Chinese companies’innovation is characterized by the latecomer’s advantage of forward thinking, which will eventually enable them to become global leaders, says Wu Xiaobo, a professor of innovation and strategic management at Zhejiang University. In this battle to catch up and compete with the best firms globally, those Chinese companies that aspire for and work toward a state of “beyond catching up”will be the ultimate winners, says Wu.

Wu says although the Chinese GDP is slowing down and the economy is experiencing a structural shift toward sustainable growth, it is still important to recognize that many individual companies, especially in the private sector, are full of vitality and innovation, driving forward the Chinese economy with unprecedented potential.

“Macroeconomists often focus on the ‘three horse carriages for growth’, which is consumption, investment and trade, but what they haven’t seen is the innovation that private companies are exercising to gradually rise to a global competitive standard,”says Wu.

One such innovative Chinese company that is known internationally is the telecommunications giant Huawei, which has the unique characteristics of pursuing active learning and innovation in the process of developing its technology.

This fast growth has made Huawei, a newcomer in 2G technology, a second mover in 3G technology and a first mover in 4G technology. When finally 5G technology came about, Huawei managed to become a globally leading innovator. Globally, Huawei is working with 20 universities on 5G research and development, and the company has committed to invest $600 million in 5G R&D by 2018.

Another innovative company is the Chinese automotive firm Geely, which has pursued innovation through three key acquisitions, Wu says.

One acquisition was UK automotive brand Manganese Bronze in 2008, which it later fully acquired in 2013, and since then re-branded it as the London Taxi Company. “The strategic intention is to learn about Manganese Bronze’s management style, so that Geely can adopt to new practices at the lowest cost possible”.

The second is of the Australian auto transmission supplier Drivetrain Systems International in 2009, which has given Geely expertise in auto transmission, a technology China’s automotive industry greatly needed.

After the financial crisis, the Swedish carmaker Volvo fell into financial difficulties, which resulted in its acquisition by Geely in 2010. “Volvo is a very safe car, and has a strong management strategy. Although financially it was not doing well, its operation has no problem,”says Wu.

Wu adds that a smart move practiced by Geely is to separate the management of Volvo and Geely, so that the Volvo brand will not be affected by Geely. But the two companies cooperate in developing new technology by pulling together their respective resources, which can then be shared between the two brands.

Wu says this is an example of healthy growth, which characterizes the emergence of many innovative Chinese companies.

“We say that Chinese companies exhibit healthy growth, because they are not taking away business from other international firms. They grow by relying on China’s large market needs and grow by being creative and innovative.”

Wu says very often Chinese companies’growth is accused by Western observers as copying, or merely relying on the unequal playing field of China’s large market, cheap labor and other costs, but the truth is not so simple.

“Many foreigners thought China’s innovation was achieved by reverse engineering or technology re-packaging, but this is not the complete picture.”

Instead, the real reason behind the best Chinese companies’success is their forward thinking vision, aiming for a state of “beyond catching up”, which enables them to withstand the challenge of rapid technology changes, Wu says.

“Those companies that only aim for catching up will be locked into the existing paradigm, and cannot enter the emerging paradigm.”

For example, many Chinese refrigerator companies that were created in the 1980s are now unheard of, as they followed existing patterns of internationally famous refrigerator brands.

Other refrigerator brands, such as Haier, created in the 1990s, have emerged due to their forward thinking.

Another example Wu has personally observed is the rise of a collection of cassette importers in Hangzhou in the 1980s and 1990s, which made great profits when the cassette market bloomed, but subsequently became bankrupt when the industry collapsed.

Such challenges are not limited to emerging countries’firms, Wu says. One example is the US digital imaging company Kodak, which had been stuck in film photography, making its shift toward digital photography painful.

“Chinese companies do have a latecomer’s advantage as they do not have to repeat many of the mistakes Western fi rms are making. They are taking advantages of new paradigms, and move into them without much heavy burdens,”he says.

Wu says another key term that aptly characterize Chinese companies’international growth is “bamboo capitalism”, which describes the fact that certain Chinese companies may spend many years building up their capabilities at home and then shock the global market when they rapidly emerge internationally.

The metaphor of bamboo is used because the bamboo plant grows very deep under the ground, but once it emerges out of the ground it can grow by tens of centimeters each day.

“China has many hidden champions. They originally may serve as low-cost manufacturers, slowly extending their capability toward both sides of the curve through strategies like R&D and establishing sales channels. They are finally noticed when they go overseas to acquire Western companies, then they take international observers by surprise,”Wu says.

The concept of smiling curve refers to value adding potentials of different stages of the production process of an item, with the early designing end and the marketing end of the curve as creating the highest value and the middle manufacturing process as representing much lower value.

First proposed around 1992 by Stan Shih, the founder of Acer, an IT company headquartered in Taiwan, the smiling curve has been used frequently to explain China’s challenge of low value-added economic growth as it historically relied on manufacturing to support the bulk of its economy.

But this situation is now rapidly changing thanks to China’s innovation, which is in part driven by fierce competition in its vibrant market, particularly in high-tech industries, Wu says.

“In our digital age, it is easy to identify hidden demands, so we are now experiencing a new wave of Internet based innovation,”he says, adding that companies like Alibaba that use the Internet to identify and satisfy consumer demand are good examples.

Another key advantage of China’s innovation is the availability of a large pool of talent, with Chinese universities now producing around 7 million university graduates each year.

This represents not just China’s abundance of cheap labor, but cheap talent, as these young graduates can make a great difference to the Chinese economy, Wu says.

But at the same time, crucial challenges need to be overcome to make sure that Chinese innovations can continue to make breakthroughs, including attitudes toward long-term R&D and respect for rules and regulations.

“Chinese companies frequently emphasize short-term R&D, but they also need to realize that some scientific R&D without short-term commercial gain is also important. At the same time, respecting the rules regarding how business is done is also important to create a good environment to encourage innovation,”Wu says.

“Often the best Chinese companies, like Huawei, are respectful of Western technology and business rules. Such respect would help Chinese companies to continue to innovate in a healthy way,”he says.