There is a lot of talk about hoverboards in the media lately. There is also a great deal of misunderstanding about what is happening here. Sure, it is interesting hoverboards were talked about and gained some momentum as a product during the holidays. But the big picture story here is not about the actual product itself. It’s about what is happening in the Chinese manufacturing ecosystem.
While the focus of this article I wrote on the future of consumer tech hardware being owned by Chinese companies was on smartphones, it applies to other categories as well. The past few years, the way China’s manufacturing prowess has increased has been unprecedented. The fact a relatively sophisticated product like a hoverboard is being mass manufactured at such low-price points is astonishing. Now, we can criticise the design decisions of these companies, particularly the quality– or lack there of– of the lithium-ion battery which causes some of them to catch fire, but that is easily solved. The $400-500 products solve this by using higher quality batteries and, even at those prices, a self-stabilizing board mass-produced is still impressive and just the start. But, as Tim point outed here, this quality wake up call to the Chinese OEM manufacturing ecosystem will turn out to be a blessing in disguise.
This Quartz article highlights that the hoverboard makers are taking quite a hit. The key point here is how Amazon laid down the law about safety requirements and patents. This is the part that will be the blessing in disguise.
These Chinese OEMs will understand more fully next time around that, when they hit on a consumer tech product that goes big, they need to be more prepared both with safety issues and particularly the patent discussion. I speak frequently with those in the manufacturing ecosystem and I can assure you the Chinese understand and are renewing their focus on original innovation. It is easy, too easy in fact, to mistakingly assume all the Chinese will ever do is knock off other people’s products and offer them cheaper. There is, and will be, unique hardware innovation coming from China, for the simple reason that so many other sources of hardware innovation will struggle as the business model for the vast majority of hardware companies today move away from hardware margins.
Another good read on this matter is a recent Wired editorial titled “How a Nation of Copycats Transformed Into a Hub of Innovation.” There is a mind-shift happening in China. I see it and many other very smart people I know see it as well. There is a foundation being laid that will pave the way for what we see happening in the future with Chinese innovation. It is exceptionally dangerous to write this off and underestimate Chinese tech companies as I see so many people do.
This is not going to happen overnight and I’m not trying to say it is. What I want to convey is how the foundation for our consumer tech hardware landscape is changing. There will still be plenty of opportunities for companies of other countries to invent and create hardware experiences. However, it will come in the face of increasing competition from China in many of the same categories. I fully expect several showcase Chinese innovations to happen over the next few years that bring more evidence to the change we are seeing take place. We can not throw away the history of Chinese people and the many inventions and innovations that once came from that country. The skills are there and all it takes is a renewed focus on originality. I think this is imminent and it will make for a very interesting economic and global competition landscape in consumer tech for the coming decade or longer.
Totally agree. Just wanted to add that in addition to China’s history of innovation many centuries ago, both Japan and Korea have succeeded in becoming powerhouses of quality and innovation. There is no reason why China could not achieve the same, although one could make a speculative argument that the lack of democracy could hinder innovation (not that Japan had true democracy or individuality either).
Once upon a time, “made in Japan” meant copycats and awful quality.
Of course, I do foresee negative side effects associated with an excessive focus on originality (it could result in the shortage of vocational workers as seen in the US, as Tim Cook recently mentioned), but that’s a topic a couple of decades into the future.
Actually it is China’s slight shift to individualism and gradual embrace of capitalism, measured and controlled as it is, that is fueling the innovation. Read the Wired article. Think how out of the ordinary it is for one person in China to be the face of a company like Alibaba. That would not have happened in 20th century China. The prosperity for the average Chinese is another change. Allowing individuals to retain much of their wealth is a huge shift to individualism for China.
You can call it speculative all you want. I call it being mildly observant. China would not be where it is today if it had not embraced certain capitalistic and individualistic principles.
Joe
Agree with your point about embracing capitalistic principles. This is all about of the mind shift happening there right now. And should that country ever become fully democratic, watch out.
I really don’t want to go into the discussion about the causation between capitalism, democracy, individualism and prosperity. I think it’s sufficient to say that regardless of which causes which, history clearly shows that emerging countries start out as copycats and move on to become leaders in quality and innovation. Even 19th century USA followed this route.
So yes, barring some huge calamity (and an economic slowdown alone is not large enough), I expect China will follow the same path.
Let’ s ^^
I remember reading decades ago in The Economist about the rule of law being the most important ingredient to economic success, presumably because it gives entreprise a reliable environment to operate in, and individuals expectations of being rewarded for economic contribution instead of nepotism, political/religious correctness…
Now, as to whether the rule of law can be achieved in anything but a democracy… and even then, the US version of rule of law for example seems very flaky, the law being different for those who can pay and those who can’t.
One of my resolutions for 2016 is to use fewer parentheses. Hello, comma ^^
All good arguments in theory, but one has to check what’s happening in reality. And in reality, China seems to be enjoying quite good economic success.
Hence either the theory is false or China is sufficiently governed by law. One could also possibly make the argument that China would be succeeding even more if it had a better political system, but it’s harder to imagine growing faster than they already did.
How is China not governed by law and not fit the theory?
Joe
I haven’t read the Economist article, but by saying that the rule of law is the most important ingredient of economic success, it is likely implying also that countries that do not rule by law will not succeed (I could be wrong here).
If this theory applies to China, since that county has clearly seen economic success, then the theory would suggest that China has been ruling by law. Whether that is or is not the case is a totally different argument, but there are at least legitimate concerns over that.
Assuming that one takes the position that China is not ruled by law, then the theory would suggest that China cannot be economically successful, which is clearly false. Therefore, the assertion that China is not ruled by law and the assertion that the theory is correct cannot coexist.
I guess there is a certain kind of law and government (as in who makes the laws?) implicit to the theory that I’m not getting.
Joe
Yes. We’ll have to look at how the article drew its conclusions to go deeper.
The government certainly sets the parameters, not just of what it rewards, but the consequences of pursuits not within government policies. It could be argued (and has been) that because the US government largely stayed out of the computer industry, neither punishing nor rewarding directly, it has enjoyed the success that it has. Even today, and even in the face of efforts otherwise, there is no government licensing required to make hardware or write software. You don’t get an industry more built on the individual than this. But the government did not impede or punish the industry simply because it did not exist within specific policy goals.
It is harder to argue, I think, that individualism as expressed by democracy (vs the US republic with certain democratic processes) has economic success built in. This is where I think culture, even as it is a partner to local politics, can deviate from political structure. Individualism is dependent on the will of the individuals.
I think individual creativity is built into the Chinese people and culture and predates Communist China. Ancient China, with the innovations they are historically known for, was quite individualistic. Communist China has long been in conflict with the individualism of China. As the modified Communism allows the cultural individualism of China to peek through, I have no doubt they will continue to prosper. Arguments that China’s prosperity is a paper dragon (can you say “ghost cities”?), not withstanding.
Not all cultures transitioning to democracy today have a history of individualism and rewarding individuals. They are just learning what it means to be an individual.
At the same time as I, post-modern wannabe that I am, have been opposed to much of the excesses of Modernity, I am becoming a bit of a structuralist. What I hate about structuralism is how manipulative it becomes. But that’s a discussion for another time, and probably another forum.
Joe
I just read the HBR article and it was interesting to a certain extent. However on the the final topic, “whether China has a good institutional framework for innovation”, I found their argument rather unconvincing. The authors make the assertion that “the freedom to pursue ideas wherever they may lead is a precondition for innovation in universities”. While this might have an element of truth, I think it is telling that even in the US, innovations tend to come out of the universities with strong connections to industry, like Stanford, and not the ones that are left to do whatever they please. “Necessity is the mother of invention”.
In Japan, our government is trying harder to guide university research away from “universities can do whatever they want” to “universities should collaborate more with the industry”. That is the lesson that our government has learnt by looking at the US system. Although this does not mean that our universities should be run by bureaucrats, it does conflict with the idea that freedom is the secret sauce for innovation. There has to be some kind of guidance, either planned or coming from the free market.
I also believe that if the Chinese government decided that the current management of their universities was detrimental to innovation, they would be more than willing to give them more freedom. The Chinese government was willing to break communist principles and bring in free market mechanisms. Compared to that, opening up universities would be a breeze.
I agree with your overall assessment of the HBR article. I can only say from inference and deduction from snippets here and there I believe China is already making those adjustments to higher education, measured and selective as it is. I don’t have the resources to do much more than that. It will take someone like a interested party at HBR to do the fuller research.
But again, this is China’s shift to individualism that is the engine of this change. If they did not make these adjustments to their Communism, then, yes, they would be stuck at copying. But they do seem culturally intent on doing more, as much for the people of China as for global economic domination.
I also agree with your assessment of the US. I’ve always said the West and the US in particular is individualistic to a fault. That fault being both a hyper-individualism that increasing whittles away at the importance of community or “collective”. And also, ironically, the propensity of Modern systemization. Bill Gates and Steve Jobs created and succeeded without graduating college. So what does Modern culture do? They try to systematize and institutionalize that process. Go figure.
If China can find that balance between the individual and the collective that eludes much of Western Modernity, there will be no stopping them.
Joe
Chinese innovation, though, is still largely government driven, the modified Communism it is today. Their manufacturing prowess is due to policies set in place a long time ago, to become less dependent on foreign capacity. To a large degree I see the furniture industry as the model the electronics industry is replicating. How many of the Chinese tech companies today served primarily as OEMs for foreign companies, Lenovo for IBM as an example?
As the HBR article I linked to for Naofumi articulates, there are limits to muscling ones way to innovation from the top down. But in the end, I’ve always believed the real power is in the hands of the ones who actually make things.
Joe
Can you elaborate our point me to the furniture industry example/dynamics you mentioned?
I’ve read a lot, but the quick reference I can remember and find the easiest is this interview with the author of the book _Factory Man_:
http://www.npr.org/2014/07/14/331356258/how-a-factory-man-fought-to-save-his-furniture-company
From the interview highlights:
“They find it after days and days of searching. They finally end up in this remote section of the province, almost to the border of North Korea, and they find it there. … The gentleman running [the factory] actually meets with them and he has this very chilly one-on-one dialogue with them that’s all translated. But the guy says, basically, “Close your factories.” (Bassett’s got three factories left at the time.) “Close your three factories and let me make all of your furniture for you.” …
The translated word, and John [Bassett III] remembered it very well, was “tuition”… “This is the tuition of [China] being able to capture your market share. We’re going to sell it so cheap and with government subsidies — we’re going to be able to make all of your furniture for you.”
It also got to the point the Chinese weren’t just making cheap knock-offs. Because their factories were newer than US factories, they were able to make furniture at a higher, more consistent quality [than before]. I found this short clip at Barrons Furniture’s website:
http://www.barronsfurniture.com/home/history/
“These Chinese factories were not the decade old factories like our industry, but highly efficient manufacturing facilities that would encompass whole towns much like the American companies did 100 years before. These factories produced, at first glance, a very high quality but almost sterile version of the handcrafted and unique pieces that we were used to seeing.”
Handmade vs machine made debate notwithstanding, it was certainly a sea change.
Joe
Ok, good stuff. But in this scenario the Chinese weren’t coming up with original designs right? I’m making the case they will start doing more unique and original new tech.
They didn’t at first, but eventually, at this point, I think they do. The HBR article, IIRC, focuses on design, finishing, and retail being China’s weaknesses. I don’t agree. I think original work is their next logical step. To stop there would make no cultural sense. After that point, Apple’s disruption can easily come from China even as China is currently important for Apple’s growth.
The furniture industry was precisely their “tuition”, not just in furniture, but as part of their overall industrial strategy. There was no Jack Ma in furniture. As they allow individuals to flourish, they will naturally and quickly fill that void. Of course under tight scrutiny.
They are learning with each step, just as you point out with the battery debacle. And they are quite patient. I wouldn’t be surprised if they have even picked through Deming as part of their learning process.
Joe
Superb post however I was wanting to know if you could write a litte more on this topic? I’d be very grateful if you could elaborate a little bit more.