How Tech Adoption Fuels China’s Innovation Boom

AI is transforming the world. And it starts with the right compute. ARM is the AI compute platform trusted by global leaders, proudly NASDAQ listed, Built for the future. Visit arm.com discover. Welcome to the hbr ideacast from harvard business review. I'm kurt nickisch. A few weeks back, people in Shanghai's downtown were surprised when a swarm of lights appeared in the night sky. They craned their necks watching these lights converge amid the skyscrapers, forming a huge pattern. Now, this wasn't a light show, as it turns out, or an alien invasion. It was a constellation of illuminated drones. And that swarm took shape as a giant QR code. It was an advertisement. The QR code promoted a role playing game from the Chinese streaming company Bilibili. Now, outside of China, this marketing stunt might have really bothered people. Too commercial, too invasive, too dystopian. But the willingness of consumers in China to engage with technology and new things, that's what intrigues and inspires today's guest. He argues that the perception of China as a copycat and not an innovator is totally out of date. He says the country is a hotbed of new ideas and not just because of its huge population. Zach Dykewald is the founder of Young China Group, a research and market advisory firm. He also wrote the HBR article China's New Innovation Advantage. Zach, I'm excited to speak with you.

It's a pleasure to be here. Thanks for having me, Kurt.

So why do you argue that China is such a hotbed of innovation?

Well, actually, what I argue is that China is a hotbed of innovation impact, and there's a difference there. When we imagine the innovation equation, we usually put a lot of emphasis on innovation itself. But in reality, it's innovation plus adoption equals impact. And pretty much every tech founder, every app developer, every technologist understands this. You could have the best idea in the world, but, you know, if you only have seven people downloading your app, it's not going to make much of an impact on the world stage. What I argue is that what makes China's innovation ecosystem so unique is that it has this enormous population who is uniquely hyper adaptive and thus hyper adoptive in their technological lives. And so if you're an innovator and you're creating something new, you're blessed with hundreds of millions of people who are willing to try new things, try new stuff, try new technologies, and lean forward in their use of technology today.

What have you seen that just has struck you? You know, being a U.S. american who grew up in the U.S. before going.

To China, absolutely grew up in the US before going to China. I moved full time to China when I was 22. What struck me in China so much more than what we have in the United States is the pace of change and people's willingness to try new things. So when I first went to China, I was particularly studying young people or people who are born the same year I am, which is 1990.

Squarely millennial, right?

Squarely millennial, right, Right. Pretty much right smack dab in the middle. And in China, it's the same. They call them post 90s generation, which is a big watershed generation in China. What's interesting is that since 1990, in my lifetime, I've witnessed our per capita GDP. So the basic unit for measuring the quality of a life within a country, it's not perfect, but it's a pretty good metric for understanding the quality of life when you're comparing globally between countries. So I've witnessed the per capita GDP in the United States increase two and a half times in my lifetime, which is pretty good for a developed country, by the way. Now, through stories, through interactions, through speaking with my friends in China's parents, it became clear that the amount of change in China that my friends had lived through was far greater. And through this metric, per capita GDP increasing over a lifetime, which I call the Lived Change Index, it really brings into relief just how much faster that is. So my friends, born in 1990 in China, have witnessed 32 times per capita GDP growth in their lifetime. And so their life has been defined by watching sort of their village turn into a town, turn into a city. I have friends who describe, you know, seeing their uncle being proud to wheel a bicycle home when they were young as sort of a sign of wealth and advancement. And now that same uncle has a two car garage. Change has defined the experience in China. So much so that they've had to have an attitude of adapt, adapt, adapt to keep up with the times. And in the sphere of technology and innovation, that adapt, adapt, adapt mindset has translated to adopt, adopt, adopt at a scale and speed that is truly globally unique.

What are some of the most interesting products coming out of China that Western economies are much slower to adopt?

To me, the biggest standout is mobile payment. And I love the mobile payment example because the technology came out from Apple and Alibaba at more or less the exact same time in 2014. And so the innovation variable in the innovation equation sort of gets nullified, right? The innovation is more or less the same coming from China and the United States, more or less at the exact same time. But the stories of these two technologies has been radically different as the product and the availability of mobile payment has unfolded in both countries respectively. And so Apple recently celebrated that in the United States, 24% of iPhone users are using Apple Pay. 24%. And by the way, to give you an idea of how we use mobile payment here in the United States, they surpassed Starbucks, which is just a reminder that mostly we're using mobile payment for really small purchases. We're buying a coffee, we're at a food truck. You know, we're not refinancing our house through Apple Pay. But then you look at China in that same amount of time with more or less the same technology, or at least the same technological roots, you have 90% adoption of mobile payment from smartphone users, either with Alipay or Tencent pay 90%. When you compare 90% to 24%, that's hugely different.

Now, this is pretty. I don't want to say well understood, but it's certainly well documented because China did not have the credit payment system that. That the US had, for instance. And a lot of people point to this adoption rate as just a great example of leapfrogging, right? One technology leapfrogging another, because it just makes more sense in the development of that nation's economy. You could compare that to cell phone use in Africa, right? Where for a lot of places, it just skipped over wired telephone lines. Do you think this is more than just leapfrogging?

So this is absolutely more than leapfrogging. And I say that with a good amount of confidence because two and a half years ago, I was sitting across from this gentleman who was describing to me a problem he was having in India. In India, they were having trouble getting people to scan QR codes. Now, if people aren't scanning QR codes, then it's really difficult to enable mobile payment. It's sort of like if you have a credit card but people aren't willing to swipe it, it sort of nullifies the potential impact of the technology. What he was describing is something I could absolutely not relate to because I had just disembarked from a flight from China and just on the way to the airport, I had used. I had broken out my phone to get in a line of people who were all using their phones to scan for a meal, to scan for a subway ticket, to buy something from a vending machine. I had someone who had. I had a friend who had told me he had refinanced his house earlier that day using mobile Payment. I mean, there really is an entirely different way that people in China were involved in commerce, were interacting with banks, were interacting with money, we're interacting with debt. And we definitely like to think that, okay, it's just leapfrogging. It's certainly easier to build something new on sort of fresh earth. Right. If you, if you don't have to tear something down first.

Right.

But in other potentially leapfrogging nations, India being the most notable, these sorts of technologies simply aren't developing and being adopted at nearly the same rates.

Why is that?

Well, it's a huge question and I'd love to say the answer is simple and I could offer a simple explanation, but I don't think it captures all of it. And one thing I don't want to discount is the role that the Chinese government plays, particularly in sort of that payment infrastructure. There's no doubt that the rails of payment in the United States are partly what limit our willingness to sort of, again, we'd have to tear down and build again instead of just building something new, which was far easier in China.

Just to put a point on this, the Chinese government gave banking licenses to these two tech firms, right. Tencent and Alibaba, as opposed to, you know, restricting all this for state owned banks, for instance. And that was a, that's seen by a lot of people as just a huge regulatory accelerator and that a lot of people in China believe that the economic achievements there have come about because of, not despite China's authoritarian form of government.

There's an element of that that's absolutely true. If the Chinese government had not been willing to take a risk, which frankly flies in the face of the sort of reputation the Chinese government has globally, which is one that wants more control, not less. They did regulate in a way that allowed for, I mean, tech companies Tencent and Alibaba to get banking licenses. Banking license, by the way, that that threatened sort of the monopoly that the, that the Chinese government and Chinese banks enjoyed. So. So it was a forward leaning decision. Absolutely. It's, it's less about the government, which I often hear by the way, sort of as a cop out when people describe, oh, the Chinese government is doing, what often is implying is that it's impossible everywhere else, which isn't necessarily true because the style of Chinese government is so unique and most people in the world don't want it. So that this idea that what's happening in China is possible other places just isn't true. And it also moves the emphasis away from the people.

I've had an experience where I've lived in other countries and seen what I thought were really innovative things that came to the US later. And you're like, well, yeah, other countries had this figured out long ago. What kinds of things are you seeing that are just kind of blowing your mind in comparison?

You know, the one that comes to mind first is a company called Pinduoduo. What's so unique about Pinduoduo is that it's a company that truly does not exist anywhere else. You know, you can make arguments that Alibaba and Tencent early on in their development were sort of practicing geographic arbitrage, which is a five dollar word to say they were copying business models and styles of being from from other places. But Pinduoduo is basically a group buying e commerce application that allows for people and it's specifically targeting people in third tier cities or below. You browse for items and typical items on Pindu doors like facial tissue, toilet paper, diapers. This isn't Prada. It's definitely sort of daily goods. And as you're shopping, you can make the decision that you want to make a group purchase. So what you'll do is you'll actually share that item or a link to that item with your friends and the price on your purchase will go down. Maybe it'll go down all the way up to 50% and then, okay, you've got a great group of two. Well, maybe if you share it with one more person, the price will go down even more and one more person and the price will go down even more. And suddenly you have a group buying experience of 20 people who all want to buy diapers, likely in your sort of area, but not necessarily. And that price can be reduced dramatically. Now what's special about Pinduoduo is that it's worked. It's scaled incredibly fast. Over 700 million people are using the app in the extraordinarily short timeframe of six years. And it's also enabled huge swaths of the population who are never able to buy name brand goods. I mean, it's an innovation that specifically made for a less developed economy, enabling huge numbers of people to actually buy things.

So you've made a really good case that this consumer population in China, it's much more than just the size and the scale of it. It's really about their willingness to adopt and try new technologies. What should companies outside of China, you know, be taking from this?

Well, one of them is that it may be time to copy the copycat the idea of innovation and you know, we create the thing and there's a lot of pride mixed up in that. But it's sort of like what the great science fiction visionary William Gibson said. The future is already here. It's just not evenly distributed in China because of this hyper adoptive population. There are new technologies that are able to iterate. There are forward leaning businesses that are able to develop in China before they're able to develop in the United States, in the uk, in South America, where have you. And so for one of the first times in the last several decades, it's a moment where there are United States companies already starting to copy China. Amazon is absolutely looking at Alibaba. Amazon Prime Day is a very close copy of Alibaba's double 11, the shopping day.

Singles day.

Singles day, exactly. If you're looking at what Facebook is doing in terms of mobile payment and their Facebook messenger app, it is extraordinarily similar to a simpler version of WeChat. And there's no doubt that they have aspirations to make it more integrated, similar to WeChat. I mean, the big tech companies are already doing this. I think there are far more opportunities for people who are creating products for the United States or other places, places around the world to see what's successful in China as sort of an innovation and adoption greenhouse and consider, okay, how can we adapt that for our market? What can we learn from those users that might be able to work here?

What technique or approach do you think has worked well for Western or non Chinese companies to do that?

Yeah, the best companies I've seen are willing not just to localize for China, which is typically what multinationals think they have to do for the Chinese market. We recognize now that sending the guy at the end of the desk in New York to run the China operations is probably not going to work. That's fine. They're willing to localize for China, but the best are willing to lead from China. They will elevate the people on their China team to positions of strategy where they're having a number of discussions with headquarters and actually learning from China what's working there, what's not. They're testing new methods of consumer engagement in again, an ecosystem that's more willing to try it out and then they're taking the learnings from that and bringing those globally. So they're using China as a sort of greenhouse and they're empowering their China team to not just be implementers of global strategy, but leaders of global strategy, which is a big psychological and management shift.

There is that issue of bringing. You can lead from China, but you don't have the same hyper adoptive consumer population where you're trying to lead into. I don't know, how do you deal with that?

Yeah, it's a great question and it's one that I end up talking about a lot. Because at this point, and again, if you look at that degree of magnitude faster pace of change since 2014 when mobile payment came out, mobile payment in China is a completely different beast than it was then, and it's evolved into a completely different beast than we have here in the United States. So if you were to take some of the more mature ideas in mobile payment and try to implement them in the United States or Western Europe or South America, they probably wouldn't stick because it's too large of a leap in the evolution for the average user here. So you sort of look at the first principles, at why these innovations are working. You see what's particularly sticky in China, and then you have to think similar to the way that you used to have to think, how do I localize? Or in some cases still do have to think, how do I localize what we're doing for the Chinese market? You now have to imagine, okay, how do I localize what's working in China for the US Market, for the German market, for whatever it is. Because there definitely is a user willingness and user adoption problem outside of China, that it certainly won't be a mirrored process of willingness to adopt outside of China as within.

Any advice for companies that are trying to do this, do this localization?

Sure. The most fundamental piece of advice is just to pay attention, looking at what's happened in China and thinking if that might happen here. Again, in the case of mobile payment, we've seen two tech companies supplant or take over the banking world. And if you're in the United States in a more traditional payment platform, credit card, you don't want that to be your Kodak moment. So just being willing, which is to say that a company who wasn't willing to change with the times sort of became obsolete. There are lessons to be learned like that in China just from seeing its past. Another critical one is being willing to expose your best. We still have some of the best technologists and thinkers in the world. Absolutely. In fact, US innovation is ranked higher than China's. We have earned the reputation that a lot of our thinkers have on the world stage. But you sort of are what you eat in terms of your mental diet, if that makes sense. And so exposing some of your best thinkers and innovators within your organization to a different mental diet that's provided by China. So that means trips to China. That means more understanding of what's working or what's not in China. And it's likely that they are going to be your best bridges to thinking, okay, what is China doing that would work with us? What are they missing that we could take advantage of? But it really has to be exposing your best thinkers to that ecosystem and then last, staying informed at China speed. And this is a critical issue, I said before that much of the world is evolving or has evolved over the last 30 years at an order of magnitude slower pace than China's. Which means that our perceptions of China, our stereotypes towards China, our understanding of where China is at today is probably not updating at China's speed. And so that means your sources of information and your willingness to sort of to have a more elastic, malleable impression of where China is at has to be updating faster because their world is currently changing faster than ours. And we need to make sure that at least mentally, we're keeping pace with theirs so that we can evolve our products and our ways of doing business at their speed too.

What does this mean for the market for talent?

Oh, it's a great question. So one way is to send sort of your global talent to China. Another way is to bring your China talent global. And by the way, you know, most people in China are eager for global experience. The prospect of getting to spend six months or several months of the year or whatever it is at HQ helping people understand, you know, new approaches to a certain business problem that, that China is doing a good job on would in many ways be a dream come true for a lot of people in China. Not everyone, but many. You know, I mentioned Pinduoduo before. There are more talented people than there are job positions. And so right now, Chinese tech companies are sort of famous for working their Talent to the bone.996 is from 9 in the morning to 9 at night six days a week. And you know, for those at Pinduoduo, by the way, that's it's seven days a week. You know, they only have one full week or two full weekends a month, which is crazy. And so I think it's a real opportunity. And by the way, this is also an area that's limited by regulation and H1B visas. But if I were really trying to leverage the sort of shifting talent dynamics, I would be thinking, how do I get great talent from China from some of the biggest tech companies, how do I entice them? What does a package look like that's going to encourage them to want to come with us or to share their learnings with us, or how do I get our talent from. How do I excavate our talent from. From China and turn that into global talent so that they're informing strategy on a global scale instead of just for the China market? I think there's a huge opportunity there.

Gotcha. Just a quick note that you mentioned H1B visas, and that, of course, is the US visa for bringing skilled workers into the American economy. If I'm a manager at an international company, what does this mean for me specifically?

I would tell you to lean in. That sounds a little, maybe cheesy or overused. But the biggest issue, and I talk with international managers often, and by the way, even those who are in China and many who are in China aren't actually immersed in China. In fact, I would venture to say the vast majority are not. And I don't mean this as an insult to managers who are trying to have some semblance of a Western life wherever they end up. But what often happens is you're not getting strong communication channels between managers and their China team. You're not getting managers who are actually willing to learn. They're often coming from a position of, okay, we are headquarters. This is the way that we've done it. This is the way that it's working in the United States, which is the world leader here. There's a certain amount of pride that we have that is a limiting perception. And so for global managers interacting with China or based in China or traveling to China or working with a China team, or curious about a China team, being willing to sort of put aside your limiting perceptions, to lean in to being willing to learn and to seek out the people who could be touch points for that learning, is essential. Because the idea that this trend that China is just going to go away, which if you look at the way that many people are acting, it seems to suggest that they believe that it will, it's not going to happen. And so moving past some of this cultural discomfort, maybe looking past some of the headlines, which of course just feature a negative government, which to many of us is scary and adversarial, being willing to look past that and focus in on the people because it's the human side of China that's empathetic. It's also the human side of China where most of the incredible technological development is taking place and where the real learning can happen.

Zach thanks so much for coming on the show to talk about this.

Absolutely, My pleasure, Curt. Thanks for having me.

That's Zach Dykewald. He's the founder of Young China Group and he wrote the HBR article China's New Innovation Advantage. You can find it in the May June 2021 issue of Harvard Business Review and at hbr.org. This episode was produced by Mary Dew. We get technical help from Rob Eckhart. Adam Bucholtz is our audio Product manager. Thanks for listening to the HBR Ideacast. I'm Kurt Nickish. Sam.