Innovation, and imitation, in China

Whenever I am talking with anyone about entrepreneurship in China, we end up discussing innovation. And I am nearly always asked whether I see real innovation in China, or if the “innovation” is really just imitation. While this a very nuanced topic I plan to explore in many posts, in this post I wanted to discuss just one example of innovation flowing from imitation in China. This example blurs the lines between innovation and imitation for me, and reminds me that innovation is often just taking someone’s idea and tweaking it a bit. So while when I picture innovation I often imagine a creative genius with an epiphany, innovation is more frequently found when one idea is tweaked, or when multiple ideas are put together in novel ways. In business, this generally stems from solving problems faced by your customers in novel ways.

Taobao as an example of innovation flowing from imitation

One could imagine Taobao being described as simply an eBay or Amazon for the Chinese market. Indeed, Taobao shares many similarities with these sites, and certainly learned from them as any startup should learn from similar businesses and competitors. However, Taobao has also had to come up with innovative ways to address concerns of Chinese users who are not used to shopping online that makes it an interesting example of innovation in China. Doing this successfully also at least partially explains why Taobao has been so successful in China.

While in the US one can assume that online shoppers have a credit card, even to this day very few Chinese citizens have them. Despite the heavy use of debit cards, China is still very much a cash-based economy, and this was even more of a challenge for Taobao when it first started in 2003.[1] In the US, consumers are used to being able to trust that they can return something they have purchased to the store and that they will receive a full refund when they do. However, in China return policies are quite rare. I remember purchasing something a few years ago in Beijing and then returning to the shop just a few minutes later because I notice another item in the same shop I liked better. When I asked if I could exchange the item, they said I was welcome to buy them both but that it was too late to exchange the original item for the other one I liked better. This was within minutes of my purchase!

So how does Taobao make customers confident that, if they return a product, they will receive a full refund? The simple, elegant solution Taobao employed is to place the money in a temporary holding account rather than giving it to the seller immediately. In fact, this payment is facilitated by Alipay, rather than by Taobao itself. If the customer receives the item and wants to keep it, then they go online and indicate that they have received the item and the money is transferred to the seller. However, if the customer is not happy with the item for any reason they can just go online and indicate that the item has been returned to the seller, and once the seller confirms receipt the money is returned to the customer.

With this solution, Taobao only has to convince consumers that they should trust a single entity, Taobao, rather than trying to convince customers to trust all of the faceless sellers on its platform. So while one could certainly argue that Taobao started out by imitating what was working in the US, they did come up with a simple, innovative solution to overcome one of the chief challenges in getting Chinese consumers to purchase goods online. It may have been imitation at the start, but innovation in serving Chinese consumer needs is what made them a true success in China. And with 170M users in 2009[1], it’s hard to argue that this innovation wasn’t successful.


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