The rise of Asia and reverse innovation

Will Asia reinvent itself as the world's innovation capital?

This would have been an easy question to answer if we had the privilege to have the world-famous French astrologer Nostradamus among us.

Unfortunately, we do not have that option today, so let's try to make sense of the signals around us that will help find an answer to this question.

The best place to start is to look at some of the predictions you may have come across at some point:

- Asia is expected to make up half the world's economic output by 2050, led by seven economies _ China, India, Indonesia, Japan, South Korea, Thailand and Malaysia, with more than 3 billion people among them.

- The combined gross domestic product of Asia is expected to rise from US$17 trillion in 2010 to $174 trillion in 2050, with per-capita GDP of $40,800 in current terms.

- The rapidly developing economies in Asia, with low household incomes, will experience an explosive GDP growth of 8-12%, whereas the developed economies, with high incomes, will encounter slow economic growth of 1-4%.

The stuttering growth in the US and Europe's current struggles to hold itself together against severe austerity policies do lend some credence to above prophecies. Job losses, high personal debt, a weak housing market and high healthcare costs have changed the complexion of markets in developed countries, where affordability continues to move up the list of most important buying criteria among a growing population of people.

How to serve this Western demand for high-value, low-cost innovative product and services?

Answer: reverse innovation.

Reverse innovation or trickle-up innovation is a term referring to an innovation seen first, or likely to be used first, in the developing world before spreading to the industrialised world. The term was introduced by Dartmouth Profs Vijay Govindarajan and Chris Trimble and GE chairman and chief executive Jeffrey Immelt.

The Harvard Business Review said this reverse innovation approach is the opposite of the "glocalisation" approach that many industrial-goods manufacturers based in rich countries have employed for decades. With glocalisation, companies developed great products at home and then distributed them worldwide, with some adaptations to local conditions. It allowed multinationals to make the optimal trade-off between the global scale so crucial to minimising costs and the local customisation required to maximise market share. Glocalisation worked fine in an era when rich countries accounted for the vast majority of the market and other countries did not offer much opportunity. But those days are over thanks to the rapid development of populous countries such as China and India and the slowing growth of wealthy nations.

Some of the industry examples of reverse innovation are:

- Automotive: India's Tata manufactured the Tata Nano for price-conscious customers in that country in 2009. It plans to launch Tata Nano in European and US markets.

- Health care: GE Healthcare developed the GE MAC 800 electrocardiogram machine for doctors in India and China in 2008. These were later introduced in the US market at $2,500 or an 80% markdown from products with similar capabilities.

- Telecommunications: Nokia 1100 was launched with the tagline "Made in India". It had a built-in flashlight and a dust-proof non-slippery grip and was lightweight and small. This phone was instant success in the developed world as well due to its durability and long battery life.

Indeed, in this column writers have often pointed out the same thing is happening with supply chain management innovation, particularly in logistics. Innovation has enabled competencies and capabilities in Asia to leapfrog over those in the likes of North America and Europe.

To execute reverse innovation successfully, two key supply chain elements _ coordination and collaboration _ are absolutely necessary. GE Healthcare's success case study in China shows there are three guiding supply chain reorganisation principles:

First, resources and decision-making must be localised in emerging markets. GE did that by creating local growth team (LGT) in China with dedicated resources in areas like product development, manufacturing, sourcing, marketing, sales and distribution. Second, the local organisation has to be connected to global technology. In GE's case, the China team could borrow world-class technology that the company had in the US. Third, the local organisation must take an experiment-and-learn approach that GE's LGT took and tried to test assumptions so they could uncover knowledge about unknowns such as the size of the customer base and the price point at which the customer base will buy the product.

Back home, the above appeal of reverse innovation, hopefully, will build a strong case for higher R&D spending in Thailand, which is at a low 0.02% of GDP. According to Global Competitiveness Report 2011-2012 released by the World Economic Forum, out of 142 economies Thailand was ranked 39th overall last year, falling one place from 2010 and three places from 2009. And in the area of innovation and sophistication, Thailand's rank was further down to 51st place.

Like GE's Mr Immelt has been saying: "Success in developing countries is now a prerequisite for continued vitality in developed ones." We hope Thailand can follow through, act fast and adjust to these new realities.

Kanishka Ghosh is a supply chain professional and independent writer. Weekly Link is coordinated by Barry Elliott and Chris Catto-Smith CMC of the Institute of Management Consultants Thailand. It is intended to be an interactive forum for industry professionals. We welcome all input, questions, feedback and news at: Barry.Elliott@Inslo.com and cattoc@cmcthailand.org

About the author

columnist
Writer: Kanishka Ghosh
Position: Reporter