Reporter's Notebook: How Entrepreneurs Innovate in China

I’m on a two-week fellowship in China and am taking advantage of it to report on entrepreneurship here in a series of blog posts. Check out my previous posts in the archives section of this blog.

I was hoping to see the innovative entrepreneurial face of China. So far, I’ve seen very little in the way of original innovation but I have witnessed quite a bit of innovative adaptation.

For instance, I visited the Yili Group, the largest dairy factory in China. It is located in Hohhut, the capital of Inner Mongolia, in the country’s north. This is a city of 2.7 million and an example of the country’s urbanization process. It is a mini-urban metropolis sprung up in the midst of huge stretches of rural countryside. In Hohhut as in most of the cities, there are broad paved thoroughfares and city squares (and numerous statues of Genghis Khan and wild horses). There are also stretches of massive construction. At night the entire city lights up in candy-colored neon – resembling a combination of Las Vegas and Willy Wonka’s chocolate factory.

Hohhut’s stark contrast to its surroundings is a reminder that a huge portion of China has not yet been swept up into the arms of its economic miracle. The vast countryside is a portrait of grasslands, corn and sunflower fields but it is also bisected by muddy, unpaved roads with crater-sized dips, open sewers and domed brick houses carved into the mountains. Many of these houses have large piles of coal in front used for heat and cooking (ironically a number also have satellite dishes). In between there are industrial factories of various sizes alongside residential areas, where piles of waste, tires, rubbish, live chickens, drying laundry, and children share intimate space.

But if Hohhut stands out from much of the rest of Inner Mongolia, the Yili Group is perhaps a peek into a stark new modern and high tech future for the area. The gleaming factory is all glass and steel and sharp angles. At the factory’s entrance there is a giant model of the facility’s various manufacturing plants. Signs in Chinese and English throughout the factory exhort such aphorisms as: “Supply High Grade Quality Product and Enjoy Healthy Life.”

Like nearly every enterprise in China, Yili is a joint private and state-owned business. However, when I asked what the percentage of private to state ownership was I was (repeatedly) told that Yili has “many shareholders.” (Looking at Yili’s website later I found that the company was listed on the Shanghai stock exchange in March 1996).

Yili says that it was one of the earliest companies in China to use robotic machines and its impressive warehouse has the capacity to manage 20,000 tons automatically — but the systems in place were brought in from Germany, Switzerland and other European countries. And it turns out that even Yili’s Holstein cows that are raised specifically on the company’s dedicated organic farm to produce Yili’s organic line, Satine, were imported from New Zealand.

Perhaps what is most innovative about this enterprise is the fact that in large part China has had to create a domestic market for milk and dairy product. This is an undertaking that on first blush appears to be tall order — after all this is a culture (and now a population of 1.3 billion people) that existed for centuries by and large without a tradition of dairy in its diet. Of course, over the past 30 years, the Chinese have demonstrated that if they want something to happen, they will make it happen.

Actually, Yili has broader ambitions, like a number of Chinese companies that are now looking outward Yili hopes to become an international brand. More specifically, Yili says that by 2015 it plans on becoming one of the world’s top 10 dairies.

Currently, Yili – established in 1993 has 130 factories across the country whose five divisions produce over 1,000 different dairy products including a milk developed in 2006 aimed at the 70% of the Chinese population that are lactose intolerant (which may account for the traditionally low interest in dairy). There are also lines of baby formula, powdered milk, yogurt, butter, cheese, and ice cream. In order to help encourage milk drinking, Yili began offering all pregnant women in Inner Mongolia free fortified milk during their pregnancies. The company was especially proud of an ice cream bar (chocolate outside and inside layers of chocolate puffs, cookie and banana) that sold 1.8 billion units during the opening ceremony of the Beijing Olympics last summer.

Yili looks like many of China’s big industries that have gone from 0 to 180 in a matter of years. Still, despite the excitement surrounding its success not one of Yili’s executives could explain just why they felt the need to create an entire dairy industry for a society that seems to have lived quite happily without one.

In any event, Yili exudes an image of milk happiness. Aiding its push to make dairy consumption a regular part of Chinese life is a very slick advertising campaign accompanied by eye popping product packaging. Throughout the factory LCD screens run Yili television commercials that appear to borrow heavily from the west. A number of Chinese Olympic champions endorse Yili products as well as famous movie actresses.

Indeed Yili intends to make milk more popular than green tea. Near the entrance of Yili’s headquarters large sign sums it up: “In the eyes of Yili people there are only two kinds of people in the world: those who drink milk and those who don’t. The mission of Yili people is to convert them into one: milk drinkers.”

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