CIP hypothesis

*China’s Innoflection Point

brand activation occurs when optimization converges with innovation

In business, an inflection point is a turning point where change sets in. It is also where a business may change its regiment, for instance from a period of investing in innovation to a period of investing in (qualitative) expansion or brand positioning.

China is approaching what I would like to call China’s innoflection point. The point where optimization transforms into innovation and brands start emotionally connecting with their customers. In the run up to this convergence, China is discovering that delivering quality products and paying attention to customer relations actually pays off.

A crucial step in the process of product development is the final step of optimization. It’s what distinguishes an ordinary product from a wildly commercially successful product. Optimization is important because it has a big impact on the design of a product. Even more important, it is the stage during which a lot of experience is gained and internalized. This experience is not easily copied. At least, that is what common sense would suggest. If we take a closer look at the world’s factory, zooming in on the Shenzhen “Bill of Material” ecosystem in particular, this does not always correlate. Likewise, Chinese companies with an ambition to grow internationally will make a law firm or accountant their port of call. Register the subsidiary first and worry about the market later.

In the old Middle Kingdom, reproduction and copying was an indispensable and respected skill. The only road leading to a “literati” career was passing the imperial examinations by memorizing Confucian works. The way to become a great painter was to copy old masters. After spending many years in acquiring technical excellence, one might stray a little bit from the beaten track and venture into optimization. From there, an exceptional individual would occasionally venture into originality.

The Chinese have turned into masters of business optimization, albeit they are better at the art of optimizing profits than improving design. Copy and paste is still the preferred business model in China. Take a proven concept from the West, implement it in China, then localize and optimize it. I have yet to come across the first typical Chinese food “youtiao” (fried dough) or “doujiang” (soy milk) being sold in a KFC in America. In the online world, WeChat is becoming a platform in its own right, with features specifically catering to the Chinese user and going beyond the creativity of the makers of WhatsApp.

From being a contract manufacturer to being an original design manufacturer, the next logical step in China’s development is the approaching innoflection point. That is when innovation no longer lies in optimization but becomes true originality of thought, products, and services. At that point, what has been anticipated for many years becomes a reality, i.e. the popularization of Chinese brands. A related question is whether innovation in our conventional understanding of the word is still possible. We may have to come to the conclusion that innovation is nothing more (and nothing less) than optimization of marketing techniques. Only a small percentage of the total budget spent on product development goes to innovation. Over 90% of the budget is typically split between optimization and marketing. The trend seems to be that optimization is chipping away resources from marketing, oftentimes at the very request of business developers and marketeers.

China is rooted in a centralized plan economy. It has a marketplace that is less mature than the one in America or Europe and it lags behind in terms of marketing strategies. In fact, in the Chinese context, marketing oftentimes amounts to old school networking. The key concern is not the marketing mix but finding out which government official is in charge of which project and how to get into a particular person’s good graces. Low friction reach, distribution, and positive feedback from satisfied customers are what Chinese manufacturers must start caring about. Arguably, the Chinese manufacturer is in a better position today than most Western companies to truly care. It is the manufacturer who has control over the optimization cycle, who can still change the product, whereas the West depends on the factory. The reseller has a lengthier loop to deal with.

If networks rather than product innovations -which can be copied or bought- are the top of the food chain assets of tomorrow, then the West has another innoflection point to worry about, namely its own. Exciting times lie ahead of us, with challenges for both East and West.