Reverse Innovation: Made in China - For China

Posted by Joel

A few years back I remember hearing about Sara Bongiorni’s book entitled “A Year Without “Made in China”: One Family’s True Life Adventure in the Global Economy.” As the title implies, Bongiorni convinced her family to spend a year without purchasing any products with a “Made in China” stamp/label. But in reality it’s no longer simply about “Made in China.” Emerging markets like China can no longer be leveraged solely as manufacturing bases - China is where innovation needs to happen, with products designed specifically for Chinese consumers. Once perfected, these locally designed products can then be adapted for and exported to the “developed countries”. The process I just described is what Vijay Govindarajan, director of the Center for Global Leadership at the Tuck School of Business describes as “reverse innovation.”

In his October 2009 Harvard Business Review article co-authored with GE CEO Jeffery Immelt, “How GE Is Disrupting Itself” Govindarajan discusses the transition from “glocalization” to “reverse innovation” and the organizational transformation companies must undergo to position themselves to capitalize on this trend.

“Glocalization” vs. “Reverse Innovation”

Glocalization is a combination of “globalization” and “localization” and is the traditional approach adopted by multinationals. Initially for US companies “going global” meant developing products in the US and localizing them for European and Japanese markets where local consumers have similar purchasing power. Govindarajan argues that the consumer markets of emerging economies like China and India are fundamentally different from those of developed countries. He questions “How can you take a product that was originally designed for a US consumer with a median income of $50,000 and profitably adapt it for a middle-class consumer in China whose earnings are significantly less?”

(http://www.vijaygovindarajan.com/2009/10/what_is_reverse_innovation.htm)

“The fundamental driver of reverse innovation is the income gap that exists between emerging markets and the developed countries. There is no way to design a product for the American mass market and then simply adapt it for the Chinese or Indian mass market. Buyers in poor countries demand solutions on an entirely different price-performance curve. They demand new, high-tech solutions that deliver ultra-low costs and “good enough” quality.”

What if you developed a product for the Chinese mass market first, and then adapted it for the US mass market?

That is the question “reverse innovation” seeks to answer, and the reason why Govindarajan feels all companies will ultimately have to adapt in the future. He sees development of products like GE’s $15,000 portable ultrasound machine, originally developed for rural China and later adapted for the US market, as the norm for innovation in the future.

In the context of China, I think we can use Jack Perkowski’s recent post on Geely in China to frame the distinction between glocalization and reverse innovation for what he considers China’s two markets.

“…there are two markets in China—a high priced, high technology market where the 400 million people who have benefited most from China’s economic development shop, and the low priced, low technology, purely local, market where the other 900 million people buy the goods needed in their daily lives.”

While glocalization might get you your piece of the consumer market of 400 million, reverse innovation can get you the other 900 million. If this is the case, then can you come up with a way to effectively implement a combined approach and get the full 1.3 billion?

UPDATE: Read the China Law Blog’s addition to this post HERE

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