treat Samsung's and Apple's smartphones as premium products next to phones from Lenovo, Xiaomi and Huawei.

The recent decision by China's government to halve import duties on foreign imports to stimulate Chinese private spending means less protection and even more competition for China's own manufacturers, whether in machine tools or high-end consumer products.

Against this background of rising labor costs, price competition from Asia and choosy Chinese buyers, China's deeply rooted culture of industrial copying is the enemy of the innovation necessary for China's manufacturing to compete with the world's best, which the Chinese government is trying to encourage. Industrial copying comes from the pressure to generate revenues and profits. By contrast, innovation, particularly in the early stages, may not be related to revenues or profits at all. A genuinely innovative culture requires its own risk-taking, hungry, determined mindset.

Some innovations are market-based, like the stream of new, consumer-oriented electronic products from Apple, starting in 2005 under Steve Jobs' leadership. Other kinds of innovations are based on new processes or on technological improvement.

My own family firm, Chance Brothers, developed a stream of new glass products starting in the 1830s in England. It led the world in lighthouse design from the 1850s until the 1930s, building 45 lighthouses in China starting in the 1870s.

The company operated by a motto: "Make it ourselves". Whenever it could, the company made its own machines, because it wanted to ensure quality and keep its processes secret. Chance Brothers invented the glass microscope slide in 1840, and it was the only world supplier of microscope slides until the 1880s. The process that the company invented was not replaced until 1949, more than 100 years after its invention.

In 1952, Pilkington, another innovative British glass manufacturer, acquired Chance Brothers for its highly profitable and proprietary process for making patterned glass. Pilkington invented the flat glass technique used, under license, to make all the world's flat glass starting in the 1960s. Pilkington's own acquisition in 2006 by a Japanese glass company, NSG, was a consequence of the end of Pilkington's dominance of the world market for flat glass.

It's well known that, once upon a time, China was a great innovator, successfully guarding the silk manufacturing process for thousands of years until it passed along the Silk Road to the West. In the 1940s, while traveling in western China, the Cambridge biochemistry professor Joseph Needham became fascinated by Chinese inventiveness when he saw evidence of ancient irrigation systems in Sichuan province. He noted that gunpowder, the magnetic compass and printing, considered the West's most important inventions, enabling the transition to the modern world, actually were all invented in China.

Needham devoted the next 40 years of his life at Cambridge University to researching China's technological evolution since the earliest times. The first volume of Needham's work Science and Civilisation in China, appeared in 1954. It had reached 15 volumes by the time of his death in 1995.

Needham was obsessed by the question of why Chinese inventiveness was overtaken, about 1500, by the West. Liu Yingqiu, a Chinese researcher at Cambridge who worked with Needham, thought the reason was that property rights, or the ownership of new inventions, belonged to the emperor and could be withdrawn by him. Others have attributed the reason to the Chinese failure to develop a scientific, evidence-based process, relying purely on experience. Both these explanations probably have some merit, but the main point is that the Chinese people once demonstrated great ability to innovate. They can do so again, given the right environment.

It's here that the Chinese government can provide real support to adding more value to Chinese manufacturing, by providing a rules-based legal environment that can protect intellectual property. The history of successful innovation in different countries shows that it is individuals operating either on their own, or within like-minded teams or companies, who invent new products and processes.

Government officials and departments may understand the importance of manufacturing innovation, but they themselves cannot invent, nor can they demand inventions to order. Inventiveness and industrial innovation follows from the marriage of natural curiosity with the freedom to experiment, and the ability to see how a new process or scientific phenomenon could be practically applied to create an attractive product or service.

Some Chinese companies have already become innovative. Huawei and Lenovo have both invented new products in order to satisfy customer demand. Both these companies are led by individuals committed to their customers, and therefore to new ways of meeting their customers' requirements. Both companies operate in the whirlpool of international competition, where new products attract immediate attention and will be copied if possible. They appreciate the vital importance of innovation and branding in allowing companies to price in a way that allows a generous gross margin, and bottom-line profitability, which, in turn, provides the money for new research and development.

The 10-year national plan to create a high value manufacturing sector in China depends for its success on the ability of Chinese companies to create new products and services that customers want and will pay premium prices for. This in turn requires leadership at Chinese companies that can break with the old copying culture, and can inspire new technologies and processes.

The last big industrial breakthrough for China, in the export sector, came from joining the World Trade Organization. Now, the most important assistance the Chinese government can provide to its manufacturing sector is to support a legal, social and educational environment in which successful innovative risk-taking can thrive.

The author is a visiting professor at Guanghua School of Management, Peking University. The views do not necessarily reflect those of China Daily.

( China Daily European Weekly 06/19/2015 page10)