From Factory Asia To Creator China; Lessons For Malaysian SMEs

China is the top manufacturing country in the world, making up 20 percent of global output worth over two trillion dollars. In comparison, in 1990, China only produced less than three percent of total global output.

There’s much to learn about China’s astonishing emergence as a manufacturing powerhouse.

While it has for many years depended on low wage levels to compete internationally, supported by a vast domestic market, the economic giant no longer just wants to be known as ‘Factory Asia’ that manufactures products originally invented elsewhere; it is making big leap forward in innovation by honing in on research and development (R&D).

Last year, China spent over 279 billion dollars on R&D, up 14 percent year-on-year, focusing on promoting technologies such as robotics, big data and artificial intelligence. It broke into the world’s top 20 most-innovative economies in the Global Innovation Index 2018.

But the transition from a manufacturing-led to innovation-driven economy did not happen overnight. Professor Neale O’Connor from Monash University Malaysia explains.

“China did not go directly into pure R&D; it has gone around it.” O’Connor has spent decades in China and Hong Kong analysing factories and their manufacturing operations.

“It is happening now but it has taken them more than a decade or more to get there.”

Factory Owners Don't Have the 'Steve Jobs' Mindset

O’Connor, who now heads Monash University Malaysia's accounting and finance department, says China had for many years tried different approaches to innovation but has mainly been driven by profits instead of long-term development strategies through scientific and technological progress.

“The traditional approach to SME manufacturing is to make something that can be sold very quickly and make money out of it,” says O’Connor.

That same mindset is prevalent among Malaysian SMEs, he noted.

“It really gets down to the mindset of the factory owner. They don’t have the ‘Steve Jobs’ mindset of wanting to make the best product in the world. It tends to be profit-focused instead of having a multi-year plan to make the best product,” says O’Connor.

Malaysian SMEs, making up 98.5 percent business establishments in the country, can learn from China on what it has done right, and more importantly, evade the pitfalls it made over the decades.

Focus on Clustering, Niche Design and IP Protection

“One thing that China did well was to cluster its manufacturing into particular areas,” says O’Connor.

Take Guangzhou’s automobile industry cluster, for instance. “About ten years ago, Volkswagen, Peugeot, Toyota and many more were encouraged to come and invest in Guangzhou. So now, you have a cluster and an ecosystem,” adding the agglomeration of anchor firms sets up the conditions for the arrival of related industries and technology to drive collective growth.

Malaysia, has had similar cluster ecosystem in Penang in electronics manufacturing but it is not enough, says O’Connor.

“Malaysia is challenged because of the small population, it has to focus on niche.”

Malaysia, he says, has great potential to be the base for design teams as it offers favourable intellectual protection rights, compared to China. “For assembly, Indonesia has the scale. Cambodia and Vietnam has lower costs to support manufacturing. But for new start-ups that don’t need to produce huge volume, Malaysia can be a place to make small volume prototypes (before it goes into large scale manufacturing).

‘By keeping the designing in Malaysia, so you have total control of the intellectual property protection that goes into the firmware.”

Malaysia's Advantage Over China. Better IP Protection

“IP protection is so critical. If Malaysia can afford that protection, it will be attractive to start-ups. Thailand, in some ways, is a good model in being niche in the Internet of Things area.”

In Thailand, its Saensuk Smart City, backed by the Saensuk Municipality is testing the roll out of intelligent healthcare monitoring system aimed at improving the quality of care for its senior citizens. The first of its kind project is developed via partnership with tech majors like Dell and Intel.

Get the Education Right

“China hasn’t got everything right yet. What Malaysia can learn, at the very minimum, is to get the education right,” says O’Connor.

China’s education, he observes, tends to emphasise on memorisation or rote-learning, while the examination structures do not necessarily prepare graduates for the real world.

“Malaysia needs to invest more in education and rethink its right curriculum so that it fits the needs of industries. Things are changing faster compared to a decade ago, so curriculums need to change too,” says O’Connor.

Even though China has the scale to do robotics that Malaysia doesn’t have yet, it still faces talent constraints as it lacks highly skilled labour to run those machines.

“For China factories, they find it easier to not upgrade their assemblies and stick to low skilled labour because it is hard to get highly skilled employees. Graduates are not interested in manufacturing because they perceive it as ‘dirty’. They go into the cities to find finance jobs.”

“We need to produce graduates who are ready to go into SMEs and actually empower the change that needs to happen in manufacturing.”

Pay Attention to These Industries

“I always look at where the top venture capitals (VC) are invested in. It is a good predictor of the future because they are always looking for the next best thing,” says O’Connor.

Over the last five years, the VC-funded industries are biotech and fintech, he observes. “That is definitely one area that Malaysia could get into, to provide an attractive place for VC-funded tech start-ups.

Biometric sensing is another area he thinks Malaysia can capitalise on.

“It is becoming a huge trend, being able to acquire biometric data of humans. It’s in high demand by insurance companies. So, sensoring technology is a huge area where Malaysia may see as an opportunity to capitalise on.”

KPMG’s Venture Pulse Q22018 report notes that artificial intelligence, autonomous driving, healthcare, biotech and blockchain are expected to be the big winners over the next few quarters. According to the report, there was considerable funding for companies specialising in genetic sequencing-related technology for early detection of terminal diseases.

While the agro-tech sector continues to draw encouraging investments as investors look to capitalise the growing issue of food security.

Artificial intelligence is also attracting investors across other sectors as more companies focus on integrating the technology into their business models, with China having a distinct advantage in terms of AI development due its large population and massive pool of aggregated data.

China-based SenseTime, which provides facial recognition technology, raised over $1.2 billion in the quarter, making it the world’s most valuable AI company to-date at a $4.5 billion valuation.