New Era of Chinese Innovation Marks Its Transition to New Standard-bearer

By Edward Tse

2022-1-16

Most people now recognize China’s ability to innovate and its status as a top digital economy in the world. Since the late 2000s, many companies have taken advantage of the growing penetration of wireless internet in China to develop innovative business models. With the emergence of newer disruptive technologies such as 5G, AI, blockchain and cloud computing, the nation has entered a new phase of technological innovation.

Coupled with the government’s latest policies announced as part of the 14th Five Year Plan, technological self-sufficiency has become a national imperative for the Chinese. To that end, the focus of innovation is now being shifted from consumer internet-driven to “hard tech” areas such as high-end semiconductor chips, precision and intelligent manufacturing, robotics, life sciences and others. In fintech, the central bank digital currency, or CBDC, has also become a priority.

Not too long ago, products made by Chinese companies were ridiculed as “shanzhai”, portrayed to be of low quality and lacking originality. Few expected the Chinese to turn around so quickly and become innovators in their own right. This has prompted Eric Schmidt, former Google CEO, to say, “(China’s) technology is generations ahead of what is possible in the West.”

This new era is epitomized not only by what technologies are being adopted or in which sectors innovations are happening, but also how China is shifting from being a technology standards follower to one setting global standards.

There are four ways in which the Chinese are beginning to set new standards. The first is in technology protocol setting, manifested currently in 5G rollout. The second is creating new innovative business models previously unseen. The third is transformation of industries by creating completely new sectors. And finally, the pioneering applications of the CBDC.

In technology protocol setting, Chinese companies such as Huawei have been leading the world, particularly in setting the standards for 5G. This technology has had a profound impact on many industries accelerating growth and development. For instance, 5G is enabling more advanced autonomous driving, remote diagnostics and operations, and digital twins.

In July 2020, during the 5G standard competition, the 3GPP 5G technology that Huawei invented was officially declared as the only international mobile communication technology standard by the International Telecommunication Union. By the end of 2023, 30 key industry standards are set to be finalized.

Chinese innovators have also developed new business models that set “standard” practices for others to follow. Examples include Tik Tok, a video-focused social media app; Taobao and JD.com, two major e-commerce players; and Meituan a food delivery app.  

In 2021, Tik Tok overtook Google as the world’s most visited website. Its vast following suggests a strong sense of affinity that the app is able to generate with its users. Using AI-driven algorithms, Tik Tok and its domestic China twin Douyin assess users’ needs and push “tailor-made” content in areas that users are interested in, thus increasing the conversion rate for its advertising efforts. The powerful AI algorithms that optimize content creation, curation and recommendation are key factors behind Tik Tok and Douyin’s great success.

Tik Tok and Douyin, along with other social commerce apps such as Bilibili, Kuaishou and Little Red Book, have become major sales channels for consumer products. At the same time, Key Opinion Leaders, or KOLs, have revolutionized modern-day sales and marketing. Chinese as well as foreign companies have caught on to the trend with cosmetics brands such as Lancome and Estee Lauder leveraging KOLs and using social commerce in China.

China is also redefining standards for entire industries. A good example is the auto and mobility sector. The pioneering development of the connected digital economy has resulted in automotive companies rethinking their products, and entirely new breeds of mobility players have emerged. Concurrently, electric vehicle technology has been taking off and from early on, the Chinese government issued policies to encourage the development of new energy vehicles.

Along the way, cities across China were embedding intelligence in the infrastructure they were building for smart cities. This in turn generated synergistic effects which led to emergence of the new breed of smart and connected new energy vehicles that are becoming increasingly autonomous. Not only design and manufacturing, but the entire industry value chain has been disrupted as the role of software has become critical.

Foreign automakers have also recognized the innovation happening in China. For Ford, the China Innovation Plan and Smart Technology Plan are a core part of its “China 2.0 Strategy.”

China is the first major economy to develop and deploy a CBDC, an electronic record of a country's official currency. CBDC will simplify cross-border payments and implementation of monetary and fiscal policy, and promote financial inclusion in the economy by bringing the unbanked into the financial system. While several countries are developing their own digital currencies, China is well positioned to take the lead with the digital yuan.

In April 2020, digital yuan pilot programs were launched in four cities. The digital currency’s debut was the culmination of a six-year journey that began when China’s central bank, the People’s Bank of China, announced research on a “Digital Currency/Electronic Payment” system in 2014. Today, digital yuan pilots are growing rapidly in scope and size.

The use of digital yuan could bring significant economic and political benefits to China, which could also help drive internationalization of the Chinese currency over time.

As China joins others in setting standards, its ability to create and define “new lanes of innovation” will become even more profound. This signifies the coming of a new era not only in China but also increasingly for the rest of the world.