How to stay competitive when everything can be copied

A look at how Hong Kong cast aside its former manufacturing and colonial identity and turned itself into a financial and logistics hub for the region, and other examples of how companies and countries similarly reinvented themselves

PUBLISHED : Saturday, 02 December, 2017, 10:15am
UPDATED : Saturday, 02 December, 2017, 10:15am

Achieving a sustainable competitive position is every manager’s dream. Outlasting competition is difficult, and doing so over decades or centuries often seems impossible.

Since the great Industrial Revolution, every country that has become rich started by copying others: the French copied the British, the Americans copied the Germans, and the Japanese copied pretty much everybody else.

I remember my junior school teachers describing the Hong Kong economy as an “entrepôt,” a term the British applied to my city when it served as the only window between China and the rest of the world.

With its low labour costs, Hong Kong rose up as a major manufacturing hub for labour-intensive industries. The once-sleepy fishing village became “the Pearl of the East”– a shining example of economic development.

By 1972, Hong Kong had replaced Japan as the world’s largest toy exporter. Garment and apparel manufacturing also helping to form our economic backbone.

But in the early 1980s, Hong Kong’s manufacturing cluster started collapsing. Factories were moved to mainland China and, with them, manufacturing jobs. First, they moved across the border to Shenzhen, then to Guangdong Province, and then to the rest of country. Unemployment in Hong Kong soared, crushing the optimism that had characterised its residents for so many years.

That knowledge, capital, and expertise were transient and in this case, Hong Kong’s competitive advantage was unsustainable. They were the same complaints made more than a century ago by German drug maker Hoechst against its Swiss copycats, CIBA, Giegy, and Sandoz.

In the land of counterfeiters, or “le pays de contre-facteurs”, as the French would call it, Switzerland had yet to establish patent laws as late as 1888. Local chemists were free, or even encouraged, to imitate foreign inventions.

When antipyrine – the first synthetic fever-reducing drug – was created, the world couldn’t get enough of it, and the Swiss were selling their German imitation as quickly as they could produce it.

Organic chemistry was the hotbed of innovation. Only when Alexander Fleming discovered antibiotic penicillin did everyone understand that the next blockbuster would no longer come from chemistry alone, but from an entirely new discipline: microbiology.

Immediately following the Second World War, from Europe to the US, the nascent pharmaceutical firms were rushing to set up soil screening programmes around the world, looking for exotic fungi, and hunting down the pay dirt, in search forevermore potent antibiotics.

Field workers got soil from cemeteries and sent balloons up in the air to collect windblown samples. They went down to the bottoms of mine shafts, hiked up mountains, and ventured anywhere else in between.

The study of microbes took centre-stage, displacing organic chemistry as the key discipline for scientific discovery. Along with new techniques of deep-tank fermentation and the purification of medicines, the world saw a precipitous drop in infectious disease. What was once a nasty, brutish, and fatal infection was transformed into a curable inconvenience.

Then came the biotechnology revolution, beginning in the 70s. Scientists marvelled at the inner workings of chromosomes within the nuclei of cells and eventually were capable of recombining DNA molecules, instructing bacteria to produce insulin for diabetics, and producing many other active ingredients that couldn’t be abundantly harvested from nature alone.

Then, with the complete scanning of the human genome and the advancements in computational applications, genetic engineering essentially went digital.

Scientists are now uncovering molecular pathways and the biological underpinnings of even rare cancers. We have again witnessed the transition into a new knowledge frontier, a discipline under the rubric of genomics and bioengineering.

Today, it takes extravagantly equipped laboratories, huge budgets, and large teams of investigators to stay at the forefront of the industry.

Switzerland’s Novartis alone spent a staggering $10 billion on research and development in 2013. From cancer therapy to HIV treatment, Western pioneers still lead the global industry in the latest developments.

In contrast to the automotive industry, where global competition has decimated Detroit, turning it into the American rust belt, the wealth in Basel, where Novartis is headquartered, seems forever bountiful. Its inhabitants continue to enjoy the highest standards of living in western Europe.

Capital expenditure in the pharmaceutical industry, however, can never properly explain how newcomers in emerging countries fail to overtake Western pioneering incumbents.

In fact, along with trade secrets and patent protection it was hardly a challenge for the United States to overtake Britain as the leading exporter of textiles during the turn of the century.

The same went for heavy machinery, wind turbines, solar panels, personal computers, mobile phones, and automobiles – where latecomers irrevocably displaced early pioneers.

What the history of pharmaceuticals has shown is that the shift of knowledge disciplines – chemistry, microbiology, and then genomics – opened new paths for willing pioneers to race ahead.

Sustainable advantage results not so much from a utopian position that a company could try to attain; rather, only by infusing new knowledge and constantly changing the rules of the game can a pioneer create headroom for innovation and thus prevent latecomers from catching up.

That is the miracle how centuries-old pharmaceutical firms have managed to keep themselves evergreen.

Viewed from this angle, a firm’s advantage is as sustainable as its ability to reinvent itself and the same goes for a country’s economy and its citizens.

To survive, we have to reinvent ourselves. And Hong Kong did just that. It cast aside its former manufacturing and colonial identity and turned into a financial and logistics hub for the region.

This week, the business school where I teach – Switzerland’s IMD Business School – has produced a talent report.

Hong Kong has topped Singapore in a tight race for the best of Asia’s talent. The survey measured the ability of a country or territory to develop, attract, and retain talent and measured benchmarks such as health infrastructure, apprenticeships, and student mobility, as well as less quantitative indicators, such as quality of life and worker motivation.

If there is anything Hongkongers can take solace from, in a world where advantages are ever more transient, it’s perhaps our city’s attraction to retain its brain power.

Howard Yu is professor of strategy and innovation at IMD