Is China Inc. going from imitator to innovator?

Just a month ago, China’s state owned chemical conglomerate, ChemChina, which has USD$45.6 billion in revenues and 140,000 employees, successfully acquired Munich machine tool builder KraussMaffei for USD$1 billion. It marked the single largest investment that a Chinese company had ever made in Germany, till then. Today, the long-battered Syngenta, a seeds and pesticides group based in Switzerland, saw its stock price jumped despite its lackluster performance in recent months. The reason? ChemChina is near to closing the deal of taking over Syngenta at around USD$40 billion.

This is a big number game. It is also likely the Chinese government would help foot the bill, one way or another. But the real question is: would buying Syngenta be important, not just in size, but because of its kind?

Historically, China has been the world’s factory. After years of tinkering and large scale manufacturing, China’s enterprises have become world class system integrators. That is, they don’t necessarily possess the expertise in fabricating critical components themselves. But they have developed deep knowledge in sourcing components from the Western world and then developing localized solutions that achieve reasonably high performance at rock bottom prices. Nowhere is there a better illustration than the country’s high-speed rail system. The entire network was built through technology transfer agreements with foreign train-makers including Alstom, Siemens, Bombardier and Kawasaki Heavy Industries. Chinese engineers then devised their own vision for a rail network, which is becoming the fastest and vastest the world has seen.

Going places

In more recent years, Chinese enterprises have been branching out abroad, like Lenovo acquiring IBM, Geely buying Volvo, Sany purchasing Putzmeister, and again just last month, Haier announcing its interest in taking over GE appliances. Crucially, the western counterparts involved were also system integrators themselves, albeit with better technologies.

But this way of growth has its own limitations. System integration without the ability to control the underlying technology at the component level has prevented China’s Inc. from introducing “new to the world” innovation. To move from imitation to innovation, a radical shift from development and application to basic research is desperately needed. Intel, for example, was pouring over USD$10 billion in research annually, in order to develop the latest microprocessors that power the entire computer industry. Roche, a Swiss drug maker, also the world largest bio-tech company, was investing at a similar rate, at 19.8% of sales, amounting to USD$10 billion in R&D for drug discovery.

Component business turns out to be very big business. All this makes the upcoming acquisition of Syngenta by ChemChina all the more interesting.

Talking About Food

Unlike KraussMaffei, which is essentially an equipment manufacturer for plastic molding technology, Syngenta is a component provider (bioengineered seeds and plants as well as pesticides) nestled within the value chain of food production. If Nestlé and Unilever are the “assemblers” of food products that we ultimately buy from Walmart and Costco, Syngenta and other biotech giants are ones that sit along the upstream of the production system. Rarely known by end consumers, they are nonetheless the technology drivers that keep the big food industry going. The bid made by ChemChina, whether it ultimately goes through or not, cannot be more clear of the country’s determination of moving from a system integrator—a fast follower at best, to a true global leader that shapes the technological trajectory of an industry.

Howard Yu is Professor of Strategic Management and Innovation at IMD, where he teaches on the following programs: the EMBA, Advanced Management Program (AMP), Building on Talent (BOT), Breakthrough Program for Senior Executives (BPSE) and Orchestrating Winning Performance (OWP).

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