Low Costs, Plentiful Talent Make China a Global Magnet for R&D
March 29th, 2006Kathy Chen
Jason Dean
The Wall Street Journal, 14 March 2006
BEIJING -- Multinational companies, drawn by a huge and inexpensive talent pool, are pouring money into research and development in China -- a trend that promises to broaden the country's huge role in the global economy.
The total number of foreign-invested R&D centers in the country has surged to about 750 from 200 four years ago, according to China's Ministry of Commerce. And in a survey of multinationals published in September by the United Nations Conference on Trade and Development, China was by far the most frequently cited location for R&D expansion, well ahead of the U.S. and third-place India, China's chief rival as an emerging innovator.
Still, China's growth as a global R&D hub faces some constraints. Among them is the country's weak protection of patents and other intellectual-property rights. That has encouraged some foreign companies, fearful of risking their trade secrets, to keep more cutting-edge research out of China, analysts say. But others have rushed to expand the scope of their development efforts here.
Whereas R&D investment in China initially focused on adapting existing products and technologies to the Chinese market, companies such as Procter & Gamble Co., Motorola Inc. and International Business Machines Corp., among many others, have been investing to expand their Chinese R&D operations to develop products for the global market.
P&G opened a research arm in China in 1988, consisting of two dozen employees concerned mainly with studying Chinese consumers' laundry habits and oral hygiene. Today, the U.S. consumer-products giant runs five R&D facilities in China with about 300 researchers who work on innovations for everything from Crest toothpaste to Oil of Olay face cream.
The Chinese facilities have been a lead site for developing a new grease-fighting formula of Tide laundry detergent that sells in Asia, Eastern Europe and Latin America. At one facility in Beijing's university district, researchers use computer modeling to tinker with other promising formulas that chemists in white lab coats and protective glasses then mix and test. "We are developing capabilities in China that we can use globally," says Dick Carpenter, director of P&G Technology (Beijing) Ltd.
Giving impetus to the R&D expansion in sectors from biotechnology to pharmaceuticals to semiconductors is China's government. Having enlisted foreign investment to transform China into a manufacturing powerhouse over the past few decades, Beijing now is mounting a campaign to strengthen domestic innovation that could help push the country into more advanced niches of the global economy.
In his annual report at the National People's Congress in Beijing, which ends tomorrow, Chinese Premier Wen Jiabao said the central government will increase spending on science and technology by nearly 20% this year. "China has entered a stage in its history where it must increase its reliance on scientific and technological advances and innovation to drive social and economic development," he said.
China's State Council, or cabinet, recently said the country would seek to boost R&D investment to 2% of gross domestic product in 2010 and 2.5% by 2020. At a news conference Friday, senior officials outlined tax breaks and other tools they plan to use to meet that target. Last year, total R&D spending in China -- not including foreign investment -- reached $29.4 billion, rising steadily from $11.13 billion in 2000, according to the government.
China faces numerous obstacles to joining the ranks of the world's innovation leaders -- beyond its weak intellectual-property protections. Research spending is still small compared with that of developed countries; the U.S., for example, spends about 2.7% of GDP on R&D, compared with 1.3% of GDP in China last year. And much of what is spent in China still comes from foreign companies: Less than a quarter of Chinese midsize and large enterprises had their own science and technology institutions in 2004. Of China's high-tech exports, valued at $218.3 billion last year, nearly 90% was produced by foreign-invested companies, according to the Ministry of Commerce.
Still, the R&D trend is bolstering China's position relative to other developing countries, particularly India, which is also seeking to build its innovation abilities. India's total domestic spending on R&D rose an estimated 9.7% to $4.9 billion, or 0.77% of GDP, in the fiscal year ended March 2005, according to India's Ministry of Science and Technology.
India is also trying to build R&D, "but the scale of investment is not much" because of budgetary constraints, says V.S. Ramamurthy, a top official at the ministry. Foreign investment in Indian R&D has also lagged behind that of China, he says. And while Mr. Ramamurthy argues that the amount of investment isn't the only way to measure R&D success, "it is a concern for us."
Zhang Jun, director of the China Center for Economic Studies at Shanghai's Fudan University, says that given time, "China's advantages in this area will become more obvious...and its attractiveness will increasingly become stronger than India's."
Among China's draws, he says: the relatively low cost of hiring engineers and researchers; a huge talent pool, including five million university graduates annually (one-fifth majoring in science or engineering); and China's own huge market of 1.3 billion consumers. China offers its students abroad incentives to return once they graduate, including generous research grants and chances to run their own R&D projects.
One early returnee is Enge Wang. Mr. Wang, who had worked as a research associate at the University of Houston, decided to return to Beijing to conduct research under a Chinese Academy of Sciences program in 1995. At the time, he says, his U.S. colleagues and friends questioned his decision, but he says he is glad he made the move. Today, Mr. Wang is director of the Institute of Physics under the academy, one of China's top research organizations, which is engaged in several R&D cooperative ventures with foreign companies.
China's "research funding is getting much better," Mr. Wang says, and as a result, overseas Chinese are flocking back from top U.S. institutions like Harvard University and Lawrence Berkeley National Laboratory. Talented returnees can secure enough backing "to build up their own lab and extend their research in one direction for 10 years," he says. "It's hard to find such conditions elsewhere."
"There's been a paradigm shift among foreign companies in China," says Chen Zhu, a Chinese Academy of Sciences vice president. "Now, more foreign companies realize
China is not just a market but a country with huge amounts of talent."
Motorola, which began investing in low-level R&D in China in 1993, now has 16 R&D offices in five Chinese cities, with an accumulated investment of about $500 million. The U.S. company has more than 1,800 Chinese engineers, and the number is expected to surpass 2,000 this year. They have recently begun developing new phones and other products for sale not only in China, but also overseas, executives say.
One phone developed in China, the A780, lets users write on the screen with just a finger, rather than a stylus. It's now available in the U.S. and Europe. Another phone that can scan contact information from business cards using a built-in camera and enter it into a contact database is expected to be marketed in the U.S. "China is moving from the manufacturing center into advanced R&D," says Ching Chuang, who heads Motorola's Chinese R&D operations.
Microsoft Corp.'s basic-research lab in Beijing was only its second outside the U.S. when it opened in 1998. That China lab now employs about 200 full-time scientists, and the software giant expects its total R&D headcount in China to double in this year to about 800 researchers.
At IBM's research lab in Beijing, Chinese scientists have led the development of several technologies now being used abroad. Among them: "voice morphing" software that can convert typescript or a recorded voice into another voice. "Our R&D now has a global mission," says Thomas S. Li, director of IBM China Research Lab.
At the state-run Institute of Computing Technology, engineers are tackling one of technology's tougher challenges: designing a computer microprocessor. Though still many years behind industry leaders like Intel Corp., the institute last year unveiled its second-generation microprocessor, with about the same computing power as mainstream chips in the late 1990s. This year, it plans to finish work on a third-generation chip that could narrow the gap.
China is also emerging as an R&D force in such sectors as nanotechnology, biotech and genetically modified crops. It was the first country to establish a full rice genome database, which has helped Chinese scientists develop hardier and higher-yielding strains of the staple cereal.
Swiss pharmaceuticals companies Novartis AG and Debiopharm SA have teamed up with the Shanghai Institute of Materia Medica under the Chinese Academy of Sciences to conduct research into traditional Chinese medicines to look for treatments for malaria and Alzheimer's disease. "This last decade, the progress we have seen in China's scientific research sector is phenomenal," says Ju Li-ya, director of Debiopharm's China department.
For Indian IT biggies, China is hot
March 29th, 2006Bruce Einhorn, BusinessWeek | March 24, 2006
It's fair to say that Hari Natarajan is obsessed with Microsoft. A vice-president at Satyam Computer Services, one of India's biggest outsourcing specialists, Natarajan is in charge of the company's strategic-relationship unit with Microsoft. Or, as he puts it, "I breathe, eat, and drink Microsoft every day."
And what occupies the Microsoft-focused thoughts of Natarajan these days? Easy. Satyam and Microsoft are partners in a new joint venture designed to develop the software-services market in China. Right now, China isn't much of an outlet for Indian outsourcers like Satyam. But Natarajan and others at Satyam are determined to change that.
"This is a huge market with great innovation potential," Natarajan says. The local market is only about $1billion, but that will probably grow eightfold in the next five years. "You don't see these kind of growth numbers anywhere else in the world," he adds.
A major shift
That's one reason Satyam and other Indian companies have been busy putting down stakes in China. Infosys has acquired 50,000 square meters of land in Shanghai and 300,000 square meters in Hangzhou, and is building new centres in both cities.
Tata Consultancy Services has reached a deal with Microsoft and the Chinese government to launch a new joint venture in Beijing this year. And on March 1, Zhang Guangning, the mayor of the southern Chinese city of Guangzhou, visited Satyam headquarters outside of Hyderabad in southern India. While there, Zhang and Satyam's managing director, B Rama Raju, signed a deal to set up a Satyam operations center in Guangzhou.
All of this represents a major shift for India's information-technology leaders. Not long ago, China wasn't even an afterthought for Indian software executives, who looked pretty much in one direction: West. And who could blame them? After all, companies in Europe and North America represented almost their entire customer base. Japanese companies didn't do much outsourcing, and what little they did wasn't sent India's way. Other Asian markets were similarly unpromising, and there was no business to speak of coming from China.
That's all changing. Increasingly, companies in Japan and South Korea are outsourcing. They're sending a lot of that work to nearby China, where it's relatively easy to find programmers who understand Japanese or Korean -- certainly a lot easier than finding people in India who can speak those languages.
Job boom
With China attracting tens of billions of dollars in foreign direct investment each year, there's a growing list of Western multinationals that need outsourcing help for their Chinese operations. And Chinese companies themselves are starting to realise that they not only need to upgrade their IT systems, they need outside help to do the work for them.
One of the early Indian movers into China was Bangalore-based Infosys. Early this decade, following visits to Infosys headquarters by then-Premier Zhu Rongji and Li Peng -- China's longtime No 2, who at that time was head of the National People's Congress -- the Indian company announced plans to open an office in Shanghai.
To date, the growth hasn't been spectacular: Infosys has only 450 people in China, out of 50,000 employees worldwide. But James Lin, a Taiwanese-born veteran of IBM Global Services, who joined Infosys in 2004 as chief executive of China operations, says Infosys will be embarking on a China hiring spree. "In the next five years," he says, "we're talking about 6,000 (Chinese) staff total."
Maintaining lead
Why the renewed commitment to China? According to Girija P Pande, Asia-Pacific director for TCS, Indian companies have to build up their workforces there. The business model depends on it. "This is a business of skill and scale," he explains.
"There aren't many countries with both. In Asia, you have India and China." Of course, companies like TCS are already employing tens of thousands of Indian engineers. That leaves China as an untapped talent pool. "So China becomes important as well," says Pande.
Executives like Pande insist that Indian companies have little reason to fear that all of those talented Chinese engineers will go to work for homeland companies that can seriously threaten Indian IT dominance. Indian companies last year had $17 billion in revenue, compared to just $2 billion for their Chinese counterparts. Three years from now, Indian companies will have sales of $48 billion, compared to $5 billion for Chinese.
"They aren't going to be in the same league. If anything, they will fall behind," Pande says. "They don't have scale, and they don't have the marketing connections that Indian companies have established."
Structural risk
Not everyone is so sure. A December report from analysts at Merrill Lynch noted that China produces 400,000 new computer-science graduates a year, compared to 181,000 IT-engineering grads in India. China also boasts far better infrastructure, the Merrill analysts reported, and less red tape than India.
While Chinese IT-services outsourcing companies are still in their infancy, they stand a good chance of growing up quickly. "Unlike the general belief that the China threat is a very distant one, we believe the first wave of competition from China could be felt in two or three years," wrote the Merrill analysts. "(And) over a three- to five-year time frame, we need to watch the structural risk posed by China in 'commoditising' IT services outsourcing."
All the more reason why Indian companies need to expand their operations in China now, while they still have time.
Putting china on your resumé
March 29th, 2006EXECUTIVES LOOK FOR CAREER BOOST FROM ASIA STINT
By Katherine Yung
Dallas Morning News
Bobby Carter shows all the symptoms of China fever.
Each week, he meets with a private tutor to learn Mandarin. On airplanes, he listens to language tapes. And in his spare time, he reads books about the Asian powerhouse and blogs written by expatriates living there.
China ``is really intriguing to me. I want to experience it,'' said Carter, 44, UPS's international sales and marketing manager for the Southwest region.
Although he's traveled in the region for his job, now he wants to work full time in China, for at least a few years.
``Who would think in our lifetime we would have the opportunity to be pioneers in anything?'' he said.
As China evolves into an increasingly important market for many U.S. companies, a growing number of Americans are eager to work there, despite potentially formidable obstacles of language and culture.
`Not a hardship'
Interest in China extends beyond multinational corporations. Increasingly, managers at small and mid-size businesses are volunteering for forays in China, seeking excitement, riches and a career boost.
``It's not a hardship,'' said Louisa Wong-Rousseau, managing director of China for Stanton Chase International, an executive search firm. ``People see going to China as a career advancement.''
Though many in China prefer to hire locals, a shortage of skilled executives means expatriates remain in demand, said Lisa Johnson, director of consulting services for Cendant Mobility, a large relocation company.
Many companies award assignments in China to their rising stars, she said. ``It's where a lot of companies' future is.''
According to a Cendant Mobility study conducted last year, people relocating to China for business reasons are typically married men in their early 40s.
Shanghai, China's most cosmopolitan city, ranks as the top destination for expatriates. But a growing number of them are headed to less well-known places like Chengdu, Dalian and Tianjin.
Americans who have taken the plunge and relocated to China often find the experience an eye-opener.
In November 2004, Nokia Oyj employee Ron Davenport sold his house and two cars in Grapevine, Texas, and moved to a gated community in Beijing.
Now, he is helping develop low-cost phones at Nokia's product creation center in Beijing.
``The pace is quite frantic,'' Davenport, 41, said of the Chinese business environment. ``But I am much more sensitive to growth in other parts of the world.''
`Flying in and out'
For Mark Abe, living in China became a necessity. The 40-year-old executive for Plano, Texas-based Electronic Data Systems arrived in Beijing three months ago to help his company win information technology services contracts from Chinese airlines, airports and other air services providers.
``It's very hard to build those relationships when you're flying in and out,'' he said.
The expatriate from Orange County quickly learned that conducting business in China requires forming personal relationships, not just making sales calls.
``The business models that are prevalent here in China are different from ones in other parts of the world,'' he said, referring to the nation's many state-owned firms.
``Don't wait,'' he advised others considering working in China. ``The country is changing so fast. Jump in with both feet and don't look back.''
Taking on a China assignment does involve some challenges and adjustments.
Chief among them is finding health care that meets U.S. standards, according to the Cendant Mobility study.
An unhappy spouse and children can also cause problems.
Ironically, once expatriates and their families adapt to life in China, the hardest part is often coming home.
Attorney Carter Meyer endured a difficult transition when he and his wife returned to Dallas in August 2004 after living in Beijing and Tokyo for a little more than two years.
``It was hard getting used to it,'' he said of the first few months back on American soil. ``I missed the food quite a bit. I missed the people.''
Meyer, 37, recently left Vinson & Elkins to become head of a small venture capital firm. But if the right opportunity came along, he would consider going back to Asia.
``On a résumé, it has a lot of credibility,'' he said of his time spent in China. And ``I appreciate the size of the world a lot better.''
http://www.mercurynews.com/mld/mercurynews/business/14203721.htm
Automotive Competition: Is China the Next Japan? (GM, F, TM, HMC)
March 29th, 2006By Evelyn Rubin on Douglas McIntyre
Douglas McIntyre submits: Chinese automotive manufacturers Geely (in photo) and Chery have begun to show their cars at the auto shows and are starting to make the rounds of U.S. dealers. According to MSNBC, Malcolm Bricklin, who helped Subaru and Yugo get footholds in America, is working with Chery to line up retail outlets.
No one seems worried. Maybe the American automotive industry should not be. Maybe the Chinese automotive threat is still too far off.
The Chinese automotive industry is growing at an astonishing pace. According to the People’s Daily, in February, China produced over 528,000 cars and sold 480,000. The Chinese Ministry of Commerce says both figures are increases of more than 50% over the same period a year earlier.
Granted, General Motors Corp. (NYSE: GM), Ford Motor (NYSE: F), Toyota Motor Corp. (NYSE: TM), Honda Motor Co. Ltd. (NYSE: HMC) and others are doing well in China along side the local manufacturers. And, they should. In the U.S. there are more cars that households. In China, there is still only about one vehicle for every 100 households.
The demand for cars and light trucks in China over the next decade will drive down production costs and raise unit sales in a way the industry has not seen since the early part of the 20th Century in the U.S.
It would be foolish to think that the Chinese will not be aggressive exporters as their manufacturing cost efficiencies rise with unit sales.
It’s a good bet that U.S. consumers will be driving Chinese-made cars in the next two or three years. The question is, will these new models go the way of the Yugo, or will they take share the way Subaru and others have?
Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He has also been president of Switchboard.com, which was at the time the 10th most visited site on the web, according to MediaMetrix. He has also been on the boards of TheStreet.com and Edgar Online.
China Needs People!
March 26th, 2006Foreign firms invest $1 billion a week in China but they lack creative managers who are willing to take risks.
Reasons For Lack of Talented Managers
1. Success often depends more on loyalty to the party than business acumen .
2. There aren't many MBA programs in China.
3. Chinese talent is 1st-generation. They don't have role models. Their parents worked for state-owned firms and were too bureaucratic. Entrepreneurial types are too unrestrained.
4. The Confucian heritage emphasizes rote learning and hierarchy. That might explain why Chinese managers are cautious about taking the initiative. But maybe living in a police state has something to do with that, as well.
5. The one-child policy doesn't grow team-players. [Are only children loners?]
No Marketing Talent
Local Chinese are good technically and in administration. But there is no experience in marketing.
"You find yourself micro-managing more than you'd like.... If the tasks are across departments, or if it means working in a team or trying to relate to others, they still have a long way to go."
The biggest issue - Retention
In 2004, 1 in 10 execs changed jobs in Shenzhen. 1 in 12 in Beijing. That's a nationwide employee churn rate of 11.3%, up from 8.3% in 2001.
Some smaller firms see a 30% turnover.
Compensation Rates
Middle Manager, foreign firm (in Beijing or Shanghai): $27-32K (base plus bonus)
Senior Managers: $46-54
Top execs: 80-90K
Salaries Rising
Avg annual salary increases for mid-level and senior managers: 6-10%.
Accountants' salaries: rising 14% / year.
Standard Perks: Bonuses, long-term incentives, free housing, meals, a mobile phone, car. Also: more holidays, mat and pat leave, more frequent job rotation and share options.
Employers also make Big Contributions to China's National Security Fund. So, workers cost double their basic pay.
Attractions: Chinese employees will join a company for good training.
Alternate Strategies
Overseas Chinese are filling some jobs. But they're expensive and don't know the local market.
Non-Managerial Labour
1. South Chinese economy is growing and moving into higher level work.
2. Firms can't find skilled labour.
3. They can't find cheap labour. (What does "cheap" mean in China?)
Some companies are relocating to cheaper inland cities.
Some will outsource to Vietnam and Cambodia.
Problems with HR Strategy
Business plans aren't taking the lack of talent or the cost of recruiting and retaining talent into account.
From the Economist
how returned overseas chinese viewed by locals?
March 25th, 2006Post from blog.bcchinese.net
received a mail:
I'm a chinese girl who was born and raised in *** (an european country). I'm coming this *** to work in Shanghai, and I'd like to know how chinese people consider people like me, I mean huoqiao ren. Are we considered as strangers, even if we look like asian, and talk chinese ?
returned overseas chinese are still regarded as "chinese" and therefore a "zi ji ren" (people of our side), no matter what passport they hold. however there are some changes in recent years. overseas chinese are no longer seen to hold those advantages over the local chinese in fields such as language, skills or working experiences, in fact, the trend is that many executive search firms favor local talents over those returned from overseas because of their extensive experiences and knowledge of china.
interestingly, the chances are greater that local chinese got frustracted in socializing with overseas chinese than with foreigners. i don't understand why. but in general, returned overseas chinese can fit into shanghai quite well, and they are viewed as a member of shanghai and chinese community.
good luck to you!
http://blog.bcchinese.net/bingfeng/archive/2005/08/16/32031.aspx