Strategy
MNCs are falling for China’s potential as a base for R&D, and Shanghai is leading the way
By Sophie Chen
According to incomplete statistics from China’s Ministry of Commerce, by March 2010 China had more than 1,200 R&D centres set up by MNCs. Driven by a market of over 1.3bn potential customers, China has become a major destination for foreign-invested R&D centres. Multinational companies aim to make R&D an engine for growth in emerging markets.
“We have seen a rapid increase of R&D activities focussed solely on the local Chinese customer needs. Our Chairman Jeff Immelt named this trend ‘reverse innovation’,” says President of GE China Technology Center, Dr. Xiangli Chen. “In order to compete in the growing emerging markets, MNCs have to better capture the vast local market potential to succeed. So they start to develop technologies which can meet the local customers’ needs. We call this initiative In China For China (ICFC).”
“Customer needs drove us to Shanghai. In the past years, we have changed from ‘Made in China’ to ‘Created in China’. The Chinese market is different from any other market in the world, and it has unique requirements for products which are cost-effective and include the right technologies,” says Donald E Wood, director of China Engineering at Tyco Electronics (TE), a global provider of engineered electronic components, network solutions, undersea telecommunication systems, and specialty products.
R&D Without Borders
However, for multinationals, R&D activities in China are no longer just a matter of localising global products for Chinese customers’ budgets and tastes. China’s R&D is working to achieve innovation with an international impact – the development of technologies and products for both China and the rest of the world.
“Apart from the Chinese market, our R&D centres also support our markets in the rest of the world. For our R&D activities in Shanghai, while we are developing cost-conscious and customised products for the domestic market, we also develop products which are both cost-efficient and equipped with advanced features for export. This is also part of our long term goals,” says Daniel Q Zhu, director of China Engineering, Communications & Industrial Solutions at TE.
There are many other examples.
Philips Research Asia Shanghai (PRAS), established in 2000, is one of three global Philips research labs. Based on local strong
R&D competence, PRAS not only delivers meaningful innovations to meet the local needs; they are also seeing that some of their innovations have been reversed to serve global markets to meet diverse market needs.
The auto industry has also found opportunities to make use of fresh ideas from China. General Motors (GM) was the first global auto company to establish a JV in China, Pan Asia Technical Centre (PATAC), formed in 1997, to provide automotive engineering services. Now, PATAC is fully integrated into GM’s global network, ensuring strong input in global programme development.
The country’s strong manufacturing base provides a solid foundation for these developments; the production of “Made in China” goods has benefitted from the mass of labour resources and emphasis on the importance of manufacturing for the developing economy. A combination of manufacturing know-how and original ideas informs a new emphasis on innovation. With this past experience, China is in a good position to understand the conversion of local innovations into real products. China is becoming an international innovation base to list with global players such as the United States, Europe and Japan. “Made in China” will soon be upgraded to “Innovated in China”.
Get R&D First
By October 2010, 316 MNCs had established R&D centres in Shanghai, said Jian Heping, vice chairwoman of Shanghai Municipal Commission of Commerce, at “Shanghai Forum on Foreign-Invested R&D Centres” in November 2010.
Already designated a future financial centre by the Chinese government, the city is also becoming a hub for R&D, including R&D for the automotive, chemical, electronics, pharmaceutical and machinery manufacturing industries, and others.
“Shanghai is the economic and financial hub for mainland China and enjoys unique advantages in geography, economic development, education, culture, art etc. In particular, Shanghai has long been taking the lead in internationalisation in China.
Like Intel, MNCs are now increasing their R&D investment in Shanghai. They mainly focus on product and technology R&D, in the areas of hi-tech industries such as electronics, pharmaceutical and automobile,” says Bob Liang, general manager of Intel Asia-Pacific R&D Centre (APRD).
“Our R&D centre in Shanghai has the ability to streamline our business in China.
Shanghai is a hub for everything that is happening right now,” says Wood.
“As the largest economic powerhouse in China and one of the leading cities to directly attract overseas investments, Shanghai has a higher demand for advanced products. The city is also home to a number of China’s most prestigious universities. It is a rich source of talent,” says Liang.
Shanghai’s fertile ground for nurturing future talent has proven tempting for many. According to Wood, “The population growth here provides a huge talent pool which has potential technology leaders and innovation leaders. It drives our business growth in a long term.”
“Shanghai is the city which could attract more talent from elsewhere, though the cost is relatively high comparing with the other cities. Most global customers have the tech centres and facilities here and that makes communication and visiting much easier, and also makes our support faster,” says Weibo Weng, vice president of Engineering and Technology, Asia Pacific, at Federal-Mogul Corporation.
Chen from GE agrees that Shanghai has a great talent pool for engineers, especially in the areas of mechanical engineering, chemical engineering and electric engineering, which all fit well with GE’s R&D activities.
Friends in High Places
After overtaking Japan as the second biggest spender on R&D, China is expected to spend USD153.7bn on R&D this year, up from USD141.4bn in 2010, according to Battelle Memorial Institute, an international science and technology enterprise, working to advance scientific discovery and application.
The Chinese government’s enthusiasm for these developments will help to take things further. The government has been encouraging the entry of foreign capital R&D through policies such as offering tax exemptions on equipment imports, providing government R&D subsidies and strengthening the protection and enforcement of intellectual property rights (IPR).
“Shanghai municipal government has been supportive about MNCs setting up R&D centres in the city for a long time.
The government has put forward three measures at the November forum last year,” says Liang.
“The Chinese government has advocated and provided support for MNCs to establish R&D functions in China in recent years. Also, with China’s complementary focus on improving energy savings and emissions reduction, it offers a good opportunity for PPG and other MNCs to develop sustainable technologies here,” says Cathy Yan, general manager of Government Affairs and Business Development at PPG Asia Pacific, a global supplier of paints, coatings, optical products, specialty materials, chemicals, glass and fiber glass.
Sticking Points
Although the Chinese government has also been making an effort on helping IP development and IPR protection, it takes time. However, foreign companies are probably more concerned about competing within the domestic market for a growing share of what is available.
“There is always a challenge in China for MNCs when it comes to collaborating closely and deeply with their customers, partners and suppliers while protecting their IPs. What we should do is to manage, not to avoid,” says Zhu from TE. Wood agrees, “We see the Chinese government has been making efforts on the IP issue. There is a fine line. You have the concern, but to compete in the market and meet customers’ needs, you need to bring the best. Staying away would be a greater risk than bringing the latest technologies here.”
With this attitude, the IP issue is now perhaps less significant than other concerns.
The supply of talent seems to be a bigger worry for multinationals, who must have the best people at the core of their R&D activities. Even if a city like Shanghai has a glut of respected universities and academic institutions, as the competition grows fiercer, talent wars are inevitable.
“We feel the pressure of the intensified competition. MNCs need to put more resources into recruiting talent as well as research and industrial cooperation if they are to be competitive. With increasing demand for talent, MNC’s R&D centres must face the challenge of attracting, training and retaining outstanding talents amidst this competition,” says Liang from Intel.
“There is still a gap to fill in terms of globally influential top scientists in Shanghai. The younger generations’ education is also a big hurdle for attracting top overseas research talent to work here. In addition, it would be helpful to facilitate local talent cultivation by bridging the gap between MNCs, local research institutes and universities,” says Chen.
But despite the feeling that there is room for improvement, with a huge and varied market demand and the customers’ willingness to try new things, Shanghai has already succeeded in becoming a regional R&D centre from which to develop world-class innovative ideas and technologies; and it is on the way to becoming a global centre.
“Shanghai is definitely the hub for R&D centres in China because of the diverse customer base. Our Shanghai R&D centre is one of TE’s premium R&D centres to the company,” says Wood.
“The talent availability is one of the most important factors for successful R&D. Despite the competition heating up, we still see that Shanghai will become the regional R&D centre in the near feature,” says Weng. “Among our four centres, the one in
Shanghai is regarded as a COE (centre of excellence) for research work particularly in clean coal, water treatment, wind power conversion technology and etc. We have been in Shanghai for more than ten years; that says it all,” says Chen from GE.
This article first appeared in the February issue of the Shanghai Business Review.
Mar 19, 2011