Economics
The Tragicomedy of Innovation I Personally Experienced
The author of this article, Zhang Guobao (1944-2019), was the former Deputy Director of the National Development and Reform Commission and Chairman of the Expert Committee of the National Energy Administration. His life witnessed China's transformation from a backward feudal country to a modern industrialized powerhouse. In this process, he also experienced the emergence, prosperity, decline, and even disappearance of numerous industries. Many companies competed fiercely, some succeeded, while others were eliminated. However, for enterprises, there are no permanent winners, only perpetual innovators, and the same applies to the country. (This article was written by Mr. Zhang Guobao in 2013, and many of the insights and stories within it still offer profound reflections today.)

January 6, 2024
Zhang Guobao
The former Deputy Director of the National Development and Reform Commission and Chairman of the Expert Committee of the National Energy Administration.
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Nokia and other old brands have declined.

Recently, due to work-related reasons, I visited a company in the United States for investigation. What did I see? One of the most crucial components of our third-generation nuclear power— the reactor coolant pump. It is the “heart” of a nuclear power plant, working from the start of the plant until decommissioning. If it stops working, the power plant cannot operate. The founder of this company is the Wright brothers, who invented the airplane. It used to be an aircraft manufacturing factory and was once the second-largest company in the United States. However, it couldn’t compete with Boeing and other aircraft manufacturers that emerged later, so it shifted to producing certain important components for automobiles. Later, it transitioned to producing reactor coolant pumps for nuclear power plants, which are also highly technologically advanced products. However, the company’s scale has become much smaller compared to its earlier years. I had a profound realization that it is extremely difficult to become a century-old establishment in the industrial field.

In the past two years, many people may have noticed that Kodak, Motorola, Nokia, and other former global brands have gradually exited the stage of history, either disappeared or been acquired by others. Recently, even Sony is not doing well.

I have visited Nokia before. I am a straightforward person, so I directly asked the CEO of Nokia at that time: “Nowadays, many people in China are talking about Apple. Will Nokia one day be unable to compete with them and fail?” The CEO of Nokia didn’t look pleased after hearing this and said that they were not afraid, explaining why they believed they could compete. I told them whether they are afraid is not up to them; the market decides. That conversation didn’t make the other person very happy. However, unfortunately, my prediction came true. In the mobile phone industry, Apple and Samsung began to rise, and Nokia was also acquired. There are numerous examples like this.

The consequences of being late for domestic color TVs and digital cameras.

I often warn some Chinese companies that they may be very successful at a certain time, but they must never be complacent and should tread carefully. Today, your products may be selling well and prestigious, but after a while, you may exit the stage of history. I have encountered many examples of this in my work.

In the early stages of reform and opening up, China did not produce color TVs. People who had the opportunity to go abroad would prioritize buying a color TV. So, the country made a determined effort to develop the color TV industry, and indeed, the industry was established. China’s color cathode-ray tube (CRT) televisions were once the world’s number one, with an annual production of 10 million units, and they had a dominant position in exports worldwide. It was during this time that LCD technology emerged. Domestic companies started considering whether LCD would replace CRT in the future and held research conferences. At that time, I asked the CEO of a color TV company if LCD would one day replace their CRT. He said, “No, at least not for the next 20 years.” The country also conducted assessments and invited the top one to two hundred experts in the industry to discuss the future development direction of display screens in China. The conclusion was that LCD could not replace CRT. However, the subsequent development proved otherwise.

Our digital cameras were also like that. When digital cameras first appeared, they may have had a resolution of just a few hundred thousand pixels. Later, they reached one or two million pixels, and the cameras were not very bulky. It was more of a casual hobby for everyone. At that time, I even wrote something emphasizing the importance of digital technology development. We also organized expert assessments, and the experts said that digital cameras could not replace optical cameras. However, I still insisted on having them research digital cameras. Rumors started spreading, saying that Zhang Guobao liked taking photos, so he had them work on this. Despite our subsequent efforts, we were still a step behind in competition with other countries in terms of digital technology. We missed out on such a huge market. I share this story to illustrate the importance of innovation.

Huawei’s high-intensity investment in innovation.

Let me share two more stories. One of them is about Huawei. I knew Ren Zhengfei and a few others when they started their business. During the early stages of reform and opening up, I visited Northern Telecom (now Nortel) in Canada. The company was located on the border between the United States and Canada, surrounded by beautiful scenery with lakes, and the living conditions were excellent. They had 4,000 R&D personnel, including many Chinese who had studied in the US or Canada and stayed to work there. When I saw that, I felt disheartened, thinking that I might never see a hope of catching up with them in my lifetime. At the very least, we couldn’t provide our researchers with such hardware conditions. However, I was mistaken in my prediction. Huawei has already surpassed Northern Telecom, and the batch of companies from that time are now quite weak.

Why can Huawei achieve this? Because they have indeed put great effort into innovation. In 2012, Huawei’s sales revenue was 220.1 billion yuan, and their R&D expenses reached 30 billion yuan, accounting for 13.7% of the sales revenue. Generally speaking, if an international company can allocate 3% of its sales revenue to R&D, it’s considered good, and 5% indicates a focus on research and development. At the same time, Huawei recognizes the importance of intellectual property and has implemented a patent technology strategy, engaging in legal battles with others. By the end of 2012, Huawei had accumulated 41,948 patent applications in China, with 14,494 patents filed abroad and 30,240 patents granted. It is precisely due to their high-intensity investment in innovation that Huawei has grown into a globally renowned high-tech company.

There may be other factors contributing to Huawei’s success, but I believe that innovation is undoubtedly crucial because Huawei doesn’t heavily rely on government support. When Huawei gained some recognition, then-Prime Minister Zhu Rongji visited and was impressed. He immediately offered support, saying, “What conditions do you need? I will support you. If you lack funds, shall I provide a loan of 300 million yuan?” Ren Zhengfei agreed in front of the Prime Minister, but I could tell that he wasn’t very enthusiastic. Later, we firmly implemented Premier Zhu Rongji’s directive to provide the loan to Huawei, but they declined. They didn’t want to be too closely tied to the government. Even now, they are not publicly listed, but instead, they have focused their efforts on innovation.

Foreign lamb meat and modernization that cannot be bought.

Starting from 2004, China’s installed capacity for power generation has been growing at an average rate of 100 million kilowatts per year, creating a miracle. Not only have all domestic power plants adopted domestically-made equipment, but from 2008 to 2012, a total of 92.36 million kilowatts of power generation units were exported, making China the world’s most important provider of power equipment. This progress in our equipment manufacturing industry is a microcosm of China’s industrial development. In the past, people used to say that modernization cannot be bought. I now deeply understand that if we hadn’t pursued innovation back then, could we have produced these equipment ourselves? Even if we had so much foreign exchange, could we have purchased 100 million kilowatts of power generation equipment on the international market?

Let me give you an example. This year, the price of lamb has increased faster than pork. The relevant departments and the central government are hoping to stabilize the price of lamb, and it’s being taken seriously. We have such large foreign exchange reserves, so why not just use some money to buy? Everyone agrees. However, when we tried to purchase, we found that there wasn’t that much lamb available in the international market. The amount of lamb available for trade is only 100,000 tons, and if you try to buy, the price might rise. Similarly, if we were to buy power generation equipment, it could also drive up the prices. Therefore, we must take the path of independent innovation.

“Outstanding Students” and the New Challenge in Suzhou

A few days ago, I met an old friend, Jiang Hongkun, the Party Secretary of Suzhou City in Jiangsu Province. He said that Suzhou had achieved remarkable performance from 2000 to 2010. In those 10 years, Suzhou invested a total of 3.5 million people, including migrant workers who found employment in Suzhou. They used 1.04 million acres of land, which means that 1.04 million acres of land were converted from agricultural to industrial use. They created a trillion yuan in output value, and the local fiscal revenue increased by 100 billion yuan. It can be said that Suzhou is a leader in reform and opening up, and these numbers already demonstrate that.

However, Jiang Hongkun also mentioned that this development model, relying on high-intensity input of factors, is becoming difficult to sustain. Can you still bring out 1.04 million acres of land? No, it’s impossible. What will be Suzhou’s next step for development? It can only rely on institutional and technological innovation to unleash new development vitality.

Since the reform and opening up, we have made great achievements in innovation. However, if we look at it objectively, we should neither underestimate ourselves nor be overly arrogant. We still have a certain gap with developed countries. Taking patents as an example, in 2011, China applied for a total of 16,406 international patents, only one-third of the number in the United States, and these one-third of patents also have technological gaps compared to US patents. In 2011, among the Fortune Global 500 companies, there were only 21 mainland Chinese brands selected, with only 7 in the manufacturing industry, while the United States had 239, France had 43, and Japan had 41. Therefore, we still have a long way to go in terms of our brands and innovation.

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Zhang Guobao
The former Deputy Director of the National Development and Reform Commission and Chairman of the Expert Committee of the National Energy Administration.
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