Unfolding China's smartphone re-innovation strategy  

Contrary to the idiomatic metaphor 'Don't Reinvent the Wheel', China deliberately spelled out a re-invention strategy in its ambitious Science and Technology (S&T) Development Plan. For the full-fledged construction of a well-to-do society, the 16th National Congress of the Chinese Communist Party commissioned the formulation of the national medium-and-long-term programme. In response to it, the State Council prepared the S&T plan spanning from 2006-2020. In the strategy section, it was clearly spelled out that the focus would be on strengthening the assimilation and absorption of imported critical technologies and pursuing re-innovation of commercially successful products. Accordingly, China focused on adjusting and improving national policies on industrial technology so as to reinforce the assimilation and absorption of imported technologies to succeed in re-innovation.

In this modern age, technology, as opposed to natural resources and labour, has been the driver of wealth creation. The journey begins with the discovery of scientific principles, starting from the relationship between the energy level of electrons and incident photons to age-old Newton's three laws. New technology is developed around these scientific principles, such as the technique of conversion of photons to electrons providing the underlying technology for digital imaging innovation. But only a small fraction of discovered scientific principles is amenable to the development of meaningful technologies. Moreover, a subset of these technologies could find the opportunity to support commercial innovations. As a result, such linear path of innovation is often risky. Moreover, it requires substantial investment in basic research and often it takes decades to reach profitable revenue generation. But, in this open market economy, once such innovation enters the market, a new opportunity is created for the competitors. Irrespective of the greatness of a product, once it is released in the market, the first version is often primitive. The primitive product creates very little willingness to pay among a small group of customers. In order to capitalise on the potential market, the product should be continuously improved by offering higher quality - preferably at a lower cost. Such reality opens the opportunity to pursue re-innovation associated with incremental performance improvement.

Moreover, upon the release of each version, the willingness to pay for the product starts drifting downward. This could be articulated as one of the fundamental laws of competitive market behaviour to innovation. Three underlying forces - imitation, innovation and substitution - are responsible for such downward movement. To slow down this trend, existing features of the product need to be improved and new features added. Due to increasing scope of software-intensive innovations, the strength of such drifting downward force has been strengthening day by day. To counter this force, the cycle time of bringing a better version of the product has come down to even less than six months. For this reason, Apple has been updating its iconic innovation iPhone and releasing better versions at regular intervals. Such act is known as sustaining innovation-focusing on incremental performance improvement. In the absence of sustaining innovation, the product will suffer from eroding  buyers' willingness to pay, if the price is left unchanged. Often, some producers follow the tactic of reducing the price. But in the competitive market of innovation, such tactic will only lead to eroding profitability and customer base while drifting towards the exit. Upon spotting the underlying market potential of newly-released innovation, mastering the journey of continuous improvement is a key strategy to profit from already proven innovation potentials often demonstrated by competitors.

China deliberately chose the path of re-innovation to capitalise on this underlying dynamics of innovation in the globally competitive economy, instead of exploring new scientific principles to innovate completely new products. With the generous support of public R&D investment, aspiring Chinese firms such as Huawei started assimilating component technologies of iPhone-led smartphone innovation. The availability of the design and the source code of the underlying Android operating system without the IPR (intellectual property rights) barrier for further enhancement accelerated the progress of technology assimilation associated with smartphones. Initially, Chinese firms like Huawei embarked on imitation strategy. Instead of attempting to innovate next-generation smartphones, they opted to imitate a bit inferior version of innovations offered by market leaders like Apple or Samsung. But, in course of time, they succeeded to add innovative features. The high-scale advantage of local market, already available manufacturing facilities at easy to reach locations and highly efficient supply chain logistics provided added edge to such imitation strategy. To replicate such a strategy, new Chinese smartphone makers like Vivo, Oppo or Xiaomi started entering the market. These firms rapidly started capturing local market shares. As a result, in the third quarter of 2016, Apple's market share in China fell to 7.1 per cent, down from 11.4 per cent a year earlier. On the other hand, Oppo's market share jumped from 10 per cent to 20 per cent during the same period.

Upon succeeding with re-innovation strategy in the local market, Chinese smartphone markers started expanding their footprint in the global space. Chinese smartphone brands captured 48 per cent of global market share in the second quarter of 2017, according to a recent report issued by market research firm Counterpoint Research. This report also states that China's Huawei has become the world's third-largest mobile phone vendor after Samsung and Apple. In addition, seven out of the top 10 global brands of smartphones are from China.

The next step of this journey of innovation is the substitution. Often, substitution effect causes significant disruption to highly-hailed mega-success stories. The cell phone technology was initially invented by the USA, primarily for defence purpose. Although in the innovation space, initially US firms were dominating the production, European firms established supremacy over the time. Primarily, Nokia's success in handset-making was notable. US innovation giant, powered by the magical mind of Steve Jobs and the availability of rich technology portfolio in the ecosystem, Apple entered the handset innovation market in 2007. Apple's iPhone emerged as a force of substitution, as opposed to re-innovation. This strong substitution effect of iPhone caused serious disruption in the industry, completely reshaping the innovation landscape. The mighty Nokia was entirely knocked out of the market within just a span of a couple of years. Even iconic Blackberry lost its market share, forcefully pushing innovation leader 'Research in Motion' toward bankruptcy.

There is no doubt that China's re-innovation strategy is paying off in the smartphone race. By pursuing this strategy, Chinese smartphone makers have succeeded in capturing significant market shares and establishing their dominance. But in this age of innovation, no product, or technology firm, or even the entire industry is immune to substitution effect--suffering from constructive destruction. Are Chinese firms prepared to encounter such dynamics of the rapidly evolving innovation pace, often creating discontinuity? Or rather, Chinese firms are acquiring the capability to be a disruptive force in the global innovation space. Irrespective of the outcome, it's worth observing and learning from China's re-innovation strategy as it unfolds to build an innovation economy. 

M Rokonuzzaman PhD is an academic, researcher and activist on technology, innovation and policy. [email protected]