By Eugene Sebastian

This year, 24 major Asian firms appear among Forbes list of the World Most Innovative Companies.  The list identifies the top 100 “creative disrupters” – companies that are entering, innovating and attracting the interest of investors.

Japan has the highest number with eight companies listed, followed by China (7) and India (5).  Unlike other ranking methods, Forbes 100 does not ask executives to vote.  Instead, it uses a method developed by researchers and co-founders of the Innovator’s DNA, Jeff Dyer and Hal Gregersen.  “Many ‘Most Innovative’ rankings of companies begin by asking executives to vote on which firms they think are most innovative”, said Dyer and Gregersen.  “These end up becoming popularity contests based on past performance. Our method relies on investors, who vote with their wallets, to identify the companies they expect to be innovative today and in the future.” Bruce Upbin, managing editor of Forbes puts it another way, “it’s the premium the stock market gives a company because investors expect it to launch new offerings and enter new markets that will generate even bigger income streams”.

Companies must meet two criteria: they need to have seven years of financial data, and must have $10 billion in market capitalization.  Dyer and Gregersen use the Innovation Premium method to compile the list.  “It is calculated first by projecting a company’s income (cash flows, in this case) from existing businesses, plus anticipated growth from those businesses, and look at the net present value (NPV) of those cash flows”, explains Dyer and Gregersen.  “We compare the NPV of cash flows from existing businesses with a current market capitalization: Companies with a current market cap above the NPV of cash flows have an innovation premium built into their stock”.  Using Credit Suisse HOLT’s data and algorithm, Dyer and Gregersen identified a company’s “innovation premium”.  Only industries that are known to invest in innovation are included.  And banks, energy, and mining firms are not listed.

Japan’s highest ranked (17) company is e-commerce giant, Rakuten Inc., the Tokyo based firm which e-commerce platform, Ichiba, is the world largest by sales. Rakuten is the “Amazon of Japan” with a pretty comprehensive internet ecosystem. Over the last couple of years, the company has spent big to diversify and expand.  In 2014, Rakuten, who owns digital products like e-reader Kobo, streaming entertainment site Viki, acquired messaging app Viber for $900 million.  Last year, it spent over $700 million on 11.9% stakes in Lyft, the San Francisco based ride-sharing service provider and purchased OverDrive Inc, a leading eBook, and audiobook content marketplace.  Late last year, it launched Rakuten FinTech Fund, a new $100 million global investment fund focused on investments in startup and growth companies in the US and Europe.

Japan’s other innovative companies include medical devices firm, Sysmex ranked at 28; Fast Retailing (41), a retail company and owner of Uniqlo; Unicharm (43), a company that manufactures hygiene products and household cleaning.  Shimano, specializing in leisure products is ranked 55, followed by electronics supplier, Keyence (64); leisure and tourism operator Oriental Land (65); and robotics manufacturer, Fanuc (76).

China has seven companies, the second highest number, in Forbes top 100.  Leading its contribution is research and development (R&D) firm, Shanghai RAAS Blood Products (16), that manufactures blood and plasma-derived medical products.  At 29 is web service company, Baidu.  Ranked 48 is Tencent Holdings, one of the largest internet company in the world, exceeding US$200 billion in market value.  BesTV New Media, an information technology, and service company, ranks 49.  Top travel site, Ctrip.com International ranks 53; a world leading supplier of video surveillance products and solutions, HIKvision is at 91; and AVIC Aviation Engine, a state owned aerospace, and defense enterprise is at number 100.

Five Indian companies rank in Forbes 100.  Appearing at number 18 is paint maker, Asian Paints. The rest includes Hindustan Unilever (31) – India’s largest consumer goods company; Tata Consultancy Services (66); Sun Pharma Industries (73); and infrastructure giant, Larsen & Toubro (89).

Expanding into online domains

What stands out about the 24 innovative companies? First, the majority of the Asian firms are in internet, life science, and biotechnology.  In fact, life sciences and biotechnology companies occupy half of Forbes’ top ten list. China’s internet giant, Tencent, is into social network, web portals, e-commerce and multiplayer online games.  WeChat, its mobile chat service is its well-known offering. Tencent’s investments have extended into online retail in China with its 15% stake of JD.com, one of the largest B2C online retailers. In late 2015, it acquired Riot Games, the developer behind the world’s top eSports game, League of Legends. The League of Legends video game championship is like the “Super Bowl and the World Cup rolled into one”, according to Whalen Rozelle, director of eSports at Riot Games. The game has over 100 million monthly players and generates about US$1.5 billion a year for the Los Angeles-based developer. Tencent’s stake in the online multiplayer game company is strategic. Chinese gamers love League of Legends. According to research firm Newzoo, the game has 85 million monthly active users, at least 40 million of who are in China. Online gaming in China is the fastest growing internet business sector in the world. About a staggering 457 million internet users currently active in China, making it now the largest online user base in the world. According to Newzoo, “indirectly, Tencent partially controls about a third of the revenues generated by the top 10 global companies” in online multiplayer gaming.

Lower cost of innovation

The second stand out is how information and communications technology coupled with data is helping drive down the cost of innovation. The Japanese company, Rakuten’s new innovation buzz is Artificial Intelligence (AI) and machine learning.  Recently it made a $10.5 million bid on ViSense, an AI startup in Singapore.  ViSense started out of a joint research centre set up by the National University of Singapore and Tsinghua University of China. The company provides visual search and visual image recognition used in online retail and advertising. Yuki Watanabe, founder, and CEO of Sensy, believes AI can help consumers find what they really desire faster.  “For an online shopper, buying shoes, for example, means quicker shopping with more style options.  Not just any style, styles a smart app has figures out they will, most probably, like a lot”, Watanabe said.

Though AI presents enormous potential for the services sector, there are still limits.  Masayi Mori, Global Head of the Rakuten Institute of Technology – the company’s dedicated R&D arm – points to limits in AI’s communication capabilities.  “AI still can’t clearly distinguish dialogue and provide response, nor can it complete creative and challenging tasks”, said Mori.  But he believes AI can go beyond data analysis to generate unique data where gaps exist in database sources. “That means, in the very near future, even if you don’t have enough data for analysis of prediction of consumer behavior and business operations, AI applications can generate the missing data (more precisely infer data), to fill these gaps”.

Networks of excellence

The third stand out is how outward looking these companies are becoming. More are looking globally for new and innovative solutions to major business problems. They are shifting beyond centralised configured R&D model where research is only done within the organisation and in home country.  R&D is becoming more collaborative, multidisciplinary and networked around key clusters of research excellence. Over the last few year, Japan’s Rakuten have established research centres across four countries, to focus on particular parts of their value chain and develop technology.  The institute now has five branches across the world, with presence in Tokyo, New York, Paris, Boston, and Singapore. Its Boston research institute focuses on artificial intelligence and machine learning technologies, while its Singapore’s Centre brings together engineers, data scientists, and psychologists to focus on behavioral science, mobile and social innovation.

Over the next few years, the number of Asian firms in Forbes 100 Most Innovative Companies will continue to increase.  Affordable and fast paced development in ICT will be an important contributor. What is perhaps less understood is the role universities will play in corporate growth. Reuters’ most recent Top 75: Asia Most Innovative Universities offers new insights into the advancement of science and invention of technologies in Asia’s most innovative universities.