Foreign R&D Labs in China See Missions Expand, Practices Advance (2004)

The last five years have witnessed remarkable growth in both the number and the size of foreign laboratories in the People's Republic of China (PRC). Confirmation of this trend was evident in the presentations and comments from members of 27 companies of the Industrial Research Institute, Inc., participating in the Third Forum for Senior Technology Executives, held in Beijing in late September 2003. In a study carried out jointly with IRI member companies in the mid-1990s, Professor Eleanor Westney of the Massachusetts Institute of Technology described the evolving role of offshore laboratories for global companies as a step-wise hierarchy of purpose. The evolution depicted in the illustration (next page) has also played out for most of the more than 35 IRI companies now in the PRC, with the role of these laboratories within their individual companies becoming more strategic over time. The growing economic strength of the PRC and the emergence of the Chinese consumer attracted companies around the world, including those of IRI, that wished to expand their businesses geographically. These companies first tested the market with goods exported from their home production facilities. For sophisticated products, however, support for sales had to be provided to teach customers how to use and/or maintain the product. It was not long before it became economically attractive to establish this support in or near China. As volume grew, local captive or contract manufacturing began, requiring technical support not only for production but to qualify local suppliers. In the case of the PRC, an additional force--that of China's political leaders' wish to grow its local industries--manifested itself at times with a requirement that laboratories be established in China as a part of the foreign direct investment (FDI) required for participation in the commercial market. Lab Missions Change As companies grew closer to their customers, opportunities or necessity to localize a product or service appeared, requiring a change in the labs' missions and capabilities. An easily recognized example was the necessity for software programs to be compatible with Mandarin. In another case, a company found that by value engineering its product, it could cut cost by 40 percent while expanding core functionality, thus greatly expanding the market in the PRC and other emerging economies. A third company noted that, unlike Western users who play games on their own computers, PRC cell users play group games over the Internet, with many thousands of users on-line simultaneously. This company realized that such traffic required a totally new approach to allocation of server time. Insights like this clearly began to transform tactical support into a strategic new product and service direction for businesses. Consistent with the current practice of open innovation--pioneered by IRI companies like Intel, DSM and Procter & Gamble, and popularized by Professor Henry Chesbrough (see Managing Open Innovation, pp. 23-26 this issue)--the FDI laboratories also supported research in universities and partnered with companies in the PRC. Thus, listening posts were established into leading areas of research and technology, such as Internet and communications technology, nanotechnology, mathematical simulation and modeling, and biotechnology. While this activity sometimes starts early in the chronological life of a laboratory, it begins in earnest when a laboratory expands its staff to include experts in the PRC laboratory who can help direct current partnerships and evaluate the potential of emerging programs in the region. These experts may be expatriate scientists and engineers from the home country laboratory or local talent hired and trained for the role. All the IRI laboratories in the PRC have ongoing partnerships like these, consistent with the PRC's emergence as the third largest R&D spender. …