Open Production and the three Chinas...

Thanks to Hans Herick over at CPH127 for the post on John Hagel's work on Edge Perspectives. It led me to his interesting essay about developments in the emergent India and China markets.

Of particular interest to me was this extract:

Open production - the third pattern of innovation

Now, what about China? This is where the Business Week coverage is most disappointing. In fact, one of the articles makes the observation that “China is surprisingly weak in innovation.” I beg to differ. In fact, I would argue that China, along with India, is rapidly becoming the global center of management innovation.

What explains this divergence of views? First, at least in its coverage of China, Business Week seems to equate innovation with product innovation, while I give at least as much emphasis to the importance of process innovation. Second, Business Week seems to ignore the fact that there are three Chinas: rural China, the state-owned enterprises (SOEs) and the private, entrepreneurial sector. Much of Business Week’s coverage concentrates on the state-owned enterprises which still account for the bulk of China’s industrial production and are usually the partners that Western companies choose to affiliate with when they enter China. But, the state-owned enterprises, favored with massive subsidies from the government and low-cost loans from the state-owned banking system, have almost no incentive to innovate. In this arena, it is not surprising that Business Week finds little innovation.

The cauldron of management innovation is in the third China – the growing array of privately-held companies emerging on the edge of the Chinese economy. These companies rarely receive much attention from the Western press, in part because they have developed a culture of keeping a low profile. JSB and I have written extensively about the management innovations being pioneered by these companies in The Only Sustainable Edge.

The contrast with the patterns of innovation among Indian companies is intriguing. These entrepreneurial Chinese companies (which also include a number of high tech Chinese companies in Taiwan) are focused primarily on competing in global markets in product categories like electronics hardware, textiles and motorcycles where product lives are compressed and demand is highly uncertain. These companies are pursuing a third pattern of business innovation focused on re-conceiving the economics of production in order to more effectively mobilize distributed expertise for both product development and manufacturing – let’s call this the “open production” pattern of innovation. The process innovations in this case include:

* modular design of products and processes
* management techniques to flexibly configure highly customized business processes encompassing hundreds, if not thousands, of specialized business partners
* management techniques to encourage business partners to work together in ways that enable them to get better faster than they could on their own.

These are innovations in their own right, but their real power comes from the fact that these management techniques establish the conditions for even more rapid incremental innovation in products and processes. Think of it as meta-innovation - management innovations that spawn a continuing series of innovations.

As a stakeholder in a small but rapidly blossoming "privately-held company [sic] emerging on the edge of the Chinese economy", I can attest to the accuracy of these claims. Certainly we are not yet getting the attention we might because the focus is still on the major western companies that are jostling to get into the market though truthfully still struggling to understand it.

For all the talk about China - few westerners outside those who venture there to live understand the culture - and even then they remain outsiders. That is the mystery of China. That is the fascination.