By Kiran Patel for China Brain.
Driven by the 13th Five Year Plan, Germany’s Industrial blueprint of Industry 4.0 and the government policies of Made in China 2025 and Internet Plus, China is embarking on an exciting journey into the New Industrial Revolution. The 4th Industrial Revolution in China will be driven by policies of innovation, consumerism and efficiency while at the same time maximizing transition towards high-tech, high-yield and low pollutant initiatives. Industry 4.0, Made in China 2025, Internet Plus and the creation of an Internet of Things (“IOT”) have become the key economic triggers of China’s long-term economic strategy. In defining the evolution from ‘Made in China’, to ‘Designed in China’, ‘creativity’ and ‘Innovation’ are the buzz words of President Xi’s administration. When examining China’s potential to develop and sustain a creative innovative economy, it is important to take a step back from the pre-conceived notion of cheap ‘Made in China’ knock-offs and occasionally maligned Intellectual Property (“IP”) practices. From the 4 Great Inventions of yesteryear fast-forwarding to present day innovative and practical mobile shared economy applications such as DidiDaChe, Alibaba’s incredible service integration of E-Commerce, Logistics and Financial Services and integrated ecosystem m-commerce and social media platforms such as WeChat, China certainly possesses a culture of continual innovation and execution.
With China expected to exceed well over 700million netizens by the end of 2016 and exhibiting phenomenal potential for further growth and penetration, the possibilities for creative sector growth are vast. In addition, possessing a burgeoning Urban Middle Class with growing disposable incomes that have risen to around 27,000 CNY per annum on average according to the National Bureau of Statistics and an incredible appetite for technology and innovation both in terms of products and services among consumers, China is ready to embark on its second economic miracle, with creativity and innovation forming the bedrock. However with such rapid development and exciting opportunities for China and businesses operating within the scope of the key focus areas of the new economic policies of the Xi Jinping and Li Keqiang administration come two caveats.
Firstly, how can China develop and sustain a society that encourages creativity and innovation to thrive and thus, drive forward a long-term and ultimately sustainable innovation economic vision?
Secondly, what role if any can innovative Foreign Invested Enterprises (“FIEs”) play in this transition and does the business environment allow for success in the market?
This article will examine the key drivers towards how China can successfully develop its creative economy and transform it into that of an innovative world leading one, to match its GDP and global economic strength, while also showcasing the key areas of opportunity for FIEs.
Part I: Building a Platform for Success
China’s previous growth model which was tremendously successful is starting to decline due to a weakening demand for exports particularly in the US and Europe, overcapacity and high-levels of pollution. Faced with these key challenges, China has embaked on a journey of economic reform directly linked to innovation policies as the stimulant for sustainable economic growth. The 13th Five Year Plan through its 5 Key Tenets of ‘Innovation’, ‘Coordination’, ‘Green Growth’, ‘Opening Up’ and ‘Inclusive Development’ has laid the blueprint for delivering this new economic vision.
China’s Current Global Innovation Index Ranking
Currently, according to The Global Innovation Index (16th September, 2016), China while having consolidated its position as the 2nd largest economy in the world ranks 29th in the world behind Slovenia, Malta, Estonia and the Czech Republic. China does not rank amongst the Top 3 Innovation performers in South East Asia (which are ranked in order; Singapore, Hong Kong and the Republic of Korea).
Fig 1 - Global Innovation Index (Sept 2015) Innovation Quality (Source: The Economist)
Fig 2: Global Innovation Index, (Sept 2015) Middle Income Countries (Source: The Economist)
Ranking is based on 3 key criteria: Average rating of top three universities, Number of patents filed per unit of GDP, Cited articles as % of published articles.
In the ‘Innovation Quality’ category, while China leads the ‘Middle Income Innovation Quality’ category by some distance ahead of Brazil and India taking into account the average ranking of the Top 3 universities, number of patents filed per unit of GDP and cited articles as percentage of published articles, China still ranks far behind ‘High Income Nations’ (Ranked in order: USA, UK and Japan). In a perfectly geared innovative world, China according to the research conducted within The Global Innovation Index would be a global pillar of Human Capital and Research due to the excellent performance of pupils in literary and numeracy skills. The findings of The Global Innovation Index report conclude that in order to successful enact the transition to a creative and innovative economy; China is progressing forward to achieve its undoubted potential.
Creative Industries in China: The Opportunities
Creative sector industries can be defined as per the visual below. China possesses a rich culture to act as the creative economy catalyst and has significant potential for growth across these highlighted areas, therefore illustrating the great economic benefit that development of a creative economy can hold as China embraces further economic reform.
The Key Elements for Building a Prosperous & Sustainable Creative Sector
Navigating the transition from a manufacturing economy to a knowledge economy is the key goal of China’s economic shift however development of a prosperous and sustainable creative sector driven by world-class innovation and entrepreneurship is a fundamental component of this process.
The Oxford dictionary defines creativity as “The use of imagination or original ideas to create something; inventiveness. Bringing into existence! Giving rise to, being imaginative and creative.”
Creativity is the essence of effective business, whether through creative product and service innovation or generation of creative solutions around a negotiation table. All industry sectors and industries require creativity and innovation at some stage.
The following elements are the key areas that constitute a prosperous and sustainable creative sector:
From grass-roots education to professional practice in the real world, education forms the backbone for the evolution of a creative sector. Creativity and kinaesthetic activities should stand on equal footing with literacy and arithmetic in order to drive forward the creation of innovative thinking within China’s creative leaders and innovators of tomorrow. Successful creative economies such as the UK and US have achieved a balance between these three key areas. China’s education system is largely traditionalist, however the education sector is seeing patterns of reform and an increase in demand for extra-curricular creative activities and it will be of interest to view how government policy on education evolves.
Culture is the heartbeat of a creative and innovative society and this is an area that holds great potential for China. With a rich history and culture, the opportunities for China to showcase it are immense. Creation of Creative Industry Clusters in Beijing such as 798, Shangdi, Tech Parks such as the Zhongguancun Science & Technology Park and events such as Beijing Design Week are vehicles to leverage creativity and innovation as forces of economic growth.
A sustainable creative sector in order to thrive requires strong representation and networks through government vehicles both internally and externally.
Sector Diversity is brought about through creation of a multidisciplinary diverse creative industries sector that promotes cross-fertilisation of people across a wide range of expertise and skill areas as illustrated in the table below.
The 2008 Olympics and 2010 World Expo in Shanghai created a two way transformation of perceptions as to how China viewed the West but perhaps more significantly, how the Western World viewed China. These key events also significantly enacted a mind-set shift throughout Chinese society. As Chinese enterprise continues to expand and diversify its reach into new markets and industries and developing new innovative technologies to export, an international mind-set has become an increasingly important characteristic for creative talent. Alibaba’s successful brand expansion into new creative industries and international growth can in part be attributed to Jack Ma’s ability to communicate and engage with the international business community, exuding that precious creative commodity of soft power.
Can China’s IP Protection Environment Incubate Creativity?
IP is a common buzzword but it is an idea that is the result of a creative process that when registered, transforms into an asset that can be exual Property protection environment can be argued as having obstructed the growth of domestic innovation which has an impact on both Chinese and Foreign Invested Enterprises. With China’s focus shifting towards innovative economic drivers, both Foreign and Chinese firms will require stronger protection of their IP. The signs are encouraging however. There is greater flow of IP in China both from domestic and from foreign invested enterprises than ever before.
Fig 3 below shows the rapid rise in the filing of utility, design and invention patents between; 2002 – 2012
Patents Issued by China, 2002-2012
In 2015, 1.1 million patent applications were filed, up 18.7 percent year on year, according to figures from the State Intellectual Property Office (SIPO). About 359,000 invention patents were authorized, 263,000 of which were granted to domestic applicants, 100,000 more than in 2014. SIPO figures also indicate that in 2015, 60.5% of invention patents went to Chinese enterprises, demonstrating a 4.1% increase. With Innovation being one of the 5 key tenets of the 13th Five Year Plan, authorities have rolled out favourable policies to support high-tech companies and encourage investment into research and development, which to date have been successful.
Part II: Opportunities for Foreign Invested Enterprises in China’s Creative Economy
The development of the Creative Economy as a powerful economic driver has opened up a number of opportunities for FIEs across a number of sectors. The below section highlights these potential growth areas:
Music, Film & TV
Since the Chinese State Council took the decision to open up commercialisation of the creative sector in 2009, particular focus has been made on the film and television industry, publishing and distribution, printing, advertising, entertainment, cultural exhibitions and digital content. Since the promulgation of the “Cultural Industry Revitalisation Plan” in 2009, China has sought to exercise controlled growth specifically concerning the television industry whereby restrictions have been placed on the export of TV programmes and formats in order to ensure that Chinese broadcasters remain competitive. With the new economic policy direction of China through the 13th Five Year Plan, Made in China 2025 and Internet Plus, funding has been allocated to developing key innovation sectors including entertainment, live music, animation and digital games, TV, film production and distribution, publishing, cultural exhibitions and internet media. Education institutions have established research centres and regional governments have set up city specific plans for developing the creative economy.
Fashion Design & Retail
China’s growing middle income consumer demographic has created a demand for global fashion brands to continue retail expansion into China. Alongside this, boutique ateliers and independent designers also have an opportunity to export product and sell to a thriving new market. With the changing lifestyles and habits of China’s ‘Middle Income Consumers’ transitioning from being traditionally brand led to quality led, a different approach is needed in order to successfully achieve market penetration. According to a recent study by McKinsey, China’s Middle Income Consumer demographic has seen their disposable income rise to between GBP 6,000 to GBP 23,000 per year in 2015, making this segment an important consideration for FIEs in this sector. In addition, the much-discussed '80后' (post-1980s) demographic in China consists of the 240 million people born between 1980 and 1990. With unprecedented access to technology, consumer goods and social media, understanding what drives their buying decisions is also of great importance. Chinese companies have yet to successfully enter the premium market and foreign companies still dominate the skincare, premium car, sports apparel and fashion sectors, illustrating that FIEs maintain a very competitive proposition for China.
E-Commerce & M-Commerce
It has been estimated that by 2018, China will surpass the United States as the largest market for cross border e-commerce. Approximately 88.9% of Chinese users access the Internet from smartphones. With the growing use of internet and smartphone technology to make purchases, companies should look towards strategically leveraging the largest e-commerce market in the world. It has been predicted that China’s e-commerce market will reach GBP 3 Trillion by 2020. This is larger than that of the US, UK, Japan, Germany and France combined. This is not restricted to 1st tier cities. Tier 2 cities according to a Jan 2016 survey by The Economist Corporate Network and Admaster have overtaken Tier 1 cities in terms of purchases made on mobile devices. Member companies in the retail sector particularly should pay close attention to leveraging a localized and optimised website, social media, CRM tools and digital advertising to engage the market. Foreign brand-based companies should either focus on developing their own sites to increase traffic or establish relationships with Chinese e-commerce platforms such as JD, Taobao and T-Mall.
Professional Services (Legal, Financial, Marketing & PR Agency Services)
The Professional Services sector is extremely diverse and carries substantial opportunity for FIEs to prosper within China’s creative economic boom. The demand for financial and legal services will remain buoyant in light of the growing need for protection of IP and patents, which form the backbone of a sustainable creative economy. Aligned with this, we have seen growing M&A activity in the sector as China continues to reach outbound and diversify its investment portfolio into successful global creative sector enterprises. This facilitates the need for financial consulting and accountancy services in tandem with legal services. As Chinese companies continue to expand overseas and integrate more with the wider global economy, effective communications, PR and brand management, as well as the necessary soft skills, will only grow. FIEs therefore operating in this area of professional consultancy services are therefore strongly positioned to enable Chinese businesses to innovate and grow beyond borders.
With the population ratio of Chinese living in cities expected to hit 60% by 2020, development of infrastructure will remain firmly on the government’s agenda. Coupled with this, the 13th Five Year Plan directive of ‘Green Growth’ will ensure that foreign architects and consultancy firms will remain competitive, especially concerning Smart City and Sponge City initiatives. In February 2016, the State Council released a new set of directives focused on the promotion of environmentally friendly urbanization. This will create opportunities for foreign architects and urban planners to export experience and best practice for utilization of green space, creation of mixed use developments, preservation of historical buildings and energy efficient initiatives. Beijing will also host the 2022 Winter Olympic Games, thus maintaining market opportunity for foreign invested architecture firms with a world class pedigree and track record in sports facility and related infrastructure developments.
Cultural Arts, Leisure & Entertainment
The emergency of a thriving creative industry in China has led to a boom in the cultural arts driven by growing scale of economy and professionalism. The role of foreign enterprises to play in this area is particularly strong commercially and politically with plenty of political capital to be gained through ‘soft power swaps’. The export of cultural initiatives such as museum exhibitions, performing arts and literature, Film & TV and sport remain powerful opportunities for foreign invested enterprises to leverage in tandem with the opportunity to not only succeed commercially, but significantly also build cultural bridges with China.
Computer Science Technologies
Made in China 2025 and Internet Plus will integrate both industry and Information Technology to form an Industrial Internet. This will open up further opportunities for FIEs in the creative economy for export of automation software in manufacturing and construction. IOT evolution in the Internet Economy will lead to demand for big data and digital marketing services, cloud computing, shared economy and a number of online consumer services.
The growth potential of the ‘Industrial Internet’ through linking manufacturing with IOT technologies is strong. In order to make this possible, the Government will be launching fiscal and tax policies to help these industries grow and therefore enabling a sustainable environment for both domestic and foreign invested FIEs to evolve within the Internet Economy.
In terms of leisure services, digital publishing, internet gaming, software and mobile application development also remain strong opportunities for FIEs focusing on partnership through the creative economy.
Looking ahead, these are exciting times for the Chinese Creative Sector and for the foreseeable future FIEs still have in important role to play in the development of the creative economy across a variety of sectors as outlined. In order to move further up the creativity value chain and enable construction of a sustainable creative economy, China is seeking creative partners from abroad through which to deliver upon its need to innovate while at the same time building up its own competencies domestically.
As the 2nd largest economy in the world, with a final ranking of 29th in the 2015 Global Innovation Index, there is therefore substantial potential for continued growth in the creative sector and for FIEs to add value.
Kiran Patel has been living in China since 2004 and is currently the Marketing & Communications Director of LehmanBrown International Accountants, a China focused accounting, taxation and business advisory firm. He is also an elected Executive Committee Board member of the British Chamber of Commerce in China.