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20 August 2012

From Made in China to Innovated in China;
What is the Role of Universities?
President's Speech     [ The International Academy for Production Engineering1, 62nd General Assembly ]

Ladies and gentlemen, welcome to Hong Kong. It is a great pleasure to be speaking here today in front of manufacturing experts from different parts of the world. I am taking this opportunity to exchange our views on the recent progress in manufacturing and productivity. And I want to focus specifically on the situation in China (including Hong Kong) and go one step further to discuss how universities, in particular the Asian ones, including those in Hong Kong and Mainland China, can adapt to a new role to continue the growth and prosperity.

Let me begin by stating the obvious: that China has become a manufacturing powerhouse and that moving into higher value added manufacturing is a natural next step.

After undergoing structural economic reforms at the end of the 1970s, China's investment and export-led economy have produced the Chinese economic miracle, which has lifted hundreds of millions of people out of poverty, and re-awakened the once great economic power.

For a large part of history, China was one of the most productive manufacturing nations in the world, however, missing out on the industrial revolution changed this.

China's re-emergence as a manufacturing nation has occurred mainly through low-value added manufacturing and has resulted in China becoming the world's largest manufacturer in terms of output - producing roughly 1/5 of world's manufacturing output – with the 'Made in China' label, almost on every product that we touched.

The rapid growth in Chinese manufacturing materialized due to mostly export-led production based on the abundance of cheap labor, land and capital that could be tapped by companies from around the world amidst increased globalization. The export processing zones, initially stimulated the growth of manufacturing: raw materials, parts and components, and other intermediate goods could be imported duty-free as long as they were used to produce items to export. This practice resulted in a massive inflow of foreign firms and capital into China, and in China becoming known as the 'Workshop of the World'.

Times have changed from the colonial days of international production, where countries specialized in different parts of the supply chain. Division of labor can be dominated by those who wield political powers, some countries will do the low value and some countries have the privilege and unique capability to dominate certain portions of value chain, be it product design, or production operation.

With the watershed event of ubiquitous adaptation of Information Communication Technology (ICT) in industry, the entry barrier for countries and regions to engage in manufacturing has been dramatically reduced. Or, as Thomas Friedman would say, the world is flat. No country can be complacent. The competition can come from different corners of the world. The desire for each country to live a better life is equal. However, each country has to develop its own ability to earn its own right to conquer each customer and get its own share of the market.

To propel the continuing growth, it is only natural that China will move to higher value-added manufacturing. But the old recipe of rapid transfer of manufacturing know-how, products and management systems will no longer work. China will need to approach manufacturing with a completely new set of strategies, namely, innovation with science and technology so that high tech products will be developed, equipment will be automated, new materials will be incorporated, factories will be upgraded and last but not the least, the environment will be protected.

Let's take the popular iphone as an example. The 'Designed by Apple in California, Assembled in China' label, which can be found on the back of an Iphone highlights the limits of today's Chinese manufacturing capabilities.

Manufacturing iPhones involves more than nine companies, which are located in China, Korea, Japan, Germany, and the US. The major producers and suppliers of iPhone parts and components include Toshiba, Samsung, Infineon, Broadcom, Numunyx, Murata, Dialog Semiconductor and Cirrius Logic. All iPhone components produced by these companies are shipped to Foxconn, a company from Taiwan, located in Shenzhen China, for assembling into final products and then are exported around the world. As a consequence it is no surprise that the value added by China is a mere single figure percentage.

In other words, most of China's activities are in the middle stages of the Smiley curve–manufacturing, plus some component supply and engineering design–but not at the two high value ends, with product innovation, branding and new materials at one end, and retail and servicing at the other. China knows that it needs to go for these two parts of the Smiley curve.

The Chinese government has written this ambition into its current 12th Five Year Economic and Social Development Plan. As well as developing higher value-added manufacturing in China, there is also aspiration to be producing breakthrough products, which will increase the global competitiveness of Chinese firms. To achieve both of these aims, science and technology is seen as a key driving force. Policies will refocus manufacturing in China toward the sustainable growth and away from the current labor-intensive, low-value added manufacturing practices. R&D spending will increase from 1.4% to 2.2% of GDP; the number of patents held within China will increase, and educational attainment will also increase.

This now brings me to the second part of my speech, what is the role of universities in all this?

It is not just a case of providing the appropriate human capital. Universities around the world are now being looked upon by both governments and industry to be the catalyst for innovations that are viable to stimulate economic activity: exactly what the Chinese economy is seeking right now.

The once separate worlds of academic and industrial research are becoming more and more intertwined. This is happening for two main reasons. The first being that the cost of cutting-edge research is increasing, so universities that want to continue producing cutting-edge research have to depend on support from industry and government. This relationship also allows enterprises to tap into the research capabilities of universities, as well as human resources for the company. Or the graduates can create new startups.

The second reason is that governments are now looking to universities as incubators of new science or technology to propel economic development. Hence governments demand that universities take an active role in the creation, transfer and application of their knowledge for societal use, and want funds to be set aside to support such activities.

The success of the Massachusetts Institute of Technology (MIT) is a good example of why governments have changed their thinking. In 2009, Prof Edward Roberts, the founder and chair of the MIT Enterprise Center published a remarkable study, titled: Entrepreneurial Impact: The Role of MIT. The study boldly claimed that the active companies founded by MIT graduates employ about 3.3 million people and generate annual world revenues of $2 trillion, which would make the 11th-largest economy in the world.

The ability to produce socially relevant research has been described as the third pillar of universities, adding to the existing pillars of fundamental research and teaching. The term given to universities that have achieved such success is third generation universities. And it is becoming common place now for universities to desire such a reputation.

But how is such a reputation achieved?

A platform needs to be in place at a university to allow the commercially focused research to take place. Within the university the infrastructure needs to be in place to support ideas from the stage of gaining initial funding for the research through to providing the resources and expertise for creating a start-up company or for licensing the intellectual property to a corporation. Expertise needs to be gained in obtaining intellectual property protection, and an external network developed to gain funding and support for faculty and students to pursue their ideas.

On top of this platform, the development of a strong innovation culture is vital. In essence, the ability of a university to attract talents, and to empower faculty and students to take initiatives to pursue innovative projects will determine a great deal of their success. Such a culture will be the catalyst for research initiations and will act as a magnet to further attract innovative talents.

The source of new ideas and insights are often located at the interface of established disciplines. To truly tap the knowledge at university, faculty and students need to be encouraged to network across departments. My own institution is a science and technology university but has a business school and a school of humanities and social science, partly to facilitate joint research projects between scientists or engineers and faculty or students from such schools, and also to drive innovation and leadership. We are all located in a physical setting that does not have boundaries. Students and faculty of different disciplines can run into each other often in the corridors and strike up interesting discussions.

A third generation university also needs part of its research to be directed towards the needs of society. By gaining an understanding of the innovations that industry, government and society require, capabilities can be utilized to meet these needs, with research focused into demand-driven projects that have a greater chance of adoption. Collaborations need to be built with established innovators from industry and other educational institutions, as well as government and the investment community. An innovation ecosystem needs to be created of which the university is a part.

In addition to creating innovations, universities need to do their more traditional job of educating the workforce. Investing in higher education, developing human capital is necessary to move up the value chain, enabling the desired move from a low cost labor economy to one higher up on the value and innovation chain.

So how are Asian universities, in particular Chinese universities, doing in this aspect?

In the Times Higher Education 'reputational ranking' which was released in March this year the press release stated: "The West loses ground to the East in the global index of academic prestige, ...US dominates with 44 institutions in top 100 but clear evidence of the growing prestige of Asian institutions across the region, especially China...signaling the start of a power shift from West to East." In the QS Global University Rankings it is a similar story with the US dominating but Asia gaining ground – Hong Kong now has three universities in the top 50 and my own university, the Hong Kong University of Science and Technology (HKUST) was given the number one ranking in Asia for the second year in a row.

China is investing heavily in higher education; it has more than doubled the number of its higher education institutions and undergraduate enrollment has increased seven-fold over the last decade. This year Hong Kong will be switching from a UK traditional 3-year undergraduate system to a 4 year system, with a third more undergraduates overnight and the need to hire 1000 more new faculty members. The C9, China's Ivy League, is receiving substantial fundings, for example Tsinghua's school funding increased 40% from 2010 to 2011 to US$1.16 billion, while its 2011 research funding hit $580 million. The stories are similar in other Asian countries, such as Korea and Singapore.

This dramatic growth in the Asian higher education over the last decade is developing the human capital that the Chinese economy and other Asian economies need. In addition to this a large number of Chinese are still educated in top universities in the US and Europe. China overtook India in 2009 in sending the highest number of foreign students to the US, with over 150,000 annually, 50,000 of which are undergraduates. So the Chinese human capital base is moving away from the masses of cheap unskilled labor: it is becoming more and more educated as the move to higher value-added manufacturing and the production of innovations requires.

How about universities in Hong Kong? I believe universities in Hong Kong find themselves in a very exciting position, with our geo-political location being part of China under the One Country, Two systems principle, we are in a prime position to play a key role of the development of both innovation and higher value added manufacturing in China, in addition to the development of the required human capital.

However, for Hong Kong to play as meaningful a role in the forthcoming development of the Chinese economy as it has over the last three decades: it needs more than just excellent universities. This is a great opportunity for Hong Kong to change the make-up of its economy. Currently over 90% of Hong Kong GDP comes from the service sector, and the Hong Kong government is keen to reduce this dependence.

To achieve this change an innovative ecosystem needs to be created in Hong Kong including universities, government, industry, and the investment community. But Hong Kong is already the envy of the world. It will be difficult to find a region in China more favorable than Hong Kong cum Pearl River Delta in having a combination of top universities, large markets, multitudes of technology and manufacturing enterprises, rule of law, mature intellectual property protection, world-class infrastructures and an international city that most foreign talents find easy to adapt to.

By building on these attributes, Hong Kong can play an important role in providing China with the innovations and talents that it needs for its changing economic landscape, and more importantly, being a well established bridge between East and West, Hong Kong is also facilitating companies and universities from the West to participate in this economic growth and transformation.

To this end, we all need to work together toward the creation of this innovation ecosystem. We need the Government to work with the universities, industries, citizens and students since the development of S&T is of utmost importance to the future of Hong Kong. Increasing the percentage of R&D spending, say to at least match the Country's 2.2%, would be a strong signal. To make things happen and create a supportive climate of opinion, the government needs a high-profile presence, with a high-level bureau to lead the charge – which by the way the new government has publicly proposed - to do long-term and sustainable strategic planning, with a budget to go with it, and with the authority to coordinate the many different parts of the S&T innovation system.

This is a chance for the leading universities of the region to get connected with the exciting growth and market opportunities, industry interaction and consortia funding, coupled with the dynamic development of R&D capabilities in this region, offering an extremely strong combination of institutional capabilities and regional strength to create the global value chain.

I do believe as the only science and technology university in Hong Kong, my institution has a special role to play in the transformation of both Hong Kong and China's economies, which is stated in our university mission. We aim to play a key part in the creation of an innovation ecosystem within Hong Kong, and consequently help Hong Kong contribute toward the continuing upgrade of the Chinese economy: this include moving Chinese manufacturing up the value chain, creating innovations that the global community can enjoy and enabling the global economy onto a more sustainable path.

Thank you.

1   The original name is in French, College International pour la Recherche en Productique, with abbreviation, CIRP (


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