A training class at Education First. The company recently established its largest R&D center in Shanghai. Provided to China Daily

Multinational companies get ready to ride the R&D investment wave in China

For many multinational companies, China is no longer just a manufacturing destination, but an important venue for honing the research and development skills needed to stay ahead of the competition.

Though China's growing economic prowess has been the integral factor in spurring major R&D investments, other aspects like the growing research talent pool and the huge domestic market have also been contributory factors.

"Multinational companies are willing to invest in R&D centers in China because they want to capture the market growth opportunities in China and also steal a march over their domestic companies with newer products and technologies," says Waston Liu, vice-president of Roland Berger Strategy Consultants Asia.

"Multinational companies must understand what the local clients and consumers want and continue to differentiate their products and services if they want to be successful in China," he says.

According to Liu, more than 50 percent of the foreign companies present in China have set up R&D centers, with energy and chemical products being the sectors that saw the maximum investment.

"Automotive, construction and electronics are the traditional hot industries for R&D investment by multinationals. In industries like garments, clothes and shoes, due to the intense competition from domestic companies, companies need to focus more on R&D," he says.

The R&D rush has also been triggered by the vast improvements that local enterprises have been making terms of brand recognition, marketing and sales.

"The multinationals are keen to invest in R&D efforts in China primarily to maintain their share in the market with the greatest potential," he says.

Alstom, a leader in power generation and rail infrastructure, set up Alstom Grid China Technology Center in Shanghai last year to focus on transportation power generation. It was the second R&D center set up by the French heavy engineering group in China.

"The cooperation between foreign companies and Chinese companies has shifted from just transferring technologies. We will now focus on the localization of our technology," says Dominique Pouliquen, chairman of Alstom China.

That marks an about-turn from five years ago, when most of the MNC companies were reluctant to bring in complete technologies to China, Liu says.

"Since the domestic demand in China is growing steadily, we decided to set up R&D centers closer to the Chinese market. Our research programs are largely tailored to demand from Chinese customers," Pouliquen says.

"China is no longer just a processing factory with lower costs, but also a strategically important market. We need to be closer to our clients and the local markets if we have to maintain our competitive edge," he says.

Last year, Alstom invested 682 million euros ($854 million) in R&D.

"China is a key priority in Alstom Grid's global strategy. With 10 factories, 1,800 employees and a number of joint ventures, Alstom Grid China offers the full scope of electrical equipment," Pouliquen says.

Alstom Grid's China Technology Center is the first multinational invested R&D center for UHVAC and UHVDC electrical transmission, and focuses on technology research and development in energy management systems.

Industries with professional technologies in chemical, construction and engineering are definitely enthusiastic about investing in R&D centers in China, as well as in a number of other service industries.

Education First, a global English education company, had recently announced the establishment of its Asia-Pacific headquarters in Shanghai, along with its largest R&D center.

The R&D center has more than 250 experts in software development, linguistics and education.

"The Chinese market is the second largest market after the United States for our company, and we believe its importance will continue to grow in the following years," says Philip Hult, CEO of Education First.

Hult says the company is aiming at merging the most advanced technologies with education, and the R&D center in Shanghai will work to service clients all over the world. In the past 18 months, the company has more than doubled its R&D investment in China.

"Most of these moves have been spurred by the desire of getting closer to Chinese customers," says Liu.

Besides all these, there is also simply the fact that a growing number of Chinese companies are moving up the value chain and thereby improving their market outreach.

According to the 2012 China Innovation report published by consultancy firm Booz & Co, multinational companies can expect an across-the-board rise in the quality of research produced in China.

"Applied research, fundamental research and ideation are all expected to become more prevalent in China in the next 10 years," says the report.

Booz & Co believes the importance of China for companies, as a regional and even global hub for innovation, is clear. Some 40 percent of the multinationals surveyed already develop products in China for markets outside the country.

The report says multinational companies see ideation in China as a high priority now and in the future, ahead of cost reduction and applied research.

"Despite cost increases for staff, land and other inputs, multinational companies are likely to maintain competitive manufacturing platforms in the country that can serve lower market segments in China and elsewhere. They also envisage using China's specific innovation skills to make sure this happens," it says.

The company predicts that automotive is the only industry that may see no change in the amount of R&D conducted in China for the world over the next 10 years - suggesting, unsurprisingly, that it will be the Chinese domestic market that preoccupies car and component makers. In chemicals and energy, the share of companies conducting product development in China for overseas markets is expected to more than double by 2022, from 36 percent to 73 percent.

However bright the future of China's R&D development looks, there are some problems that concern multinationals.

"In addition to rising labor costs, companies also face challenges in attracting and retaining local and international talent," Liu from Roland Berger says.

Many companies are also concerned about intellectual property rights protection.

According to a survey conducted by the European Union Chamber of Commerce in China, nearly 70 percent of the 557 European companies said the enforcement of IPR laws and regulations was inadequate or very inadequate.

"Interestingly, the longer multinationals have been present in China, the greater they rate IPR protection as an issue, but the more they think it will decline in importance over time," says the Booz & Co report.

yanyiqi@chinadaily.com.cn

(China Daily 06/22/2012 page6)