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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Smartphones and an Optimistic Take on China’s Economic Future



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China’s days as the world’s low-cost manufacturing platform are numbered. Yet rising Chinese consumption levels could prove a new source of economic strength. Jack Hidary, a serial technology entrepreneur, argues that the spread of smartphones in China will have a powerful impact on the global economic landscape:

Mobile subscribers in China are now using 330 million smartphones—which is a 150% increase over last year. iiMedia, a Chinese research firm, recently released this smartphone data, which has not been widely distributed in English.

China’s active smartphone now exceeds the total number of all 321 million mobile phones active in the US. Kai-fu Lee, the former lead China researcher at Microsoft (MSFT) and then Google (GOOG), predicts that China will have500 million smartphones in use by the end of 2013. The implications of such a dramatic flip from dumb-to-smart phones are far-reaching and will ultimately affect the closely watched GDP growth rate in China. Those 500 million smartphone users are going to drive new patterns of online and offline commerce that will have global consequences. This is particularly relevant as China attempts to increase the role of domestic consumption as a driver of its GDP.

In China, consumers are more likely to access the web via smartphones rather than traditional PCs, and increasingly so. New online services are likely to be online only. Hidary describes the robust expansion of the Chinese app market and how it is contributing to the transformation of brick-and-mortar retail. He also describes how the spread of smartphones is allowing Google, very much a minor player in search in China, to gain a foothold, as Android is the country’s dominant smartphone platform.

What is more interesting about the spread of smartphones, however, is its potential to spark user-led innovation, per the work of MIT’s Eric Von Hippel:

“Historically it was thought that producers were the innovators,” explains Von Hippel. “Because, of course, they can spread the cost, and justify the cost, of doing research and development. But when you look at it every market starts insignificantly, so for example in skateboards it’s the kids who develop them and it is the company, say a Mattel, that jumps on board later when the user has a product. The user innovates.”

That is, a more consumerist Chinese public, armed with 500 million smartphones, might drive innovation in the world of mobile-only online services, giving rise to new brands and new business enterprises that might go on to transform consumption in the wider world. For a sense of how this might work I recommend reading Michael Schrage’s Who Do You Want Your Customers to Become? Consider Tim O’Reilly’s take on Michael’s book:

Great innovators, Schrage argues, don’t just conceive new products, they reconceive the customers for those products.  Think for a moment about how Henry Ford didn’t just create cars — he had to create a whole new vision of society in order to create customers for those cars. Edison didn’t just invent the lightbulb and the phonograph, he invented  people who came to rely on those things, and everything else that electricity now lets us take for granted.

Even as we fret about what is sure to be a rocky economic transition in China from investment-led growth to a more balanced and sustainable economy purged of bad debts, the spread of smartphones holds out the possibility that the next Henry Ford will be Chinese. 

The caveat, as always, is that for China to become a more innovative society, it will also have to become a freer society. We’ll see how that plays out.



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