Navigating Through Digital Transformation in China

AmCham China's launch event for the new Technology and Innovation Initiative

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On April 19, AmCham China launched its new Technology and Innovation Initiative with an expert discussion highlighting the opportunities and challenges faced by multinational corporations (MNCs) in China in the era of digital transformation. The event featured keynote speaker Jeongmin Seong, senior fellow at the McKinsey Global Institute (MGI), as well as a panel with Chris DeAngelis, partner and general manager of Alliance Development Group (ADG), Yan Luo, special counsel at Covington & Burling LLP, and Dwight Nordstrom, chairman of PRI Management and Consulting Ltd. AmCham China's President, Alan Beebe, moderated the event which hosted nearly 70 audience members from a variety of companies and institutions.

Innovation: China vs. the World

In his speech, Jeongmin shared key findings from MGI’s 2017 report Digital China: Powering the Economy to Global Competitiveness. He described the three digital forces that are reshaping value chains and have the potential to shift (and create) 10 to 45 percent of industry revenue pools across all players by 2030: Disintermediation, Disaggregation, and Dematerialization.

Jeongmin also described the three factors driving the further development of China’s digital economy: 1) A large and young market enabling large-scale, rapid commercialization; 2) Well-capitalized digital giants building rich digital ecosystems; 3) A relaxed regulatory environment promoting innovation and experimentation. China is already a global leader in customer-focused business, such as e-commerce and digital payments, but still needs to catch up in science and engineering-based innovation, such as aviation, pharmaceutical, etc.

Panelists remarked that the main reason for China’s newfound leadership in certain sectors is not a result of their cutting-edge technology, but China’s “integration innovation” model wherein the coordinated application of scientific/technological, social, and business innovation are used to develop solutions to complex challenges. While this model appears easy, in fact, it is very hard to effectively implement. Unlike their US counterparts, Chinese tech infrastructures (software and platform solutions) can be tailored to meet diverse client needs. “Chinese platforms are more scalable, open, customizable, and flexible compared to their MNC counterparts. This is where two sides need to work together for mutual benefits,” said Chris DeAngelis.

Disruptive Technology: Adopting Despite Struggling

The implications of new technologies, such as artificial intelligence, blockchain, Internet of Things, or cloud computing, are always groundbreaking, but it is still too early to truly understand their development trajectory. Uncertainties in their business applications still linger, especially in traditional industries.

As a tech-adopter from the manufacturing industry, Dwight shared a story about one of his clients, a shower door company whose sales grew from zero to US $100 million in only three years, and now has 50% of the market share in the US. The trick to their meteoric success is that they use VR technology to visualize products on their website. Among their 220 employees in the US, as many as 70 have expertise in VR.

Despite the growing group of successful tech-adopters, many companies in traditional industries are still struggling to resolve what and how to adopt, especially considering their lack of understanding and strict return on investment (ROI) requirements. In the past, machinery and engineers were the costliest components of factories’ expenditures, but now the digital solutions (automation, software) and equipment (monitors, cameras, sensors) are rapidly taking their position. To save costs or avoid potential corporate culture conflicts, traditional manufacturers tend to outsource their tech needs to digital startup partners, instead of acquiring the latter as multinational tech companies do.

For MNCs in China, there are additional roadblocks to deal with due to their headquarters and Chinese market access restrictions. Chris believes that one of the biggest challenges for large companies to adopt new technology is that their decision makers do not understand tech. As well, while it is gradually becoming a consensus that smart companies should come to China because of the rich resources (data, consumer, infrastructure) and the extreme pace of innovation, the market access restrictions in certain industries is still a major obstacle. One example of this is global credit card companies. After 15 years of limited operations in China, they are now no longer relevant with the popularity of WeChat Pay and Alipay.

No Law, Soft Law, and Hard Law

With the rapid development of disruptive technologies, the need for government regulation is becoming more and more apparent. The recent data breach of Facebook reflects the regulatory absence in the US for sensitive issues, such as data and user privacy protection. While the spotlight is shining upon the frictions between the US and China, it is actually a worldwide challenge that different governments are coping with in various ways.

According to panelists, the Chinese government’s approach is unique and to some extent “soft”. China tends to form national standards, instead of strict regulations towards tech industries. The Chinese government is giving space for companies to grow through trial and error, with a certain maneuverability for experimenting and piloting their new tech and innovative business models. With the nationwide encouragement for “mass entrepreneurship and innovation (大众创业,万众创新)”, the Chinese government is very restrained when it comes to regulating emerging tech industries.

Simultaneously, the EU is taking a wholly different approach with the recent approval of General Data Protection Regulation (GDPR), which replaces the Data Protection Directive 95/46/EC and was designed to harmonize data privacy laws across Europe, to protect and empower all EU citizens’ data privacy, and to reshape the way organizations across the region approach data privacy. Every entity that collects, uses, or retains EU citizens’ data will be subject to this regulation and may face heavy fines for non-compliance. Cross-border e-commerce companies like Alibaba may be caught in the middle and end up facing significant difficulties as they are forced to adjust their existing business models.

The discussion and audience Q&A portion of the event also covered the Chinese startup community, tech mergers and acquisition, “Made in China 2025” and other relevant topics.

Stay tuned for more activities under the framework of our Technology and Innovation Initiative, an “insight and collaboration” platform designed to help our members and their organizations navigate and take advantage of the impact of disruptive technologies. For more information and engagement, please subscribe to the T&I mailing list HERE or contact Rhine Yuan at ryuan@amchamchina.org.