lNo one can deny that China's economic success story in the past three decades has largely relied on its manufacturing clout. The country has been churning out Made-in-China products every day and exporting them to every corner of the world.
So it came as no surprise for many when a recent forecast showed that China is set to overtake the United States as the world's largest producer of manufactured goods, four years earlier than expected.
The Financial Times on Monday heralded it as a "great leap" when citing the forecast by US consultancy Global Insight as saying China will account for 17 percent of the global value-added output of $11.78 trillion next year, ahead of US' 16 percent.
However, it's not all good news for China as a manufacturing-led economy can hardly be sustained. There are already some worrying signs that other emerging economies such as Vietnam or Bangladesh are absorbing manufacturing activities from China, where the labor costs are rising fast.
In the long term, China must look at the knowledge economy to maintain its economic marvel and ensure its people continue to prosper, said Ya-Qin Zhang, corporate vice-president of Microsoft.
"We have seen other economies go through the same kind of challenges that China is starting to experience today. Just as Japan, South Korea, and even the United States and the United Kingdom have, China must evolve from the manufacturing-based to a knowledge-based economy," said Zhang.
In 1840, Britain became the world's largest manufacturer but now it has switched to the creative industries to maintain its global competitiveness. The US has dominated global manufacturing for a century but is continuing to thrive by relying on its knowledge economy.
At software behemoth Microsoft, where Zhang is both a top scientist and an executive, he has had a better opportunity than other Chinese to witness the power of the knowledge economy.
Microsoft is little involved in manufacturing, but its sales and profits could equal to the combined figures of a big number of Chinese manufacturers, even the top ones. Its success is largely derived from its relentless research and development effort as well as a focus on searching for new business models.
Zhang is one of the most successful Chinese working at a multinational company and also one of the few who are working in both research and management. Zhang studied electrical engineering at the age of 12, then the youngest college student in China. By 23, he earned a PhD in the US. Now he is the founder and chairman of Microsoft's largest talent powerhouse outside of the US, the Microsoft China R&D Group as well as chairman of Microsoft China where he is in charge of sales, marketing and strategic partnership.
That is part of the reasons he was chosen for the Beijing 2008 Torch Relay. Fresh from the running, Zhang said he was moved by China's passion and unity demonstrated when hosting the Olympics, which reinforced his belief China would eventually make anything possible, including building a robust knowledge economy.
Now the crux is how to better tap into the country's talent pool.
The country is not short of talent. "Based on what I have seen over the last few years and through my interaction on a day to day basis with our researchers and engineers at CRD, I am confident that China has the talent needed to succeed," Zhang said.
China now produces some 500,000 engineering graduates and 12,000 PhDs each year.
CRD serves as a prime showcase of the impact of China's talents. Recent contributions by the group to Microsoft products include key technologies that can be found in products such as Office System 2007, Windows Vista, and Exchange Server 2008.
"Our researchers and engineers have a very impressive ability to adapt. They are approaching some of the most challenging computing problems we face today in a more creative way. This is one of the driving forces behind our success," said Zhang.
"If there is one area that China needs to work on, it is encouraging creativity in young people," he said, adding that to build a strong knowledge economy China will need the right policy environment, educated talents, and the experience to effectively turn its raw intelligence into knowledge to further economic and social development.
According to the World Bank, a knowledge economy is one that creates, disseminates, and uses knowledge to enhance its growth and development.
China's traditional education has been criticized as discouraging creativity as it features the one-way rote lectures, textbooks and outdated teaching methods.
Some claim the traditional educational systems are not giving full play to the country's vast talent pool, thwarting its effort to build a knowledge economy.
That is changing. An increasing number of schools and universities are now introducing Western practices to encourage creativity in the classrooms.
Although China boasts a vast talent pool, the productivity of researchers and engineers has been much lower than their US counterparts, partly because of inadequate protection of their intellectual property rights.
That partly explains why China's hi-tech exports still partly revolve around manufactured goods although they are already accounting for the biggest portion of the country's total exports.
Intellectual property rights are "a very important part of CRD's culture and our approach to management. It is also a formula that can be applied to the development of a knowledge economy," said Zhang.
The Chinese government has been ramping up efforts in protecting the IPRs, providing a better environment for both multinationals and domestic companies and institutions.
"What's even more encouraging is that local companies are starting to realize the value of intellectual property and taking measures to protect it," Zhang said.
The number of patent applications in China has increased sharply from 33,600 in 1997 to 402,496 at the end of 2006. The central government has also set up more than 50 courts to deal solely with IPRs cases.
China's success story is also largely due to its readiness to learn advanced Western technoligies and practices.
"As China continues down the path to the development of a knowledge economy, partnership with the international community and multinational companies will continue to be very important," said Zhang.
"Microsoft is committed to building a healthy IT ecosystem that will foster a strong knowledge economy and deliver a win-win for China and the IT industry."
Over the years, Microsoft has created a partner ecosystem that has had a significant impact in China, Zhang said. According to a recent report from research house IDC, for every dollar Microsoft generates in revenue in China, $16.89 is generated for partners.
CRD could be a success model for local companies and it should not take too long for local companies to copy its success story, Zhang said.
CRD was formed in 2006, comprising several Microsoft research facilities in China with an annual budget of more than $200 million.
"Traditionally, we have seen a lot of outsourcing taking place in China, where teams of engineers have built software based on specifications or they have localized innovations created in other countries," said Zhang.
"Today, at CRD, we have moved beyond this localization and outsourcing model to a point where we are innovating products in China for the world. Many of our partners in China have gone through the same evolution."