Sidney Lu, Chairman and CEO of Foxconn Interconnect Technologies—a subsidiary of Foxconn Technology Group, and Michael Marks, former Chairman and CEO of Flextronics and Founding Partner of Riverwood Capital, came together at the 4th annual China 2.0 conference for a conversation about the role of innovation in manufacturing and supply chain management.

Stanford Graduate School of Business Professor Hau Lee, who moderated the panel, kicked off the debate by asking how innovation happens in China, and how it fits in the global network.

Lu shared that “innovation in supply chains is extremely critical.” For a business like Foxconn, which operates with margins as low as 5%, a dollar saved through cost management can be equivalent to 20 dollars earned via sales. In order to achieve these savings, Foxconn, like other manufacturers, is always looking to develop new materials, processes, and business models. The “lone-innovator” model of one company designing something in isolation and sending it to China for manufacture has given way to a model in which designers and manufacturers work very closely with each other.

“Truly innovative companies…take advantage of the logistics management, the suppliers, the material guys and all that, and incorporate that into the products that they are developing,” Marks argued. In fact, Marks noted that many innovative products such as the Motorola RAZR were built on the back of breakthroughs made at places like Foxconn and Flextronics.

Lee, also Founder and Co-Faculty Director of the Stanford Global Supply Chain Management Forum at Stanford Graduate School of Business, quipped: “...[B]ehind every successful man, there is a woman; and behind every successful product there is a supply chain.”

What is innovation?

Discussing the role of innovation in manufacturing, the question of how exactly to define innovation was naturally raised. On this point, Lu and Marks had divergent views, exemplified by the example of shanzhai cellphones that have proliferated in China (shanzhai phones are very close copies of common phone models, often with small changes—some functional, some not—made to the hardware and software). Lu argued that something innovative must be “new and unique” and also “serve a purpose.” Many products or developments billed as innovative only satisfy one of these requirements—a shanzhai phone with six speakers might be new, but it isn’t innovative. On the other hand, Marks championed the Chinese model of incremental innovation, arguing that almost all new products are a refinement of existing ones, and that the Chinese practice of adapting popular products and ideas to fit local needs and culture is, in fact, “a perfectly valuable approach to innovation.”

While the position of Asian manufacturers appears unassailable, rising energy costs and shifting demographics mean that China is getting more expensive. Foxconn, once the hegemon of the consumer-electronics manufacturing world, is vulnerable: the business model has been replicated, and clients are diversifying supply chains. Manufacturers are starting to form new ventures that will allow them to find and invest in promising hardware startups early on. Flextronics recently launched an accelerator program, and designers looking for a manufacturing partner can often find price-competitive services without going to Asia.

Innovation in the supply chain has been driven by increased competition and the need to be as efficient as possible. Two challenges China faces in the global innovation network, accordingly to Marks, are flexibility and communication. Although internet has led to improvements in both areas, such as making orders fasters and being able to share information in real time, there are still some gaps for China to bridge to be able to maintain its position in the global innovation network.