Examples from countless industries have proven open innovation as the new imperative for creating and profiting from technology.
Nevertheless, the trend of open innovation in China’s energy industry is noteworthy, partly because the size of the industry is self-evident and partly because it comes late.
But the landscape is changing swiftly. China’s 13th Five-Year Plan (2016–20) has pledged to an “energy revolution” with a focus on swapping out coal for renewable energy and ramping up investment in innovative energy technologies. Moves are also underway to improve the governance and efficiency of State-Owned Enterprises, while also opening up more state-owned parts of the energy value chain to private investors.
In 2018, China added 20.33 gigawatts (GW) of wind power capacity to the grid in 2018. This is about 22% of the total installed wind power capacity in the United States. For solar power, more than 44GW of solar photovoltaic (PV) power capacity was added, about 4 times as much as the expected quantity of solar PV installed in the United States. Bloomberg predicts that solar will be cost-competitive to coal generation in 2022 in China. Falling costs of sensors, storage and, computing power have also made digital investments even more attractive.
Facing the requirements of transformation and expansion of new businesses such as renewable energy, energy companies operating in China realized that in addition to relying on internal research and development, cooperating with startup companies and leveraging external innovation forces were essential to maintain their competitiveness.
What determines a company’s open innovation capabilities?
While most energy corporations have business units dedicated to open innovation, they are usually less powerful than traditional mainstream business units. Executive commitment and organizational support are therefore crucial to the successful delivery of corporate open innovation strategies.
First, there must be a closer and more material collaboration between innovation units and other business units. The introduction of outside new technologies and solutions usually require certain changes to existing products and corresponding customer education. All of these would require cross-business-unit collaboration. Max Yang, Investment Director of Center of Innovation & Entrepreneurship at China State Grid, said when executing open innovation initiatives, he emphasized to engaging colleagues in finance, legal, and human resources departments to get their buy-ins, demonstrate the power of open innovation, and to streamline the future implementation of disruptive technologies.
Secondly, the internal incentive structure must be aligned with the characteristics of open innovation. Gang Wu, Dean of Low-Carbon Industry Technology Research Institute at China’s Shuangliang Group, recognized that at times, investments into outside technologies did not yield short-term cash flow effects. Hence, internal talent and KPI appraisal matrixes may need to be revised to incentivize the consistent, long-term execution of open innovation strategies.
Where should a company open to external innovators?
A company’s business model, which itself can be innovated, determines what companies look to bring inside the firm and to go outside the firm. Chinese energy conglomerates and multinational energy tycoons both acknowledged that not all business units were suitable for opening up open innovation.
Technology attraction and comparative strength are two major matrixes guiding a company’s decision on which areas to open up.
Decision-making factors for large energy companies to consider whether a certain technology is suitable for open innovation.
Technical attraction refers to the commercial potential of the technology, as well as the applicability and compatibility of the technology in the company’s existing businesses. In terms of comparative strength, energy corporations usually measure their comparative strength on certain technology by evaluating how familiar their internal R&D teams are with that said technology.
For example, if a renewable energy technology is highly attractive to an energy company, but the company does not lead the industry in terms of the R&D of certain technology (i.e., its comparative strength is low), then the company will be more likely to open up that renewable energy technological field for external innovators.
Another example is Shell. According to Qun Deng, General Manager of Shell China Innovation & New Energy Technologies, new technologies and business areas such as artificial intelligence, electrification, and hydrogen are often more open to external innovators and see a faster implementation of proof of concept (POC) projects.
Ariel Ziyuhan Wang is an intern with Plug and Play’s Energy & Sustainability Program in China. Currently, she is a graduate student at Stanford University major in environmental engineering. Before, she graduated from Penn State University with nearly 2-year-long research experience in drinking water purification technologies.