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Will reverse innovation take over the world?

The world is changing fast. So too is the perception that innovation is an exclusively western phenomenon, exported to developing countries. In fact, the opposite is increasingly true - emerging markets are exporting exciting new products and business models to the west. 

Reverse innovation’, as it’s become known, is emerging as a key theme for the global economy and it’s one that is going to become more prevalent going forward. Ever since the term was mooted in a 2005 McKinsey Quarterly article entitled“Innovation blowback”, the term has been associated with Asia, and we cannot talk about it without talking about China.

Chinese tech giants only recently exploded onto the radar of western media, but in fact, they have spent years developing their cutting edge mobile products and building vast consumer followings. Now they’re targeting new markets further afield.

Take Tencent, based in Shenzhen. The company dominates daily life in China, with more than two-thirds of all Chinese people using its messaging apps WeChat and QQ, for everything from messaging and shopping, to dining and transportation.

As their market penetration begins to level out at home, Tencent, Alibaba, JD.com and their peers have tried to diversify their revenue sources by expanding organically, seeding their products in new markets. But the critical insight that has served them well in China - that users prefer products bundled into one ‘superapp’ rather than switching between different applications for niche services - has worked against them in jurisdictions like the US and Europe. The prevailing culture in these markets is one of variety, with users preferring to choose between multiple applications.

Facebook, Amazon and Google are formidable competitors with slick products and deep brand loyalty, honed over the past decade. Martin Lau, President of Tencent, is on record saying, ‘We tried to make WeChat international. The reality was that there were other products in the market already.’ In the face of such obstacles, Chinese companies are becoming more acquisitive, using their huge spending power to purchase controlling interests in established brands. In 2016, Tencent acquired the Finnish mobile game company Supercell from SoftBank.

Alibaba has taken a different approach, focusing on the B2B market and moving people and operations to new markets in order to build local networks from the ground up. It recently opened its third European centre in London and its share of the global cloud-computing market rose to 4.6% in 2017, up from 3.7% the year before - albeit well below Amazon’s 51.8% share of the market. And JD.com is due to open an AI lab in Cambridge and invest €1 billion over 2 years to build a logistics network in France, going head to head with Amazon.

Right now, we can’t say that Chinese companies are taking over the world. Their presence in Europe can be described as modest at best, but in time expect to see them challenge American and European companies in key areas such as AI, cloud computing and e-commerce, despite widespread concerns over data security and intellectual property. Perhaps the most powerful way they can do this is through collaboration. Indeed, as far back in early 2017, Tencent took a 5% stake in Tesla, suggesting a keen interest in entering the transformation game.

The future isn’t ‘us and them’. It’s ‘us’.  By working with market leaders in developed countries, the masters of reverse innovation can grow their influence and diversify their operations. Western startups and incumbents should take note of this opportunity to partner with powerful allies and access new markets in Asia and beyond. Reverse innovation can work both ways.   


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