A rising class of Chinese giants powered by innovation are dominating the news. But beyond these well-known few, where should we expect the next great innovations to emerge in China?
China is pouring investment into R&D in the hope that it can make the technological breakthroughs that are necessary to drive innovation. It now leads the world in newly issued patents and there has also been a measurable boost in the number of scientific publications.
While the numbers tell one story, the results tell another. Fundamental scientific and technological breakthroughs are difficult to find across industries. Moreover, we are less likely to see big breakthroughs in areas where basic science is critical. China continues to struggle to develop its muscles in the area of basic science and technology commercialization.
At least four root causes contribute to this dilemma:
First of all, not all “research” is equal. While China spends about US$200 billion on research, only 5% of this is “basic research” which is what generally leads to fundamental breakthroughs that can reshape industries. Basic research can be over 15% of R&D spend in countries like Israel, South Korea and the United States.
Second, commercializing even the greatest research requires the ability to translate a technology into a marketable value proposition. This “soft skill” is dramatically under-developed in China.
Third, onerous regulatory requirements in sectors like pharmaceuticals can dramatically slow the pace of commercialization. For example, permission to test a new drug for approval can take up to 21 months depending on its classification, while it might only take less than half that time in many Western markets.
Fourth, there is a massive talent gap. Truly experienced scientists remain difficult to find or attract back to China from their labs abroad.
Some may point to successes like high speed rail and wind power as examples of Chinese innovation, but these are mostly examples of technology transfer or successful re-application of engineering solutions developed outside of China.
China is also unlikely to be the source of engineering-based breakthroughs for the foreseeable future. While China has a growing number of engineers, they typically excel where problems -and their solutions-are well-defined. While this type of talent generates innovation, the limited talent that is steeped in the “art” of engineering slows progress.
This broadly explains why we see continued heavy reliance of Chinese auto manufacturers on their joint venture partners for vehicle platform development, engine technology and other complex systems. We are likely still years away from a vehicle being built from the ground up by a Chinese company.
So where will the next big breakthroughs likely come from in China?
Why not healthcare?
China has the science.
BeiGene, a Beijing-based biopharma company, is showing that Chinese companies can excel in science-based innovation. It has used speed and a focus on accuracy to get four cancer drugs into clinical trials within the past 18 months. Typical drug development goes through preclinical testing, which involves testing on animals, and then into clinical testing if preclinical testing is successful.
Many drugs fail in the clinical phase, and BeiGene is addressing the problem by creating a proprietary testing model. It has built its own bank of human cancer samples, which enables BeiGene to approximate testing with human subjects during the preclinical phase. This increases success rates in the clinical phase and speeds up the drug development timeline.
Another area where China is innovating is gene sequencing. BGI, a Shenzhen-based biotech company, is hiring more than 2,000 PhDs and tapping China’s enormous population for genomic data. The company recognized that gene sequencing is less about breakthroughs at the laboratory bench and more about computing power and data mining. It now controls about 50% of the world’s genome sequencing capacity – larger than any other scientific institution.
And because of the relatively less developed stage of bioscience companies in China today, senior scientists who would normally be placed in management roles in the US (and are therefore far removed from the frontlines of science), are actually doing the scientific work in China today. Thus, innovation is happening at the scientific process level because the senior people that would be running big labs elsewhere are in the labs doing the work in China.
China has “big hairy” healthcare problems that need to be solved.
The pharma industry is looking for solutions to big problems. And problems there will be in China: because of changes to consumers’ diets and severe environmental issues like pollution, the incidence of chronic diseases such as obesity, respiratory ailments, diabetes, and cancer are only going to rise. And they’re going to hit China at a scale far greater than anywhere else.
Medical delivery is an area that is rife with problems and is ripe for innovation. Baidu, China’s leading internet search engine, is already aware of the need to improve delivery of healthcare. Its Doctor Baidu app recommends the best available physicians nearby, based on the patient’s description of symptoms. The app can also let patients schedule appointments with doctors. Within six months of its launch, Doctor Baidu expanded to six provinces, covering a potential population of 340 million.
The best innovation historically occurs at the intersection of big problems to solve, technologies that enable the solutions, and a business model to allow the problem-solvers to make money. While much focus to-date has been on high tech, the internet, and ecommerce, we believe the kind of innovation that will change China and change the world will likely come from the healthcare sector.
Erik Roth is an entrepreneur, lecturer, serial innovator and leads McKinsey & Company’s Global Innovation & Growth Practice. He recently co-authored a report on innovation in China with the McKinsey Global Institute, which you can download for free here. And please connect with him here on LinkedIn.