Growth Challenges

As Xi tours Europe, China’s Patents Exceed the Continent’s Best Innovator, Germany


Chinese President Xi has begun a European tour to take in the Netherlands, France, Germany, Belgium and the European Union. His trip coincides with the release of 2013 data revealing that China has shot ahead of Germany for the first time in terms of patent filings. China now lags only the USA and Japan on patent filings, and its two greatest commercial filers, telecommunications giants ZTE and Huawei now lag only Japan’s Panasonic. This piece reflects German prospects, and somewhat by proxy those of Europe, against a 20th century context and amid global change. 

In the final years of WWII, Germany’s infrastructure was completely annihilated. The formidable – if devastatingly evil – industrial, knowledge, discipline and insanity its then regime had created wasn’t lost thereafter – even where most of its best minds had fled, in order to build, among other things, the atomic bomb in other countries… 

By harnessing that industriousness, the USA led the reconstruction of West Germany as an economic powerhouse via massive injections of the Marshall Plan. These sought to transform West Germany into the European pillar of the Cold War. France was otherwise behaving too independently (recall De Gaulle’s refusal to join NATO), and the UK too far from the front line.  

Today the German economy is known for its big brands (Siemens, BMW etc). And yet its economic backbone is the ‘Mittelstand’ – the medium-sized, highly specialized companies that manufacture many of the tiny little screws and bolts used around the world without knowledge they were designed or manufactured in Germany. That niche relates to Germany’s economic, industrial, and even social and urban landscape. Depending on the exact definition of the Mittelstand, its contribution to Germany’s exports and GDP is anything between 50 and 70%, and it employs about two thirds of Germany’s active workforce. 

Another massive boost to the German economy (and hence its Mittelstand) was the Euro. The Euro keeps German exports approximately 20% cheaper than if the Deutschmark was still operating – a massive competitive advantage. Also a good reason why, despite some pseudo-public rumblings, Merkel knows perfectly well that Germany will pay whatever it takes to keep the Euro alive, be it to bail out Greece, Portugal, Ireland or whomever – if the export market collapses, so does the German industrial-economic machine which has kept Germany alive and booming for the last 60 years. 

The average German, similar to the average North East Asian, is not a heady consumer. He saves his whole life and buys himself a little house when he goes into pension and the rest is passed down to the next generation. In this decade an estimated 2.6 trillion Euro (about 3.6 trn US$) will change hands through inheritance in Germany, until the year 2020 – an average inheritance per household of EUR300,000 ( US$410,000).  In the short-term, nothing could stimulate a German to turn into an American hyper-spending, credit card wielding shopaholic to keep the domestic let alone the international economy going. As long as this global equation holds true, everything is fine for Germany… it keeps on beating export records every year and no one would hope to succeed to break the marketing myth it managed to build through slogans like ‘Vorpsprung durch Technik’ and the like. A similar-ish story is probably true of Japan and South Korea. 

This comfort zone of the second-half of the 20th century may however to change drastically. Not only is China more of a saver like Germany as against deficit-oriented USA. China in 2013 for the first time also filed more than Germany, Europe’s patent filing leader. So what one may say. China’s patents are lower in quality, and embody little if any paradigm-shift ingenuity. That is, China files plentiful junk patents, and Germany files fewer but quality patents. Some truth today – but possibly not true tomorrow. 

More strikingly, if one looks at the nature of patent filings, it turns out that Germany, Europe’s innovation leader, may be facing greater competition than those default defensive assertions might suggest. China’s emerging Silicon Valley’s in Beijing, Chengdu, Suzhou and beyond are admittedly nascent in their global value chain shifting output. What China is doing well, especially specialised industrial hubs like those in Jinan, Hangzhou, Changzhou and Ningbo, is breaking into the bits and pieces that are below and behind leading technology companies… precisely Germany’s niche.

Presuming world demand remains for more efficient and faster cars, Germany can relax as it holds somewhat of a lead on that turf. But the next generation (ie 20 years +) of technology is set to be at a completely different level: a quantum-level (which, ironically, a German coded into a physical theory: Max Planck). This will furthermore be played out at an economic scale that most Germans cannot now begin even to grasp, having become complacent within a cosy, deeply European, wealthy and comfortable country that presumes its entitlement to being in the top 2 or 3 of the top of the industrial, competitive and technological ladder.

The silver lining of the global financial crisis that began in 2008 is that it has exposed how deeply relatively uncompetitive, even incompetent, Europe has become. The EU’s general economic crisis is as much a crisis of finance as of competitiveness and of how sclerotic the European system has become, when faced with global economic and its own internal imbalances.

As the true forefather of Europe, Charles V, the Holy Roman Emperor who united most of Europe for the first time in history in the 16th century supposedly said: ‘I speak French to the Kings, Spanish and English to my people, Latin to God, Italian to women… and German to my horse’. Amid tension over distribution of today’s wealth – pensions, banking bailouts, etc. – lest Europe become an economic museum for linguists and international real estate investors looking for their own chateau, castle, and view of the Rhine and Thames. Rather, faced with an increasingly tight and competitive innovation-oriented global economy, what exactly will provide growth, prosperity and peace over the decades ahead in Europe is patently worth some relative attention.

Lauren has worked in economic policy and research at the World Bank, World Economic Forum, EIU and for the governments of Sierra Leone and Guyana. She has learned Chinese since 1995, and lived in Beijing for almost six years, on and off since 1997. Lauren has a PhD in Economics from Peking University, an MSc in Development Economics from the School of Oriental and African Studies (SOAS) and a B.A/B.Com from the University of Melbourne.

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