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CEO Daily: Wednesday, October 21

It is innovation week in China – part of the Chinese government’s effort to prove it can lead, not follow, in the high-tech race. But can it?


That’s the topic of a report being released later today by the McKinsey Global Institute. The study goes beyond the eye-popping numbers of China’s innovation effort – $200 billion spent annually on research, 30,000 PhDs graduated each year in science and engineering, more patent applications than any other country, etc. – and looks closely at what is really happening in 30 different Chinese industries.


The conclusion: China is already showing significant leadership in two areas – customer-focused innovation (appliances, internet software, consumer electronics) where it benefits from a large and demanding consumer base, and efficiency-driven innovation (solar panels, industrial machinery, generic pharmaceuticals), where it benefits from its massive manufacturing ecosystem. But Chinese companies still lag far behind in the more challenging areas of science-based innovation (biotechnology, branded pharmaceuticals, specialty chemicals) and engineering-based innovation (automotive, aviation, medical devices.)


The report says China has some significant advantages in the high-tech competition, including strong government support and a massive supply of low-cost researchers. That may be offset, however, by an economy overly reliant on state-owned enterprises. “The phrase ‘high-tech state-owned enterprise’ is an oxymoron,” Jonathan Woetzel, author of the report, told me last week. “It is hard for a sector, if it has a large number of state-owned enterprises, to be competitive,”


Still, McKinsey’s bottom line is that China will emerge over the next decade as a dominant force in global innovation. The consulting firm’s advice to other multinationals: locate more R&D in China. That could explain why Google, which avoided China in the past because of its internet restrictions, yesterday announced an investment in the Beijing-based artificial intelligence startup Mobvoi.


Enjoy the day. And take the time to read Shawn Tully’s piece about how First Data reinvented itself and became the year’s biggest IPO. It’s in the November issue of Fortune, but out online this morning.



Alan Murray

Top News

Yahoo’s Alibaba spinoff faces delay

Yahoo CEO Marissa Mayer told analysts yesterday that the search engine company’s massive stake in Chinese e-commerce firm Alibaba is delayed. Originally expected to occur in the fourth quarter, Yahoo now says it won’t happen until January or later. The plan is to spinoff the investment to minimize Yahoo’s tax bill, but it has stumbled in terms of IRA approval as last month the IRA declined to rule on the spinout’s tax free status. Fortune

Yum Brands planning a spinoff

Speaking of spinoffs, KFC owner Yum Brands generated headlines when it announced plans to separate the restaurant chain’s China business amid pressure from an activist shareholder. Two publicly-traded companies will exist after the split: a high-risk Yum China that also comes with possible high rewards, and high-cash flow Yum Brands. Yum was an early entrant into China among U.S. fast-food chains and it benefited from a growing middle class, though some missteps have hurt the business. Reuters

Ferrari set to debut shares

Luxury carmaker Ferrari is expected to go public later today, after pricing its initial public offering at $52 a share on Tuesday – with demand for the shares described as “well oversubscribed.” That’s a good sign for Ferrari, which would command a market capitalization of around $9.8 billion if shares settle at the IPO price. As Fortune as reported, IPOs have performed poorly this year, badly trailing strong showings in 2013 and 2014. CNBC

Consumer Reports pulls Tesla plug

Shares of Telsa Motors took a hit on Tuesday after the carmaker’s flagship Model S electric car lost its recommendation from Consumer Reports after owners complained about quality issues. The concern, as Bloomberg explains it, is that as Telsa boosts production of the Model S while also launching the Model X sport utility vehicle, quality could become tougher to monitor. Bloomberg

Syngenta CEO to step down

Swiss-based Syngenta said Chief Executive Officer Mike Mack will leave the pesticide and seed maker by the end of the month, leaving the post shortly after the company fought off a $46 billion takeover attempt by Monsanto. The takeover, which would have created the world’s largest supplier of crop seeds and chemicals, was rejected by management as a bid that valued Syngenta too low. There were also antitrust concerns, Syngenta management said, though shareholders felt they weren’t consulted enough. WSJ (subscription required)

Around the Water Cooler

Humans prevail over machines at CVS

CVS Health is planning to eliminate self-service checkout registers at some locations, with a plan to revert back to staffing registers with humans, though the retailer said the switch was made on a case-by-case basis. Retailers have long tinkered with ways to process orders quickly but also potentially save money by cutting payroll costs. This strategy doesn’t always work. Costco, for example, a few years ago axed its customer check-out stations. Fortune

Walmart ditches “USA” logos

Two years ago, Walmart unveiled a plan to source an additional $250 billion worth of U.S.-made goods over the following decade. But earlier this year, a watchdog group found dozens of examples of items with a “Made in the U.S.A.” logo that misled consumers. And now Walmart is now planning to ditch the logos to avoid government action by the Federal Trade Commission. Fortune