Is China Inc going from imitator to innovator?

Just a month ago, China's state-owned chemical conglomerate, ChemChina, which has US$45.6 billion (S$63.8 billion) in revenues and 140,000 employees, successfully acquired Munich machine tool builder KraussMaffei for US$1 billion.

It marked the single largest investment that a Chinese company had ever made in Germany till then.

This week, the long-battered Syngenta, a seeds and pesticides group based in Switzerland, saw its stock price jump despite its lacklustre performance in recent months. The reason? ChemChina is near to closing a deal to take over Syngenta for around US$40 billion.

This is a big numbers game. It is also likely the Chinese government would help foot the bill, one way or another. But the real question is: Would buying Syngenta be important, not just in size, but in kind?

Historically, China has been the world's factory. After years of tinkering and large-scale manufacturing, China's enterprises have become world-class system integrators. That is, they don't necessarily possess the expertise in fabricating critical components themselves but they have developed deep knowledge in sourcing components from the Western world and then developing localised solutions that achieve reasonably high performance at rock-bottom prices.

There is no better illustration than the country's high-speed rail system. The entire network was built through technology transfer agreements with foreign train-makers, including Alstom, Siemens, Bombardier and Kawasaki Heavy Industries. Chinese engineers then devised their own vision for a rail network, which is becoming the fastest and vastest the world has seen.

ChemChina's bid to acquire seeds and pesticides group Syngenta is a clear sign of the country's determination to move from being a system integrator to being a true global leader that shapes the technological trajectory of an industry. PHOTO: REUTERS

In more recent years, Chinese enterprises have been branching out abroad, with Lenovo acquiring IBM, Geely buying Volvo, Sany purchasing Putzmeister and, again just last month, Haier announcing its interest in taking over GE Appliances. Crucially, the Western counterparts involved were also system integrators themselves, albeit with better technologies.

But this way of growth has its own limitations. System integration without the ability to control the underlying technology at the component level has prevented China Inc from introducing "new-to-the- world" innovation.

To move from imitation to innovation, a radical shift from development and application to basic research is desperately needed. Intel, for example, was pouring over US$10 billion into research annually in order to develop the latest microprocessors that power the entire computer industry. Roche, a Swiss drug maker that is also the world's largest biotech company, was investing at a similar rate, at 19.8 per cent of sales, amounting to US$10 billion in R&D for drug discovery.

Component business turns out to be very big business. All this makes the upcoming acquisition of Syngenta by ChemChina all the more interesting.

Unlike KraussMaffei, which is essentially an equipment manufacturer for plastic moulding technology, Syngenta is a component provider (bioengineered seeds and plants as well as pesticides) nestled within the value chain of food production.

If Nestle and Unilever are the "assemblers" of food products that we ultimately buy from Walmart and Costco, Syngenta and other biotech giants are the ones that sit along the upstream of the production system. Rarely known by end consumers, they are nonetheless the technology drivers that keep the big food industry going.

The bid made by ChemChina, whether it ultimately goes through or not, is a clear sign of the country's determination to move from being a system integrator - a fast follower at best - to being a true global leader that shapes the technological trajectory of an industry.

  • The writer is professor of strategic management and innovation at IMD, a business school based in Lausanne, Switzerland.
A version of this article appeared in the print edition of The Straits Times on February 06, 2016, with the headline 'Is China Inc going from imitator to innovator?'. Print Edition | Subscribe