Innovation rarely begins in a vacuum. In China's long artistic tradition, it often starts with learning by imitation—mastering the craft before creating something new.

One of China's most celebrated painters began by learning through copying. Qi Baishi—born in 1864 to a peasant family—spent years tracing the brushstrokes of master calligraphers, patiently absorbing the logic of every line. Only later did he start iterating on form and proportion, sketching from life, and gradually simplifying his subjects. In his fifties, he finally broke away with a signature style that transformed simple subjects—shrimps, crabs, flowers, mountains—into living poetry. His Twelve Landscape Screens sold for over $140 million in 2017, cementing Qi's reputation as "the Picasso of Chinese ink art."

Like Qi Baishi's path from student to master, Chinese firms' innovation journeys have moved from imitation to iterative excellence—and increasingly toward creation in fields where they hold distinct structural advantages. We argue that while Chinese companies and institutions are making progress in certain inventions and frontier technologies, their sweet spot continues to lie in iterative innovation—and this focus is likely to sustain China's technological and industrial momentum for the near term.

For much of the past half century, Chinese companies copied fast and implemented faster. Entrepreneurs adopted—and adapted—useful foreign ideas, echoing writer Lu Xun's 1934 call for "Take-ism." The Chinese were hardly the first to imitate, but their business world elevated the practice. Borrowed concepts became raw materials: reworked, improved, and commercialized. Executives still recall early-2000s pirated CD-ROMs. Baidu learned from Google, Alibaba's Taobao mirrored eBay, HiPhone riffed on Apple's iPhone—and McKinsey once shut down a fake Chengdu "branch" whose "managing partner" had been distributing a pirated McKinsey Quarterly and collecting fees.

But imitation was never the end of the story. Amazon and Facebook pioneered e-commerce and social media; Tencent, Alibaba, and ByteDance stretched those ideas into full digital ecosystems. Chinese firms iterated within sectors—Alibaba's Taobao refining early digital marketplaces—and across them, as with Alibaba's leap into finance through Ant Group. Tesla ignited the electric vehicle revolution; BYD and XPENG brought cars to market faster and cheaper with better features.

What began as adaptation evolved into capability. Foreign automakers now partner for local supply chains and software. Multinationals such as P&G, Roche, L'Oréal, Bosch, and Apple are expanding their China-based R&D. China has narrowly become the world's top R&D spender at $786 billion—about 27 percent of the world's total—just more than the US's $782 billion and roughly four times Japan's total. China's ecosystem also now generates nearly half of all patents worldwide, or more than three and a half times the US output.

Copying and actual IP theft remain real concerns, though protections have strengthened as Chinese companies build their own IPs. The bigger shift is this: guard ideas too tightly and you may keep them safe—while falling behind. In China's speed-driven ecosystem, the greater risk is being "out-innovated."

The Chinese are "at parity or pulling ahead of the United States in a variety of technologies, notably at the A.I. frontier," former Google CEO Eric Schmidt wrote in a 2025 op-ed. He urged US companies to share more AI technology and research, innovate faster, and spread the technology across the economy—learning "from what China has done well." Elon Musk said in 2022 that Twitter should become more like WeChat and long stated a desire to develop an "everything app."

In tech circles, "zero to one" refers to inventing something truly new; the term "one to one hundred" has come to describe the furious process of improvement and commercialization once an idea exists. China's scale—millions of engineers, vast consumer markets, and low-cost iteration—often allows firms to move products "from one to one hundred" faster and cheaper than global peers in "the world's toughest gym," in which competition forces constant refinement. Yet we're also increasingly seeing some companies start moving upstream from "one to one hundred" toward the "zero to one"—China's own "Qi Baishi" moment.

Patent Cooperation Treaty filings—international patent applications that signal intent to seek intellectual property (IP) protection across multiple countries—illustrate this story. By 2024, China led the world with just over seventy thousand—ahead of the US's fifty-four thousand and Japan's forty-eight thousand. It's a steep, sustained rise. Quantity doesn't settle the debate about quality; in fact, China leads in total granted AI patents but ranks only fifth in average citations; and other countries hold an enduring edge in fundamental science. Yet sheer volume signals intention and momentum.

Chinese companies' move up the value chain started long ago with foundational advantages we've described in earlier chapters: the country's scale created dense learning environments in which clusters of firms, labs, and engineers gained capabilities simply because they were doing so much, so often. "These ecosystems were intense, highly competitive, and innovative, and altogether lifted the baseline across a number of industries, including pharma," says Fangning Zhang, a McKinsey partner in the life sciences practice.

China's biopharma industry illustrates this transformation from scale to capability. Nearly half a billion Chinese live with chronic diseases, and more than eight million die each year. China's population base creates one of the world's largest pools of patients that can be tapped for clinical trials—and the country's biotech ecosystem continues to mature. "Altogether, that scale and growing capability enable foreign and local pharma companies alike to identify new disease targets, enroll trials, and develop life-saving drugs far faster than elsewhere—to the benefit of all," says Fangning.

As in most industries, China's rise in pharma didn't begin with breakthroughs—but with imitation. For decades, Chinese pharma grew by reverse engineering Western drugs and expanding through generics—a familiar path for late-industrializing countries. As capabilities improved, firms climbed the drug development ladder, first producing active pharmaceutical ingredients and then becoming a destination for outsourced biopharma manufacturing.

At every step of this progression, a vast ecosystem of contract research organizations (CROs) and contract development and manufacturing organizations (CDMOs) accumulated expertise in ever more complex scientific and engineering processes—often at the behest of foreign pharma companies. CROs took on the lab work and clinical trials; CDMOs helped develop the manufacturing processes and made the drugs. Over time, alongside domestic pharmaceutical companies, these firms became part of the backbone of China's pharma sector.

A decade ago, this ecosystem was in its infancy. In 2015, Chinese pharmaceutical firms contributed just 4 percent of the global innovative drug pipeline; the country's top five pharmaceutical companies were worth only $15 billion and generated under $100 million from "innovative drugs"—new molecular entities rather than generics and biosimilars. Investors were wary of them, citing long development cycles, heavy capital needs, and limited IPO pathways for pre-revenue biotechs.

Clinical infrastructure lagged as well. Fewer than six hundred hospitals could run trials, and patient data quality and consistency varied widely. Yet these early capabilities became the foundation for China's biopharma innovation stage.

Understanding China's innovation surge starts by separating fundamental from applied science. The US and Europe still dominate in "zero to one" scientific discovery, supported by large public funding pools—the National Institutes of Health, Horizon Europe, national science agencies and councils, world-class universities, and an open research culture (which in the US is increasingly debated amid shifting political priorities). What changed, and quickly, was Chinese companies' mastery of applied innovation, turning ideas into competitive products and ecosystems through engineering, design, cost innovation, manufacturing scale, and business model recombination.

Innovation in the biopharma industry, again, provides a clear example. "Chinese pharma companies are flipping drug discovery from a slow, hypothesis-driven science into something closer to fast, engineering-led iteration," says Jin Wang, a McKinsey senior partner and leader of the Firm's China life sciences practice.

From its base as generics-makers and contract manufacturers, Chinese biopharma companies moved up the value chain. For example, in antibody-drug conjugates, those precision "bombs" that target cancer, these companies became master iterative engineers. The components aren't new—antibodies, linkers, payloads. What's novel is Chinese firms' ability to "test different combinations—A with C, B with D—thousands of experiments through trial and error until they find what works best," says McKinsey life sciences partner Tina Hou. "And they can do it really, really fast, at a fraction of the US cost."

Healthcare investor Wei Fu describes China's advantage in drug development with a poker story: "It's like playing Texas Hold'em—in China, you can play ten hands for the cost of one in America, and even with a lower success rate, you win more often. It's probability. You simply get to see more hands," Wei tells us. He's describing an ecosystem-level advantage: China's large talent pool, founder-friendly capital, and a cost-effective supply chain help move a molecule from idea to preclinical testing two to three times faster and at a third to half the cost of global peers.

China's pharma sector has scaled at remarkable speed. The top five firms, which we noted were worth $15 billion a decade ago, had grown into a $160 billion cluster by 2025, with more than seventy biotechs listed across Hong Kong, STAR, and Nasdaq. Chinese companies now contribute nearly a third of the global pipeline of drugs in development. In the first quarter of 2025, about 32 percent of worldwide biopharma out-licensing deal value came from China, up from around 21 percent in 2023–2024. Global pharma players, including AstraZeneca, GSK, Pfizer, and Roche, are partnering with Chinese innovators such as Harbour BioMed, Hengrui, 3SBio, and MediLink Therapeutics. Clinical capacity has expanded, too, and roughly 1,700 hospitals can now run clinical trials, nearly triple the number eight years ago.

As Pfizer CEO Albert Bourla puts it, "In biopharma, China's dramatic speed, cost, and scale have triggered a shift in the global competitive landscape. I've never seen a country advancing in science as quickly, as fast, as powerfully as I'm witnessing China doing today." Chinese biopharma companies should continue to move up the value chain. "If you look at how much China's already leapfrogged in building its innovation ecosystem, the obvious conclusion is that we'll see a lot more breakthrough innovations in the decade ahead," says Jin. "Though individual companies have suffered setbacks, the industry is resilient, bolstered by the large number of entrepreneurs who keep trying and advancing."

This iterative innovation model doesn't belong only to biopharma—it now spans a number of industries: autos, aerospace, chemicals, batteries, AI, robotics, and mobility, to name a few. Shanghai alone hosts roughly six hundred foreign-funded R&D centers. Global firms have embedded in China's landscape: Bosch employs over ten thousand engineers, physicists, mathematicians, and other researchers; BASF has opened a €280 million ($325 million) innovation campus in Shanghai; Airbus designs next-generation components in Shenzhen.

Autos provide a dramatic example of this acceleration. When the Shanghai Auto Show reopened to the world in 2023, foreign executives were "overwhelmed and shocked," recalls Mingyu Guan, leader of McKinsey's China automotive practice. Visitors rode in autonomous cars, examined battery breakthroughs, and tested in-car AI assistants.

Tesla's decision to manufacture in China in 2019 had catalyzed a new generation of entrepreneurs and also helped create a core supply chain, and in time "the innovation capital shifted—from Stuttgart and Detroit to Shanghai, Beijing, and other Chinese cities," says Andreas Tschiesner, a Munich-based McKinsey senior partner and global co-leader of advanced industries. "COVID was like a twenty-year catch-up period for China's auto industry." One German luxury-brand CEO called headquarters from the show floor: "We're far too slow. We must move faster." Chinese vehicle development cycles now run eighteen to twenty-four months versus three to four years in Europe—and are still compressing.

Consumer electronics is another area where Chinese companies have leapt forward in applied innovation. In mobile phones, the camera specifications on Oppo and Vivo phones are often one to two generations ahead of the flagship models from Samsung and Apple. Huawei went further, launching Mate XT—the world's first commercially available tri-fold smartphone—before anyone else in 2024.

Haier, the leading home appliance and consumer electronics company, illustrates how this iterative model extends beyond products into organizational design. Over the past decade, Haier has dismantled much of its traditional hierarchy, reorganizing itself into thousands of self-governing "micro-enterprises" that interact directly with consumers. The goal, which Haier describes as "zero distance" to the customer, isn't centralized control but faster feedback, experimentation, and recombination. In practice, this structure has supported the company's evolution from a manufacturer into a broader smart home and industrial IoT ecosystem where appliances—from smart refrigerators to AI-driven laundry systems—are co-created with the people who use them.

The pattern has been consistent; once an idea emerges, a wave of Chinese companies is ready to plug it into the ecosystem and iterate quickly. And with more than five million STEM graduates each year—many educated abroad—and a demanding "996" (9 a.m. to 9 p.m., six days a week) work culture, this ecosystem has been dubbed by one European executive "a continuous-motion machine" activated at salaries that are typically meaningfully less than those of their US and European peers.

What was once the world's factory, in select areas, is becoming a laboratory, with a few emerging sparks of the "zero to one" variety—the rare breakthroughs that reshape entire categories on the scale of CRISPR, the smartphone, and the first practical lithium-ion battery.

Creativity takes two forms: the iterative kind that advances through a thousand small refinements, and the conceptual kind that breaks with precedent altogether, like Picasso's first Cubist canvas or a biotech team assembling a molecule no one's seen before. This shift is uneven across industries, but the direction is clear: Chinese companies—after mastering the engineering-driven incremental cycle—are now starting to make the conceptual leaps that signal emerging capability of creation.

Some of these sparks show up in consumer models before they show up in laboratories. European retailers are now looking to China's quick-commerce models, where shopping is fast, finely tuned, and intensely personal. In the practice of "digital clienteling," store associates build ongoing, personalized relationships with customers through WeChat or the business-focused WeCom. Chinese platforms are also using behavioral signals, rather than personal data, to segment consumers and tailor micro-strategies around discount seekers, new-product chasers, and annual occasion shoppers—potentially allowing companies to double or even triple sales, says Kevin Wei Wang, a McKinsey senior partner and co-leader of the Asia digital practice. "This is the model you can copy to France, even though there's no WeChat." These aren't optimizations—they're new ways of organizing data and marketing.

At the tech frontier, a similar pattern is starting to emerge. In AI, DeepSeek is introducing architectural innovations like "sparse attention" schemes which prompt models to focus on more relevant parts of an input. In batteries, Chinese companies are pairing incremental improvements with true breakthroughs in materials science and manufacturing; for example, CATL's condensed battery technology has demonstrated energy densities around 500 watt-hours per kilogram, which could push into aviation territory—a departure from conventional lithium-ion battery chemistry. In quantum science, physicist Jianwei Pan's teams have delivered world firsts from satellite-based quantum teleportation to next-generation orbital communication networks. These are breakthroughs in the truest sense: new architectures, new science, new possibilities.

These advances didn't emerge in a vacuum. They arose in fields where Chinese firms enjoy structural advantages—whether a deep bench of scientific talent or mastery of the "one to one hundred" cycle. Battery breakthroughs grew out of dense engineering clusters and supply chains; AI from massive digital adoption and data-rich platforms; biotech from a well-honed clinical and manufacturing ecosystem; and quantum computing from decades of state-supported physics research. Once the factories, platforms, hospitals, and laboratories existed, Chinese scientists, engineers, and entrepreneurs operating inside them worked to expand scientific and conceptual frontiers.

Still, the trajectory will continue to be uneven. Fundamental breakthroughs often require state sponsorship or university lab infrastructure—deep science, frontier technologies rather than the fast-cycle incentives of the markets. "China is not particularly strong at zero to one," says Henry Zhang, the contemporary Chinese novelist and poet also known as Feng Tang. "The system is cautious about failure, and the cost of being wrong is high. China's strength lies in what it does after the first step."

The most cited foundational AI work still comes from US and European institutions. In global pharmaceuticals, no Chinese firm ranks among the top twenty in 2025; long-established American and European firms such as Johnson & Johnson, Merck, and Novartis still lead. Only about 7 percent of China's R&D spend goes to basic research each year, compared with 12 to 15 percent in advanced economies. "IP imports are still 4.5 times larger than exports, and reliance on foreign inputs persists in several core technologies," says Jeongmin Seong, a McKinsey Global Institute partner. "These contradictions are exactly what make China's innovation trajectory one of the most consequential variables in global competition."

China's space sector illustrates this mixed picture. It hasn't yet matched SpaceX on the efficiency and scalability of putting payloads into orbit or Tesla's Starlink system on global satellite networks. But Chinese programs have achieved milestones that distinguish them in the global arena, such as the first soft landing on the far side of the moon, advanced lunar and sample return missions, and sustained robotic exploration underpinning long-term lunar and Mars ambitions.

This debate feels largely beside the point to the Chinese entrepreneurs we know. They're not pondering the divide between "zero to one" and "one to one hundred"; they're too busy creating and competing, building and testing, launching and iterating again.

Whenever the topic of China and innovation emerges in conversations with multinational clients, one question reliably surfaces: What about intellectual property protection? It's a fair concern, and we should be clear up front: IP theft remains a real issue, and despite improved enforcement, there is work to be done to address and eliminate it. But the debate often conflates two different issues: outright IP theft and capability building through engagement, in other words, how joint ventures, outsourcing, and partnerships help Chinese firms move up the value chain. The latter is far less discussed, yet often more consequential.

Apple didn't just outsource iPhone production for lower costs; it outsourced process engineering, tooling precision, and supply chain orchestration at scale. That ecosystem didn't steal Apple's IP—it learned to build at global standards and then kept going. In autos, Volkswagen and General Motors built joint ventures that secured decades of dominance while also training the engineers behind today's competitors like BYD and NIO. In each case, collaboration helped accelerate Chinese capability building.

The old fear of copying as the dominant risk doesn't reflect the reality. China today is simply not the China of twenty years ago. IP theft still occurs, but this pilfering nests inside a dense system of IP ownership, enforcement, and domestic rivalry. China now accounts for roughly half of global patent filings and the majority of AI patent owners worldwide, backed by a national-level IP tribunal under the Supreme People's Court. Rising IP enforcement, especially in high-value and high-tech cases, often reflects more IP ownership rather than greater infringement: Chinese firms now hold so much IP that weak protection would hurt their own interests. European and American business surveys likewise report improving protection.

Crucially, most IP battles in China today are Chinese versus Chinese. In the top court, only about one in ten IP cases involves foreign parties. In other words, the real action is a domestic cage fight where firms wield IP lawsuits as strategic weapons: Tencent versus ByteDance, DJI chasing rival drone makers, Huawei enforcing patents against smaller telecoms, and Baidu versus Sogou or Oppo versus Xiaomi in patent and unfair competition disputes. This is no longer a system organized primarily around copying; ownership and enforcement now matter internally (even as major international IP disputes involving Chinese firms continue).

For global companies, that shifts the center of gravity. The key concern isn't IP protection alone but also the speed and agility at which they can operate. In markets that move at China's pace, protecting IP may offer comfort but erecting "keep out" fortresses can often make an underlying technology obsolete.

Pharmaceuticals present additional complexity. Drug R&D takes a decade and billions of dollars, with low success rates of 10 percent. Those barriers create a degree of natural protection even as progress depends on collaboration. As Merck's Hong Chow puts it, "No single company or country can be self-sufficient in innovative medicines. The business is high-risk, and no one can develop treatments for all diseases alone. Collaboration is essential—at the same time, competition makes us better."

And when those lines between collaboration and competition get blurred, IP conflict increasingly transcends China altogether. Foreign multinationals don't just litigate against Chinese firms; they also pursue IP claims against other global rivals. In 2025, for example, Disney, Universal, and Warner Bros. sued Chinese AI start-up MiniMax in US federal court for copyright infringement and unauthorized use of its characters—and filed parallel suits against US-based AI companies. It's a reminder that IP tensions haven't vanished; they've shifted from factories and hardware to algorithms and data. In lidar and other frontier technologies, joint development and supply chain partnerships have sparked new disputes over who owns and monetizes shared capabilities.

Protecting IP remains essential, but capability building, speed, and strategic learning matter more. The real question is whether firms can engage China's innovation machine without being overtaken by it—using collaboration not as a risk but as a way to evolve faster. As innovation cycles accelerate, the greatest vulnerability for Western firms may simply be falling behind.

As we discussed, in the next China, local companies are creating and innovating at speed and scale. The next wave of breakthroughs may not just be tested in China—they may be born there.

We advise multinationals to plug into China's innovation networks, co-create with local talent, and use China's fast-moving market as a proving ground for ideas that can scale worldwide. "These are the decisive years," says Ken Wong, executive vice president and president of Lenovo's fast-growing unit, Solutions & Services Group. "If companies don't accelerate now, they risk becoming historic brands with no future."

We outline three strategic paths for engaging with China's rapidly evolving landscape.

Source innovations or partner locally. Find innovations from Chinese firms, or license or co-develop products for China or for global markets.

Build and develop in China. Use the local ecosystem as a high-speed laboratory to develop products for China and the world.

Adapt Chinese innovations. Take inspiration from China-origin products, techniques, and business models for potential application in your home market.

Jiangsu Hengrui Medicine embodies China's push toward best- and first-in-class innovation. Founded in 1970 as a maker of generic drugs, the company spent decades in the industry's back rows. Then it reinvented itself—investing nearly 20 percent of revenue into R&D and moving from "me-better" drugs to true "me-first" breakthroughs. Among them: potentially the world's first oral lipoprotein inhibitor and a therapy targeting the once "undruggable" KRAS G12D mutation.

Hengrui's rise caught the attention of Merck, the 358-year-old German science and technology company with more than a century of history in China. Today, China accounts for €3 billion ($3.5 billion)—about 14 percent—of Merck's global revenue, and the firm employs 4,500 employees across major Chinese hubs, but this partnership didn't begin in a boardroom. It started at a 2023 oncology conference when Merck's business development team spotted Hengrui's drug development pipeline. Hong, who is leading the commercial organization for Merck in China and the international region, messaged Hengrui's chairman, Piaoyang Sun, on WeChat for a meeting. "I was surprised when he immediately replied, 'Sure, let's organize something,'" Hong says.

That exchange led to one of the year's landmark deals. When Chairman Sun met Merck's former Healthcare CEO Peter Guenter in Shanghai, "there was immediate chemistry," Hong says. "It was a conversation between entrepreneurs with passions for science." Within months, the two sides finalized a $2 billion licensing partnership—"genuine co-development, not just a multinational taking over a local asset," she adds, fueled by speed and trust.

AstraZeneca's relationship with China reflects a similar shift from market access to innovation engine. Since opening its first office in 1993, the company has built hubs across Beijing, Shanghai, and Wuxi. At its Shanghai R&D center, quiet hallways and glass-walled labs for bioanalysis, proteomics, and mass spectrometry reflect a shift toward earlier-stage, more innovative research. "We're aiming for a qualitative leap in R&D," a scientist explains. "Not just taking projects from global."

That ambition is expanding: a new $2.5 billion Beijing R&D campus will host AstraZeneca's second global AI and data science lab and connect directly to local biotech clusters and hospitals. China now plays a central role in the company's development pipeline, with local teams leading nearly twenty global clinical trials and contributing to approximately 15 to 20 percent of all patient enrollments in AstraZeneca-sponsored studies.

Partnerships span China's biotech ecosystem, from multi-specific antibodies with Harbour BioMed to macrocyclic peptides with Syneron Bio. "From signing the memorandum to opening phase one on the first line took one year," Iskra Reic, AstraZeneca's executive vice president, international, notes. "That's how fast we're moving—pace, speed, and efficiency, and at AstraZeneca standards."

The company has also launched a healthcare investment fund supporting more than two dozen early-stage Chinese biotechs, aiming to bring China-origin innovations to global markets. Early engagement is a necessity, says Tina, McKinsey's life sciences partner, as multinationals increasingly "shop in China's very crowded supermarket" for new drug candidates and platforms. "If you look at a collaboration when an asset is already on the table being shopped for licensing, it's too late," she adds. "If you've promised eight blockbusters by 2030 and only have three in the pipeline, where will the other five come from—quickly and at lower cost? China."

At dawn in Hangzhou Bay, the glass facades of Smart Automobile's new complex catch the pink light rising over the port city of Ningbo—one of China's busiest shipping hubs. Inside, mixed teams from Mercedes-Benz's Smart unit and Geely review full-vehicle simulations.

This setting—two hundred kilometers south of Shanghai—is where Mercedes-Benz has anchored the future of its small-car brand. Smart's gasoline micro-cars, born in 1990s Europe, never cracked electrification. Its reboot as an electric vehicle is now unfolding not in Stuttgart but in the world's largest EV market. Mercedes-Benz still leads design, but engineering, software, and industrialization have moved into China's ecosystem.

"We're in China for global," says Mandy Zhang, global CMO of Smart Automobile. "Sixty to sixty-five percent of the world's new-energy vehicles come from China, and our headquarters is close to Geely's. We benefit from its scale and speed."

That scale has been transformative. Geely's three million-vehicle supply chain gives Smart purchasing leverage it couldn't achieve alone. "We share many components and benefit from their negotiating power," Mandy says. The effect is clear in iteration speed. She recalls a planned facelift: a 14.8-inch screen was approved; two weeks later, Geely's procurement team sourced a 15.4-inch version at the same cost; the change forced an instrument panel re-design and rapid human-machine interface safety and ergonomics validation. "The spec changed immediately—that's the speed of China's supply chain," Mandy recalls.

Smart is asset light with no manufacturing plants, and it taps Geely's EV architectures—the same platforms used by Geely's Zeekr, Volvo, and Polestar models along with the fast-evolving advanced driver-assistance systems (ADAS), the driver-assistance systems developed by shared engineering teams. These capabilities come at "almost commodity cost," says Mandy. Smart #1 moved from design to launch in two years—about half a European development cycle.

Smart's success in the crowded EV market remains to be seen, but global automakers are following suit. Volkswagen, BMW, and Tesla use China's ecosystem not simply for manufacturing but also for iteration and innovation. The logic has flipped: global firms once formed joint ventures to sell into a booming Chinese market; today, they turn to China for software systems, platforms, engineering talent, supplier speed, scale manufacturing, co-development with tech partners, and rapid commercialization—to sell both into China and globally.

As McKinsey senior partner Ruth Heuss puts it, "Europe doesn't yet have its own fully formed digital-innovation ecosystem. The next generation of Europeans will choose cheaper, more digital cars—and if automakers cannot rapidly build up their own capabilities or selectively import technology from China or the US, they'll face a period of decline."

Legacy carmakers use strategies that range from full localization to selective partnership. Volkswagen Group has poured at least €2.5 billion ($2.9 billion) into a new R&D center in Hefei, giving the company faster, cheaper, end-to-end development capability in China, and has also invested in or partnered with XPENG, Horizon Robotics, and other local players. Others use China as a manufacturing and export base; Tesla shipped roughly 260,000 vehicles in 2024 to global markets. Still others rely on joint ventures, localized platforms, or China-designed models aimed at Southeast Asia and other growth regions.

Whether automakers shift their thinking around China will determine which survive the next decade, argues Mingyu Guan, a McKinsey senior partner and China automotive practice leader. "Those like Mercedes, Volkswagen, BMW—who see the trend and commit to the future—will remain," Mingyu says. "The ones who stay in their comfort zone, who refuse to partner or explore beyond what they've done for decades, will struggle. Some players haven't moved an inch toward next-generation products."

The global market is big enough for European, American, and Chinese players, Mingyu adds, but only if they evolve. Daniel Birke, a McKinsey partner in advanced industries, sees progress: "Many multinational car companies are now making serious efforts to fundamentally change their operating models; it's not only about catching up with the status quo in China but also about defending their home markets as the industry baseline continues to rise." Competing globally now requires plugging into China's ecosystem through joint platforms, shared architectures, co-development with tech partners, and leadership teams that spend meaningful time on the ground. As Soul Capital's Herry Han, who is also an early investor in EV maker XPENG, says, "China is where the music of innovation is being played."

The global pilgrimage for innovation has long had as its destination Silicon Valley's garages and glass campuses. Lately, executives, investors, and entrepreneurs are heading east—to Shenzhen, Hangzhou, and Beijing—in search of the next big thing.

At first glance, this seems counterintuitive. Foreign direct investment into China has slowed, and the economy faces headwinds. Geopolitics look increasingly complicated. Yet the flow of people and ideas remains vigorous. Leaders across consumer goods, pharmaceuticals, AI, and industrials are visiting China to understand how its vast, digital-first market operates. At recent industry forums, the attendee list resembled a mini-Davos: the heads of Siemens, BMW, Qualcomm, AstraZeneca, Nestlé, and FedEx all made the trip. Joe recently visited RoboSense's Shenzhen headquarters and was among two dozen visitor groups that day; all were asked to place a metallic red sticker over phone cameras for confidentiality purposes before entering its lidar-sensing factories.

There's good reason for the interest. China's digital ecosystem is among the world's most sophisticated. E-commerce platforms have evolved far beyond online shops into hybrids of entertainment, community, and retail. Millions tune in daily to livestreams on RedNote, where farmers sell peaches straight from their orchards, fashion influencers push the latest streetwear, and wineries pour samples for viewers thousands of kilometers away. Every sale syncs instantly to payments, logistics, and data feedback loops that direct producers where to focus—as soon as the next hour.

These innovations are already shaping global commerce. TikTok Shop—born from Douyin—has reset expectations for social commerce worldwide, making most other e-commerce platforms seem "like a collection of analog items on a scrolling website that feels like the Stone Age," says Herry, our investor friend. In fintech, super-apps WeChat and Alipay have long merged messaging, payments, transport, entertainment, and retail into a single seamless customer journey; consumers outside China still juggle half a dozen apps to accomplish the same tasks.

Multinationals are finding their China operations often outpace headquarters, especially in digital innovation. McDonald's China has built a customer engagement and CRM engine more advanced than its US parent. Starbucks' China app integrates delivery, digital loyalty, and social features that make other global versions look dated. AstraZeneca sends global R&D leaders on multi-month rotations to its China research hubs, and Bosch Mobility's Suzhou factory—designated a green, technologically advanced World Economic Forum "Global Lighthouse"—includes among its best practices AI-driven predictive maintenance and automated optical inspection.

Such lessons are increasingly exportable. McKinsey recently worked with e-commerce players across Latin America and Southeast Asia to accelerate digital transformation using ideas inspired by Alibaba, Temu, and SHEIN. These foreign executives made repeated trips to China to observe supply chain operations, swap stories with sellers, and study business model innovations on the ground.

These are big shifts. For example, many Western and Southeast Asian platforms still rely on e-commerce home pages with "fixed columns organized by category or campaign—not conducive to customers' in-depth browsing and discovery," says Peng Xia, a McKinsey partner in China's digital practice. China's platforms, by contrast, feel like infinite feeds—digital street markets tailored for you: endless scroll, hyper-personalized recommendations, and content that constantly refreshes. One e-commerce company saw both click-through and conversion rates jump after adopting this model. An increasing number of non-China platforms have begun locating their technology R&D centers in China to leverage its vast tech talent pool. One Asian leading e-commerce company has scaled to more than a thousand engineers in Shanghai and Shenzhen to power on-site search, seller support tooling, real-time video creation, and recommendation AI. Yet another European e-commerce company has opened a China office with a 150-person team to recruit and support local sellers, curate product lines, and run logistics—linking Chinese sellers with international consumers.

Meanwhile, many platforms are eyeing Meituan and Taobao's instant-delivery model—the kind where you can get mie goreng in Jakarta, Indonesia, in nineteen minutes or a new umbrella in San José, Costa Rica, just as storm clouds start to gather. But adoption isn't plug and play—it requires rebuilding both the online interface and the offline network of couriers, micro-warehouses, and routing algorithms. Other platforms are adding influencer-led live e-commerce, which blurs the line between entertainment and shopping, leveraging influencers' credibility and charisma to drive impulse purchases. Examples include a beauty vlogger testing skincare products, a chef demonstrating instant noodles, or a tech reviewer unboxing gadgets. However, scaling this model globally requires adapting to local influencer ecosystems, building content production and personalization-of-product capability, and integrating with e-commerce transaction infrastructure to maintain the seamless user experience that defines success in China.

By drawing on practices honed in China's brutally competitive e-commerce arena, companies can reinvent both customer experience and fulfillment operations. The ideal payoff: faster user growth, deeper engagement, stronger unit economics, and a new blueprint for digital commerce.

"This is China's fundamental sauce. With its massive consumer market, abundant STEM talent, and policy support for tech infrastructure and education, you'll see continuous Chinese innovation over the next ten to twenty years," Peng says. "We could be heading toward a global innovation duopoly: Silicon Valley and China's Yangtze Delta–Greater Bay Area."

When we talk about innovation in China, we're referring to the frontier edge of a nation of 1.4 billion people that now produces nearly 20 percent of global GDP. This slice doesn't represent all of China—just as a visit to Meta or Google wouldn't explain the United States. Large parts of the economy remain far from the cutting edge. In capital markets, for example, the depth and sophistication of local institutions still lag the global financial centers of New York and London. And within China itself, the contrast is stark: alongside the gleaming first-tier cities are hundreds of third- and fourth-tier cities where many enterprises continue to operate with older technologies and management practices. Yet it's precisely this frontier slice—small relative to China as a whole but vast in what it signals—that previews where the next wave of global innovation is likely to emerge.

Yet global understanding of this frontier is narrowing just as its importance grows. As one former Google executive who spent a decade in China told us, "Westerners have about 10 percent of the knowledge of China that Chinese people have about the West." That's why immersion matters. Time spent in China has a way of resetting assumptions, and upon their return home, we've seen many executives realize that ideas they'd once dismissed as "too Chinese" might hold the seeds of their next big move.

China's innovation story is also one of divergence. In areas such as robotics, electric vehicles, and advanced manufacturing, the country's scale, speed, and engineering depth are already resetting global benchmarks. In others—biopharma, aerospace, semiconductors—the gap with Western research ecosystems remains meaningful, though its durability is increasingly uncertain amid ongoing debates in the US, in particular, over public funding for university research and government science programs. "It took the US a century to build the university and research foundation that drives fundamental scientific discovery," says Tina, McKinsey's life sciences partner. "In areas like biology and basic science, that foundation still gives American research an edge. Chinese institutions haven't yet mastered that."

Overall, though, the direction of travel is unmistakable. "Multinationals still have a five-to-ten-year advantage in branding, design, and heritage," says Alfons Mensdorff-Pouilly, CEO of Jebsen Group, which has been operating in China for more than a century. "But ultimately, you have to be in China to develop products for the future. Surround yourself with the right partners, the right engineers, and the right work ethic—and access the ecosystem."

We recently brought a group of Scandinavian executives inside China's most dynamic technology clusters for a weeklong immersion we call "Innovation Execution." Leaders from some of Scandinavia's largest commercial vehicle and industrial engineering companies moved through factories, robotics labs, and automation start-ups—to understand the operating processes behind them. What struck them was a pattern of execution that repeated itself: development cycles that would take weeks in Europe were compressed into hours; targets were ambitious; authority was delegated to frontline decision-makers; and supplier changes could be executed in hours. Key calls were made in one room. Communication ran through integrated platforms such as Lark, with response times measured in minutes—rather than days lost in email chains. Our clients observed flat organizations with wide spans and minimal matrix structures. "The week revealed just how powerful Chinese innovation practices can be," one executive tells us. "These are all approaches that can help multinationals stay competitive globally."

Every company must make its own choices about how to engage with China's innovation ecosystem. Some will keep core R&D at home and use the China ecosystem for scale; others will co-develop or compete inside Chinese markets. The US, Europe, and China bring world-class capabilities—different strengths, distinct systems, increasingly intertwined. As AstraZeneca's Iskra puts it, "The real question is how the balance between them will reshape global innovation over the next decade."

While no country has a monopoly on fostering or scaling innovation, China's ecosystem is showing increasing sparks of creative momentum—and a formidable ability in turning ideas, wherever they originate, into products and business models quickly and at scale.