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6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 15
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World politics Business amp finance Economics Science amp technology Culture Blogs Debate Multimedia Print edition
Special report
The world turned upsidedown
First break all the rules
Easier said than done
Grow grow grow
Here be dragons
Apr 15th 2010 | From the print edition
Special report
First break all the rulesThe charms of frugal innovation
GENERAL ELECTRICS healthshycarelaboratory in Bangalore contains some of thecompanys most sophisticated productsmdashfrom giant body scanners that canaccommodate the bulkiest American footballplayers to stateshyofshytheshyart intensiveshycareunits that can nurse the tiniest prematurebabies But the device that has captured theheart of the centres boss Ashish Shah ismuch less fancy a handshyheldelectrocardiogram (ECG) called the Mac400
The device is a masterpiece of simplificationThe multiple buttons on conventional ECGshave been reduced to just four The bulkyprinter has been replaced by one of thosetiny gadgets used in portable ticketmachines The whole thing is small enoughto fit into a small backpack and can run onbatteries as well as on the mains Thismiracle of compression sells for $800instead of $2000 for a conventional ECGand has reduced the cost of an ECG test tojust $1 per patient
In Chennai 200 miles (326km) farther eastAnanth Krishnan chief technology officer ofTata Consultancy Services (TCS) is equallyexcited about an even lowershytech device awater filter It uses rice husks (which areamong the countrys most common wasteproducts) to purify water It is not only robust and portable but also relatively cheap giving alarge family an abundant supply of bacteriashyfree water for an initial investment of about $24and a recurring expense of about $4 for a new filter every few months Tata Chemicalswhich is making the devices is planning to produce 1m over the next year and hopes for aneventual market of 100m
These innovations are aimed at two of Indias most pressinghealth problems heart disease and contaminated waterSome 5m Indians die of cardiovascular diseases every yearmore than a quarter of them under 65 About 2m die fromdrinking contaminated water The two companies are alreadyat work on ldquonew and improvedrdquomdashby which they mean simplerand cheapermdashversions of these two devices
Budgetshyminded
Innovation in emerging markets
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Charleston and publicpolicyWhy gun control isdoomed
Mass shootings and gun control A culture ofviolenceThe Confederate flag Time for the museumUkraine and Russia Putin the uniter
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34
263Like
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 25
New masters ofmanagement
The power to disrupt
Sources amp acknowledgments
Reprints
There is nothing new about companies adapting their productsto the pockets and preferences of emergingshymarketconsumers Unilever and Procter amp Gamble started sellingshampoo and washing powder in small sachets more thantwo decades ago to cater for customers with cramped livingspaces and even more cramped budgets Nike produces anallshyenveloping athletic uniform to protect the modesty ofMuslim women athletes Mercedes puts airshyconditioningcontrols in the back as well as the front of its cars because people who can afford aMercedes can also afford a driver
But GE and TCS are doing something more exciting than fiddling with existing productsthey are taking the needs of poor consumers as a starting point and working backwardsInstead of adding ever more bells and whistles they strip the products down to their bareessentials Jeff Immelt GEs boss and Vijay Govindarajan of the Tuck Business Schoolhave dubbed this ldquoreverse innovationrdquo Others call it ldquofrugalrdquo or ldquoconstraintshybasedrdquoinnovation
There is more to this than simply cutting costs to the bone Frugal products need to betough and easy to use Nokias cheapest mobile handsets come equipped with flashlights(because of frequent power cuts) multiple phone books (because they often have severaldifferent users) rubberised key pads and menus in several different languages Frugal doesnot mean secondshyrate GEs Mac 400 ECG incorporates the latest technology Many cheapmobile handsets allow users to play video games and surf the net Frugal often also meansbeing sparing in the use of raw materials and their impact on the environment
The number of frugal products on the market is growing rapidly Tata Motors has produceda $2200 car the Nano Godrej amp Boyce Manufacturing one of Indias oldest industrialgroups has developed a $70 fridge that runs on batteries known as ldquothe little coolrdquo FirstEnergy a startshyup has invented a woodshyburning stove that consumes less energy andproduces less smoke than regular stoves Anurag Gupta a telecoms entrepreneur hasreduced a bank branch to a smartshyphone and a fingerprint scanner that allow ATMmachines to be taken to rural customers
Frugal innovation is not just about redesigning products it involves rethinking entireproduction processes and business models Companies need to squeeze costs so theycan reach more customers and accept thin profit margins to gain volume Three ways ofreducing costs are proving particularly successful
The first is to contract out ever more work Bharthi Airtel an Indian mobile company thatcharges some of the lowest fees in the business but is worth $30 billion has contracted outeverything but its core business of selling phone calls handing over network operations toEricsson business support to IBM and the management of its transmission towers to anindependent company To make this work Bharthi had to persuade its business partners torethink their business models too For example Ericsson had to agree to be paid by theminute rather than for selling and installing the equipment and rival mobile companies to renttheir towers rather than own them outright
The second moneyshysaver is to use existing technology in imaginative new ways TCS islooking at using mobile phones to connect television sets to the internet Personalcomputers are still relatively rare in India but televisions are ubiquitous TCS has designed abox that connects the television to the internet via a mobile phone It has also devised aremote control that allows people who have never used keyboards to surf the web Thisidea is elegant as well as frugal by reconfiguring existing technology it can potentiallyconnect millions of people to the internet
The third way to cut costs is to apply massshyproduction techniques in new and unexpectedareas such as health care Devi Shetty is Indias most celebrated heart surgeon havingperformed the countrys first neonatal heart surgery on a nineshydayshyold baby and numberedMother Teresa among his patients Yet his most important contribution to medicine is not hissurgical skill but his determination to make this huge industry more efficient by applyingHenry Fords management principles He believes that a combination of economies of scaleand specialisation can radically reduce the cost of heart surgery His flagship Narayana
Products and events
Test your EQTake our weekly news quiz to stay on top of theheadlines
Want more from The EconomistVisit The Economist eshystore and yoursquoll find a rangeof carefully selected products for business andpleasure Economist books and diaries and muchmore
The media in Singapore Zip it5
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 35
Hrudayalaya Hospital in the ldquoElectronics Cityrdquo district of Bangalore not far from GE Infosysand Wipro has 1000 beds (against an average of 160 beds in American heart hospitals)and Dr Shetty and his team of 40shyodd cardiologists perform about 600 operations a week
The sheer number of patients allows surgeons to acquire worldshyclass expertise in particularoperations and the generous backup facilities allow them to concentrate on their specialityrather than wasting their time on administration Dr Shetty has performed more than 15000heart operations and other members of his team more than 10000 The hospital charges anaverage of $2000 for openshyheart surgery compared with $20000shy100000 in America butits success rates are as good as in the best American hospitals
Dr Shetty has devoted much of his energy to boosting his customer base largely forhumanitarian reasons but also because he believes that higher volumes lead to betterquality He has established video and internet links with hospitals in India Africa andMalaysia so that his surgeons can give expert advice to less experienced colleagues Healso sends ldquoclinics on wheelsrdquo to nearby rural hospitals to test for heart disease He hascreated a healthshyinsurance scheme working with various local selfshyhelp groups that covers25m people for a premium of about 11 cents a month each About a third of the hospitalspatients are now enrolled in the scheme A sliding scale of fees is used for operations sothat richer customers subsidise poorer ones The entire enterprise is surprisingly profitablegiven how many poor people it treats Dr Shettys familyshyowned hospital group reports a77 profit after taxes compared with an average of 69 in American private hospitals
The group has recently built three other hospitals next to the heart clinicmdasha trauma centre a1400shybed cancer hospital and a 300shybed eye hospital They all share central facilities suchas laboratories and a blood bank Dr Shetty is also setting up ldquomedical citiesrdquo in other partsof the country Over the next five years his company plans to increase its number of bedsto 30000 making it the largest privateshyhospital group in India and giving it more bargainingpower when it negotiates with suppliers thus driving down costs further
From jugaad to shanzhai
Indians often see frugal innovation as their distinctive contribution to management thinkingThey point to the national tradition of jugaadmdashmeaning roughly making do with what youhave and never giving upmdashand cite many examples of ordinary Indians solving seeminglyinsoluble problems But China is just as good as India at coming up with frugal new ideasMindray for example specialises in cheap medical products such as ECG devices andBYD has radically reduced the price of expensive lithiumshyion batteries by using less costlyraw materials and learning how to make them at ambient temperatures rather than inexpensively heated ldquodry roomsrdquo This has reduced their price from $40 to $12 apiece andmade them competitive with less powerful nickelshycadmium batteries
The Chinese have made two distinctive contributions to frugal innovation The first is theuse of flexible networksmdashpowered by guanxi or personal connectionsmdashto reduce costs andincrease flexibility Li amp Fung a Hong Kongshybased company has long been a pioneerworking closely with a network of about 12000 companies operating in more than 40countries It puts together customised supply chains from its vast network of associatesand keeps an eye on quality and order fulfilment Similarly Dachangjiang a motorcycleshymaker in Chinas Guangdong province works with hundreds of parts suppliers
These postshymodern guanxi have several powerful qualities They can contract or expandwith demand Li amp Fung and Dachangjiang seldom have problems with excess capacitywhen times are hard or with waiting lists when times are flush And they can be turned intoengines of innovation Li amp Fung relies on its partners to help solve problems not just fulfilorders Dachangjiang provides its suppliers with rough sketches rather than detailedblueprints and encourages them to innovate
A second area where the Chinese excel is in ldquobanditrdquo or ldquoguerrillardquo innovation known asshanzhai The original bandits lived in isolated villages and carried out raids on uprightcitizens Todays bandits live at the margins of official society but are much in evidence inShanghais Peoples Square you will be offered a cheap watch or phone at every step
These bandits are parasites who profit from Chinas weak property rights but they are also
Next in Special report X
Easier said than done
Emergingshymarket consumers are hard to reach
From the print edition Apr 17th 2010
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 45
Copyright copy The Economist Newspaper Limited 2015 All rights reserved
talented innovators quickly producing copies of highshytech gadgets that are cheap enoughfor migrant workers to be able to afford them but also fashionable enough for youngprofessionals to covet them Some of the more exotic phones are designed to look likewatches or packets of cigarettes (they even have room for a few real ones) and often havestriking new features such as solar chargers superloud speakers telephoto lenses orultraviolet lights that make it easier to detect forged currency In their own way the banditsdeploy as much innovation and ingenuity as their legitimate counterparts
From the print edition Special report
View all comments (9)
Italian carmakers Get bigor die
The Economist explainsIs the world running out offood
Terror in the MiddleEast A bloody day
More from the Economist
Want more Subscribe to The Economist and get the weeks mostrelevant news and analysis
Tweet 173 Share 95 2
Greeces debt negotiations Theneverending story
bull Global trade in graphics Whyeveryone is so keen to agree new tradedeals
bull
Ben Carson on race Speaking truth toobliviousness
bull Migration and the EU Sound and furybull
Muslims in China Wooing Islamists witha beer festival
bull Latin America The loss of El Doradobull
Sections
Debate and discussion
Blogs Research and insights
Contact us
Help
My account
Subscribe
Print edition
Digital editions
Events
JobsEconomistcom
Timekeeper saved articles
United StatesBritainEuropeChinaAsiaAmericasMiddle East amp AfricaInternationalBusiness amp financeEconomicsMarkets amp dataScience amp technologySpecial reportsCultureMultimedia library
The Economist debatesLetters to the editorThe Economist Quiz
Buttonwoods notebookDemocracy in AmericaErasmusFree exchangeGame theoryGraphic detailGulliverProsperoThe Economist explains
TopicsEconomics AshyZStyle guideThe World in 2015Which MBAMBA ServicesThe Economist GMAT TutorReprints and permissions
The Economist Group raquoThe Economist Intelligence UnitThe Economist Intelligence UnitStoreThe Economist Corporate NetworkIdeas People MediaIntelligent LifeRoll CallCQEuroFinanceThe Economist Store
View complete site index raquo
Contact us Help About us Advertise with us Editorial Staff Staff Books Careers Site index
Accessibility Privacy policy Cookies info Terms of use
263Like
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 55
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 25
New masters ofmanagement
The power to disrupt
Sources amp acknowledgments
Reprints
There is nothing new about companies adapting their productsto the pockets and preferences of emergingshymarketconsumers Unilever and Procter amp Gamble started sellingshampoo and washing powder in small sachets more thantwo decades ago to cater for customers with cramped livingspaces and even more cramped budgets Nike produces anallshyenveloping athletic uniform to protect the modesty ofMuslim women athletes Mercedes puts airshyconditioningcontrols in the back as well as the front of its cars because people who can afford aMercedes can also afford a driver
But GE and TCS are doing something more exciting than fiddling with existing productsthey are taking the needs of poor consumers as a starting point and working backwardsInstead of adding ever more bells and whistles they strip the products down to their bareessentials Jeff Immelt GEs boss and Vijay Govindarajan of the Tuck Business Schoolhave dubbed this ldquoreverse innovationrdquo Others call it ldquofrugalrdquo or ldquoconstraintshybasedrdquoinnovation
There is more to this than simply cutting costs to the bone Frugal products need to betough and easy to use Nokias cheapest mobile handsets come equipped with flashlights(because of frequent power cuts) multiple phone books (because they often have severaldifferent users) rubberised key pads and menus in several different languages Frugal doesnot mean secondshyrate GEs Mac 400 ECG incorporates the latest technology Many cheapmobile handsets allow users to play video games and surf the net Frugal often also meansbeing sparing in the use of raw materials and their impact on the environment
The number of frugal products on the market is growing rapidly Tata Motors has produceda $2200 car the Nano Godrej amp Boyce Manufacturing one of Indias oldest industrialgroups has developed a $70 fridge that runs on batteries known as ldquothe little coolrdquo FirstEnergy a startshyup has invented a woodshyburning stove that consumes less energy andproduces less smoke than regular stoves Anurag Gupta a telecoms entrepreneur hasreduced a bank branch to a smartshyphone and a fingerprint scanner that allow ATMmachines to be taken to rural customers
Frugal innovation is not just about redesigning products it involves rethinking entireproduction processes and business models Companies need to squeeze costs so theycan reach more customers and accept thin profit margins to gain volume Three ways ofreducing costs are proving particularly successful
The first is to contract out ever more work Bharthi Airtel an Indian mobile company thatcharges some of the lowest fees in the business but is worth $30 billion has contracted outeverything but its core business of selling phone calls handing over network operations toEricsson business support to IBM and the management of its transmission towers to anindependent company To make this work Bharthi had to persuade its business partners torethink their business models too For example Ericsson had to agree to be paid by theminute rather than for selling and installing the equipment and rival mobile companies to renttheir towers rather than own them outright
The second moneyshysaver is to use existing technology in imaginative new ways TCS islooking at using mobile phones to connect television sets to the internet Personalcomputers are still relatively rare in India but televisions are ubiquitous TCS has designed abox that connects the television to the internet via a mobile phone It has also devised aremote control that allows people who have never used keyboards to surf the web Thisidea is elegant as well as frugal by reconfiguring existing technology it can potentiallyconnect millions of people to the internet
The third way to cut costs is to apply massshyproduction techniques in new and unexpectedareas such as health care Devi Shetty is Indias most celebrated heart surgeon havingperformed the countrys first neonatal heart surgery on a nineshydayshyold baby and numberedMother Teresa among his patients Yet his most important contribution to medicine is not hissurgical skill but his determination to make this huge industry more efficient by applyingHenry Fords management principles He believes that a combination of economies of scaleand specialisation can radically reduce the cost of heart surgery His flagship Narayana
Products and events
Test your EQTake our weekly news quiz to stay on top of theheadlines
Want more from The EconomistVisit The Economist eshystore and yoursquoll find a rangeof carefully selected products for business andpleasure Economist books and diaries and muchmore
The media in Singapore Zip it5
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 35
Hrudayalaya Hospital in the ldquoElectronics Cityrdquo district of Bangalore not far from GE Infosysand Wipro has 1000 beds (against an average of 160 beds in American heart hospitals)and Dr Shetty and his team of 40shyodd cardiologists perform about 600 operations a week
The sheer number of patients allows surgeons to acquire worldshyclass expertise in particularoperations and the generous backup facilities allow them to concentrate on their specialityrather than wasting their time on administration Dr Shetty has performed more than 15000heart operations and other members of his team more than 10000 The hospital charges anaverage of $2000 for openshyheart surgery compared with $20000shy100000 in America butits success rates are as good as in the best American hospitals
Dr Shetty has devoted much of his energy to boosting his customer base largely forhumanitarian reasons but also because he believes that higher volumes lead to betterquality He has established video and internet links with hospitals in India Africa andMalaysia so that his surgeons can give expert advice to less experienced colleagues Healso sends ldquoclinics on wheelsrdquo to nearby rural hospitals to test for heart disease He hascreated a healthshyinsurance scheme working with various local selfshyhelp groups that covers25m people for a premium of about 11 cents a month each About a third of the hospitalspatients are now enrolled in the scheme A sliding scale of fees is used for operations sothat richer customers subsidise poorer ones The entire enterprise is surprisingly profitablegiven how many poor people it treats Dr Shettys familyshyowned hospital group reports a77 profit after taxes compared with an average of 69 in American private hospitals
The group has recently built three other hospitals next to the heart clinicmdasha trauma centre a1400shybed cancer hospital and a 300shybed eye hospital They all share central facilities suchas laboratories and a blood bank Dr Shetty is also setting up ldquomedical citiesrdquo in other partsof the country Over the next five years his company plans to increase its number of bedsto 30000 making it the largest privateshyhospital group in India and giving it more bargainingpower when it negotiates with suppliers thus driving down costs further
From jugaad to shanzhai
Indians often see frugal innovation as their distinctive contribution to management thinkingThey point to the national tradition of jugaadmdashmeaning roughly making do with what youhave and never giving upmdashand cite many examples of ordinary Indians solving seeminglyinsoluble problems But China is just as good as India at coming up with frugal new ideasMindray for example specialises in cheap medical products such as ECG devices andBYD has radically reduced the price of expensive lithiumshyion batteries by using less costlyraw materials and learning how to make them at ambient temperatures rather than inexpensively heated ldquodry roomsrdquo This has reduced their price from $40 to $12 apiece andmade them competitive with less powerful nickelshycadmium batteries
The Chinese have made two distinctive contributions to frugal innovation The first is theuse of flexible networksmdashpowered by guanxi or personal connectionsmdashto reduce costs andincrease flexibility Li amp Fung a Hong Kongshybased company has long been a pioneerworking closely with a network of about 12000 companies operating in more than 40countries It puts together customised supply chains from its vast network of associatesand keeps an eye on quality and order fulfilment Similarly Dachangjiang a motorcycleshymaker in Chinas Guangdong province works with hundreds of parts suppliers
These postshymodern guanxi have several powerful qualities They can contract or expandwith demand Li amp Fung and Dachangjiang seldom have problems with excess capacitywhen times are hard or with waiting lists when times are flush And they can be turned intoengines of innovation Li amp Fung relies on its partners to help solve problems not just fulfilorders Dachangjiang provides its suppliers with rough sketches rather than detailedblueprints and encourages them to innovate
A second area where the Chinese excel is in ldquobanditrdquo or ldquoguerrillardquo innovation known asshanzhai The original bandits lived in isolated villages and carried out raids on uprightcitizens Todays bandits live at the margins of official society but are much in evidence inShanghais Peoples Square you will be offered a cheap watch or phone at every step
These bandits are parasites who profit from Chinas weak property rights but they are also
Next in Special report X
Easier said than done
Emergingshymarket consumers are hard to reach
From the print edition Apr 17th 2010
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 45
Copyright copy The Economist Newspaper Limited 2015 All rights reserved
talented innovators quickly producing copies of highshytech gadgets that are cheap enoughfor migrant workers to be able to afford them but also fashionable enough for youngprofessionals to covet them Some of the more exotic phones are designed to look likewatches or packets of cigarettes (they even have room for a few real ones) and often havestriking new features such as solar chargers superloud speakers telephoto lenses orultraviolet lights that make it easier to detect forged currency In their own way the banditsdeploy as much innovation and ingenuity as their legitimate counterparts
From the print edition Special report
View all comments (9)
Italian carmakers Get bigor die
The Economist explainsIs the world running out offood
Terror in the MiddleEast A bloody day
More from the Economist
Want more Subscribe to The Economist and get the weeks mostrelevant news and analysis
Tweet 173 Share 95 2
Greeces debt negotiations Theneverending story
bull Global trade in graphics Whyeveryone is so keen to agree new tradedeals
bull
Ben Carson on race Speaking truth toobliviousness
bull Migration and the EU Sound and furybull
Muslims in China Wooing Islamists witha beer festival
bull Latin America The loss of El Doradobull
Sections
Debate and discussion
Blogs Research and insights
Contact us
Help
My account
Subscribe
Print edition
Digital editions
Events
JobsEconomistcom
Timekeeper saved articles
United StatesBritainEuropeChinaAsiaAmericasMiddle East amp AfricaInternationalBusiness amp financeEconomicsMarkets amp dataScience amp technologySpecial reportsCultureMultimedia library
The Economist debatesLetters to the editorThe Economist Quiz
Buttonwoods notebookDemocracy in AmericaErasmusFree exchangeGame theoryGraphic detailGulliverProsperoThe Economist explains
TopicsEconomics AshyZStyle guideThe World in 2015Which MBAMBA ServicesThe Economist GMAT TutorReprints and permissions
The Economist Group raquoThe Economist Intelligence UnitThe Economist Intelligence UnitStoreThe Economist Corporate NetworkIdeas People MediaIntelligent LifeRoll CallCQEuroFinanceThe Economist Store
View complete site index raquo
Contact us Help About us Advertise with us Editorial Staff Staff Books Careers Site index
Accessibility Privacy policy Cookies info Terms of use
263Like
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 55
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 35
Hrudayalaya Hospital in the ldquoElectronics Cityrdquo district of Bangalore not far from GE Infosysand Wipro has 1000 beds (against an average of 160 beds in American heart hospitals)and Dr Shetty and his team of 40shyodd cardiologists perform about 600 operations a week
The sheer number of patients allows surgeons to acquire worldshyclass expertise in particularoperations and the generous backup facilities allow them to concentrate on their specialityrather than wasting their time on administration Dr Shetty has performed more than 15000heart operations and other members of his team more than 10000 The hospital charges anaverage of $2000 for openshyheart surgery compared with $20000shy100000 in America butits success rates are as good as in the best American hospitals
Dr Shetty has devoted much of his energy to boosting his customer base largely forhumanitarian reasons but also because he believes that higher volumes lead to betterquality He has established video and internet links with hospitals in India Africa andMalaysia so that his surgeons can give expert advice to less experienced colleagues Healso sends ldquoclinics on wheelsrdquo to nearby rural hospitals to test for heart disease He hascreated a healthshyinsurance scheme working with various local selfshyhelp groups that covers25m people for a premium of about 11 cents a month each About a third of the hospitalspatients are now enrolled in the scheme A sliding scale of fees is used for operations sothat richer customers subsidise poorer ones The entire enterprise is surprisingly profitablegiven how many poor people it treats Dr Shettys familyshyowned hospital group reports a77 profit after taxes compared with an average of 69 in American private hospitals
The group has recently built three other hospitals next to the heart clinicmdasha trauma centre a1400shybed cancer hospital and a 300shybed eye hospital They all share central facilities suchas laboratories and a blood bank Dr Shetty is also setting up ldquomedical citiesrdquo in other partsof the country Over the next five years his company plans to increase its number of bedsto 30000 making it the largest privateshyhospital group in India and giving it more bargainingpower when it negotiates with suppliers thus driving down costs further
From jugaad to shanzhai
Indians often see frugal innovation as their distinctive contribution to management thinkingThey point to the national tradition of jugaadmdashmeaning roughly making do with what youhave and never giving upmdashand cite many examples of ordinary Indians solving seeminglyinsoluble problems But China is just as good as India at coming up with frugal new ideasMindray for example specialises in cheap medical products such as ECG devices andBYD has radically reduced the price of expensive lithiumshyion batteries by using less costlyraw materials and learning how to make them at ambient temperatures rather than inexpensively heated ldquodry roomsrdquo This has reduced their price from $40 to $12 apiece andmade them competitive with less powerful nickelshycadmium batteries
The Chinese have made two distinctive contributions to frugal innovation The first is theuse of flexible networksmdashpowered by guanxi or personal connectionsmdashto reduce costs andincrease flexibility Li amp Fung a Hong Kongshybased company has long been a pioneerworking closely with a network of about 12000 companies operating in more than 40countries It puts together customised supply chains from its vast network of associatesand keeps an eye on quality and order fulfilment Similarly Dachangjiang a motorcycleshymaker in Chinas Guangdong province works with hundreds of parts suppliers
These postshymodern guanxi have several powerful qualities They can contract or expandwith demand Li amp Fung and Dachangjiang seldom have problems with excess capacitywhen times are hard or with waiting lists when times are flush And they can be turned intoengines of innovation Li amp Fung relies on its partners to help solve problems not just fulfilorders Dachangjiang provides its suppliers with rough sketches rather than detailedblueprints and encourages them to innovate
A second area where the Chinese excel is in ldquobanditrdquo or ldquoguerrillardquo innovation known asshanzhai The original bandits lived in isolated villages and carried out raids on uprightcitizens Todays bandits live at the margins of official society but are much in evidence inShanghais Peoples Square you will be offered a cheap watch or phone at every step
These bandits are parasites who profit from Chinas weak property rights but they are also
Next in Special report X
Easier said than done
Emergingshymarket consumers are hard to reach
From the print edition Apr 17th 2010
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 45
Copyright copy The Economist Newspaper Limited 2015 All rights reserved
talented innovators quickly producing copies of highshytech gadgets that are cheap enoughfor migrant workers to be able to afford them but also fashionable enough for youngprofessionals to covet them Some of the more exotic phones are designed to look likewatches or packets of cigarettes (they even have room for a few real ones) and often havestriking new features such as solar chargers superloud speakers telephoto lenses orultraviolet lights that make it easier to detect forged currency In their own way the banditsdeploy as much innovation and ingenuity as their legitimate counterparts
From the print edition Special report
View all comments (9)
Italian carmakers Get bigor die
The Economist explainsIs the world running out offood
Terror in the MiddleEast A bloody day
More from the Economist
Want more Subscribe to The Economist and get the weeks mostrelevant news and analysis
Tweet 173 Share 95 2
Greeces debt negotiations Theneverending story
bull Global trade in graphics Whyeveryone is so keen to agree new tradedeals
bull
Ben Carson on race Speaking truth toobliviousness
bull Migration and the EU Sound and furybull
Muslims in China Wooing Islamists witha beer festival
bull Latin America The loss of El Doradobull
Sections
Debate and discussion
Blogs Research and insights
Contact us
Help
My account
Subscribe
Print edition
Digital editions
Events
JobsEconomistcom
Timekeeper saved articles
United StatesBritainEuropeChinaAsiaAmericasMiddle East amp AfricaInternationalBusiness amp financeEconomicsMarkets amp dataScience amp technologySpecial reportsCultureMultimedia library
The Economist debatesLetters to the editorThe Economist Quiz
Buttonwoods notebookDemocracy in AmericaErasmusFree exchangeGame theoryGraphic detailGulliverProsperoThe Economist explains
TopicsEconomics AshyZStyle guideThe World in 2015Which MBAMBA ServicesThe Economist GMAT TutorReprints and permissions
The Economist Group raquoThe Economist Intelligence UnitThe Economist Intelligence UnitStoreThe Economist Corporate NetworkIdeas People MediaIntelligent LifeRoll CallCQEuroFinanceThe Economist Store
View complete site index raquo
Contact us Help About us Advertise with us Editorial Staff Staff Books Careers Site index
Accessibility Privacy policy Cookies info Terms of use
263Like
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 55
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 45
Copyright copy The Economist Newspaper Limited 2015 All rights reserved
talented innovators quickly producing copies of highshytech gadgets that are cheap enoughfor migrant workers to be able to afford them but also fashionable enough for youngprofessionals to covet them Some of the more exotic phones are designed to look likewatches or packets of cigarettes (they even have room for a few real ones) and often havestriking new features such as solar chargers superloud speakers telephoto lenses orultraviolet lights that make it easier to detect forged currency In their own way the banditsdeploy as much innovation and ingenuity as their legitimate counterparts
From the print edition Special report
View all comments (9)
Italian carmakers Get bigor die
The Economist explainsIs the world running out offood
Terror in the MiddleEast A bloody day
More from the Economist
Want more Subscribe to The Economist and get the weeks mostrelevant news and analysis
Tweet 173 Share 95 2
Greeces debt negotiations Theneverending story
bull Global trade in graphics Whyeveryone is so keen to agree new tradedeals
bull
Ben Carson on race Speaking truth toobliviousness
bull Migration and the EU Sound and furybull
Muslims in China Wooing Islamists witha beer festival
bull Latin America The loss of El Doradobull
Sections
Debate and discussion
Blogs Research and insights
Contact us
Help
My account
Subscribe
Print edition
Digital editions
Events
JobsEconomistcom
Timekeeper saved articles
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6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 55
6272015 First break all the rules | The Economist
httpwwweconomistcomnode15879359 55