Summary of Key Points
State-owned enterprises (SOEs) control a massive public procurement market worth 44 trillion yuan, possess 1.1 trillion yuan in research and development (R&D) funds, and employ 1.44 million R&D personnel, making them ideal drivers of innovation. However, the traditional procurement system—focusing on compliance, low prices, and rigid processes—has become a stumbling block to innovation. This system squeezes suppliers' R&D profits, hinders the introduction of innovative products, and makes it difficult to quickly meet scientific research needs. Industries such as aerospace are exploring breakthroughs through digital platforms, and there is a push within the industry to move away from price-based competition and implement policies that support the development of first-of-its-kind products. In the future, changes are needed in three areas: mindset, environment, and institutional frameworks, to transform procurement from a mere tool for scaling up into a catalyst for innovation.
I. Large Procurement Scale but Stagnant Innovation
The annual public procurement volume nationwide amounts to 44 trillion yuan, with central SOEs accounting for 18 trillion yuan. Despite these substantial resources, why hasn't innovation been achieved? The problem lies in the outdated approaches used in procurement:
- Unbalanced Structure: Two-thirds of procurement is for engineering projects (such as infrastructure and equipment upgrades), while services and goods account for a smaller portion. R&D materials and emerging products, which are essential for innovation, receive insufficient attention.
- Rigid Logic: Traditional procurement focuses solely on compliance, low prices, and traceability, leading to slow responses to technological advancements and personalized needs. Procurement departments prefer to compare prices among established suppliers, avoiding innovative products with no prior precedent.
- Low Conversion Efficiency: There is a lack of coordination between the internal R&D teams in SOEs and small and medium-sized enterprises (SMEs), making it difficult for research needs to be matched with suitable suppliers, and thus for innovative outcomes to be realized through procurement.
II. Why Has Traditional Procurement Become an Obstacle to Innovation?
1. Price-based Competition Drains R&D Funds: Under the pressure to reduce costs, SOEs prioritize low-price options, leaving suppliers with minimal profits that hardly cover R&D expenses. For example, some argue that industries with thin margins lack the motivation to innovate.
2. Compliance Processes Slow Down Research: Research often requires new, scarce, and uncertain materials. However, traditional procurement processes involve lengthy applications, approvals, and bidding, which can delay progress significantly.
3. Innovative Products Struggle to Win Bids: Innovative products have high initial costs, variable quality, and lack established success stories. Traditional bidding methods, which focus on price and market share, make it impossible for them to secure orders or even gain opportunities for improvement.
4. Lack of a Research Supply Chain: While engineering supply chains are designed for standard products, research supply chains require developing new materials from scratch, a challenge that the traditional system does not accommodate.
III. Aerospace Industry Leads the Way with Digital Transformation
The aerospace industry has pioneered digital solutions to streamline procurement:
- Time Reduction: What used to take 21 days for a single component through traditional bidding can now be completed in just 48 hours via digital platforms.
- AI-Assisted Resource Discovery: Platforms use AI to gather innovative products from SMEs and individuals, enabling SOEs to quickly identify suitable candidates. This integration of national R&D capabilities with private innovation efforts enhances overall efficiency.
- Compliance and Efficiency Combined: Digital platforms ensure compliance while providing a transparent process that allows researchers to make informed choices without worrying about procedural risks.
IV. From Follower to Leader: Three Challenges for SOE Innovation
Ping Qingzhong points out that SOEs have traditionally focused on acquiring and adapting existing technologies, but now they need to shift towards original innovation. Three changes are necessary:
1. Mindset Shift: From relying on others to fostering independent innovation.
2. Environmental Improvement: Emphasizing the importance of a robust research supply chain that provides researchers with the necessary resources in a timely manner.
3. Systemic Reform: Implementing flexible systems that support different types of innovation, such as more adaptable evaluation criteria for research-driven industries that do not solely focus on short-term profits and tolerate failure.
V. Institutional Support for Innovation
To overcome barriers to purchasing innovative products, institutional changes are essential:
- First-of-Its-Kind Product Policies: Government incentives can reduce the risks associated with investing in innovative equipment.
- Shift from Price Competition to Value and Quality: Encouraging comparisons based on value, quality, and innovation can motivate suppliers to invest in R&D.
- Balanced Regulation: Simplifying procurement processes and establishing error-tolerant mechanisms can encourage innovation without deterring SOEs from taking risks.
VI. Procurement Transformation as a Critical Step for Innovation
SOEs have the resources and talent needed for innovation, but without a transformed procurement system, progress will be hindered. Digital technologies (such as AI platforms) and improved institutional frameworks (e.g., research-specific processes and error-tolerant mechanisms) are crucial. Once procurement shifts from focusing on lowest prices to selecting innovative solutions, the annual spending of trillions of yuan can truly drive innovation, transforming SOEs from mere market giants into centers of creative innovation.
In summary, while state-owned enterprises hold significant potential for innovation, their traditional procurement systems must evolve to support this transformation. By adopting digital tools and redefining institutional practices, they can leverage their resources to become leaders in driving technological advancement.