That said, Chinese manufacturers and government leaders will contend that less than 2%-3% of Chinese exports have been tainted in any meaningful.  2%-3% does not seem like a lot, yet when evaluated against the hundreds of billions of dollars in Chinese exports those figures are potentially alarming. Amid a growing chorus of China manufacturing critics ranging from BusinessWeek to author Paul Midler who explains that Chinese business culture is largely responsible for the country’s deteriorating reputation as a global manufacturer, officials in Beijing have rightly identified domestic innovation as a solution.  Merely acting as the labor in the production process is no longer a viable path to growth and long term economic stability.  China, they say, must innovate to grow.  Once again, I pose the question: can Chinese businesses power the necessary technical and creative innovation to help the country move its way up the value chain?  Regular CTP readers know that I remain skeptical though a critical test looms that may prove me wrong.

The news this week that Chinese battery and electric car producer BYD Auto is building 1.5 billion RMB testing facility to enhance the company’s R&D capacity may mark a critical milestone in the Chinese innovation debate.   This massive investment in R&D will serve as a clear demarcation between the skeptics who question China’s innovation capacity and those who see China emerging from being a pure-play manufacturer to a product innovator.  BYD, in so many ways, is the ideal test case for this experiment.  Its early products represent the lazy, copycat product development that has given skeptics, including myself, ammunition.  Afterall, their S6 crossover SUV was a blatant ripoff of the Lexus crossover.   Moreover, their logo (right) is painfully similar to that of BMWs.  OK, so let’s let bygones be bygones and give the company the benefit of the doubt that their early foray in to brand marketing drew on painful habits of the past.  Today, with their focus on R&D, BYD is a new company with a new innovative drive.  Afterall, Warren “The Sage from Omaha” Buffet himself 230 million dollars into BYD, so how bad can it be, right?

Well, we will soon see.  It all depends on the E6 — BYD’s flagship electric vehicle that is reportedly powered by a state of the art lithium ion battery that can travel 300 miles/400 km on a single charge.  The car is scheduled to be unveiled later this year fleet sales only.  Now, with BYD, there is reason to be skeptical.  This is a company that for a number of different reasons has failed to live up to its own hype, much less that imposed on it by others.  Projected sales figures have not materialized along with difficulties in achieving its electrical battery storage capabilities as advertised are just two of the key hurdles confronting BYD’s credibility.  If, however, the E6 does actually work as predicted, then it clearly demonstrates the potential of not only this company, but China as a whole, to break from its past an idea-copier to an idea-generator.

The BBC/Public Radio International program “The World” just wrapped up a five part series on innovation in China that dovetails nicely with the blog post/podcast that we filed earlier this week on CTP.  Correspondent Mary Kay Magistad delves deeper into many of the same issues that we raised in our discussion.  If you are interested in China’s path towards higher levels of technical and creative innovation than you will find this five-part series quite valuable:

http://www.theworld.org/2009/09/28/created-in-china/

CTP Podcast – China’s Innovation Environment

We agree that China demonstrates great innovation that is shielded from view by a well-deserved reputation for lax IP protection, but we are uncertain about whether we are reaching a tipping point where companies and individuals can more boldly go forth with knowledge sharing in China.

Sparked by Li Kaifu’s departure from Google, our discussion starts off with a discussion of a scarcity mindset that Eric brought up in his earlier post.  Have a listen….

Li Kaifu (李開復) is the closest thing China has to a web 2.0 rock star.  No one else in China’s small circle of technology titans comes close to achieving the international name recognition and buzz this guy generates.  For starters, the mere fact that he was the object of a Google-Microsoft love triangle that ended him fleeing one tech giant for the other is enough to give this guy major props.  That said, separating the noise from the signal on his actual accomplishments is brutally difficult not just because it’s China but also because of the very nature of his former benefactors who themselves have very little to show for all their effort in China.

Microsoft’s business model in China has never been a good fit given that 90+% of computer users there do not pay for the operating systems that power their computers.  Furthermore, while Google vacuums up market share in the rest of the world, China remains an enigma for Larry and Sergey.

In his short time at the helm of Google.cn, Li himself failed to significantly to make a dent in Baidu’s dominance of the mainland’s search market.  So whether or not Li deserves the rock star treatment remains dubious, the fact that he has it is beyond question.  No doubt mindful that Google’s western-centric approach to the China market will simply not work, Li made the wise decision to jump ship and leverage his own fame to launch a new incubator fund for Chinese technology start-ups that are starved for early-round financing. Li’s new 115 million dollar venture fund, Innovation Works, marks an important milestone for China in its effort to pull the country from its well-deserved reputation of being a phenomenal intellectual pirate to a society that genuinely prizes research and innovation.

Superficially, it is easy for an outsider to laugh at the idea that China can become a major center of technological innovation when industry after industry suffers billions of dollars in annual losses due to intellectual property rights violations.  Visit even the smallest Chinese city and evidence of this culture of theft is pervasive:  imitation Starbucks adjacent to the DVD vendor selling the latest episodes of “24″ for 10 yuan next to the kiosk hawking fake iPhones.  Selling other peoples’ ideas as their own in China is endemic. Unfortunately, the problem runs so deep that it extends far beyond innocuous consumer goods to fake aircraft parts, pharmaceuticals and food products that all too often have potentially lethal consequences.

The same culture that fertilizes intellectual property violations on such an unprecedented, massive scale is rooted in a culture that overwhelmingly celebrates conformity.  From their first day of school, Chinese children are educated in a system that discourages independent thinking through rote learning.   On this point, too many Americans mistakenly believe that a rigid, conformist-driven education system stifles innovation.  If that was in fact the case it would be hard to explain how equally conservative educational systems in Japan, South Korea, Taiwan and even Sweden have produced so much technical and creative innovation.  So, the education system by itself is insufficient to judge a society’s ability to innovate.  In China, on the other hand, there is another, more prevalent force that discourages innovation: “the scarcity mindset.”

As even the most elementary student knows, China’s history over the past three to five thousand years is best characterized by a cycle of state expansion and contraction with consistent patterns of war, famine, stability.  It’s been in those periods of relative harmony that China has blossomed so many of the world’s most valuable inventions.  Paper, money, gun powder, etc… the list goes on and on… providing clear evidence that even within a rigid educational and autocratic imperial political system, the Chinese had an unsurpassed innovative capacity.  Conversely, while amidst a period of instability, predictably the innovative climate was understandably restrained by larger priorities (e.g. survival).   Therefore, when considering why so many of China’s most important inventions occurred in past millenia, it is worth evaluating the impact that social and political conditions had on the creative environment.  No doubt, throughout the wars, famine and uncertainty that defined China’s history in the 19th and 20th centuries the country’s ability to generate new and revolutionary ideas was seemingly extinguished.

The “scarcity mindset” is also critical in understanding the Chinese entrepreneurial mindset as it relates to the business cycle.  In the 20th century, for example, where a bruised population emerged from the horrors of Mao’s psychotic revolution, the focus for most Chinese was simply to survive and save enough money for tomorrow — “grab what you can today because you don’t know if tomorrow will be better.”  This is a powerful, little understood sentiment that plays a big role in much of the Chinese business psyche. Yes, we hear constantly that Chinese business is defined by relationships and face, etc… yet grabbing the quick buck, cutting corners and, yes, copying others’ ideas are also equally prominent.  One of the key trends to observe now is to what extent the new found stability and prosperity that exists in China’s business centers can diminish the “scarcity mindset” to ultimately spark a new wave of Chinese innovation.

Like so many other aspects of Chinese society, innovation in China is a contradiction, and even oxymoronic, given how much of the country’s current economic success is based on the replication of others’ ideas.  Yet, Li and other venture capitalists, no doubt, sense that the culture has sufficiently changed to allow a more independent thinking environment that is conducive for new wave of Chinese innovation.