x Abu Dhabi, UAESaturday 29 July 2017

'Discovered in China' a new goal

Buildings Brics: China wants to be a research hub, in addition to being a manufacturing centre, in areas such as drugs and IT.

GlaxoSmithKline has invested in an R&D centre in Shanghai where it is carrying out studies on neurodegenerative conditions. GSK via Reuters
GlaxoSmithKline has invested in an R&D centre in Shanghai where it is carrying out studies on neurodegenerative conditions. GSK via Reuters

When the British pharmaceutical giant GlaxoSmithKline, launched a clinical research centre in China four years ago, Moncef Slaoui, the company's research and development chairman, made a comment that could easily have been uttered by one of Beijing's leaders.

A key aim of the centre, Mr Slaoui said, was to "be part of a future in which the phrase 'discovered in China' is heard as often as 'made in China' is heard today".

Investment by the company also known as GSK in its centre in Shanghai to study neurodegenerative conditions illustrated well China's burgeoning role as a research and development hub, rather than just a place for churning out cheap generic drugs or pharmaceutical ingredients.

It tied in with the economy's aim of moving up the value chain in many industries, including the automotive sector and IT, as wage rises push some non-value-added manufacturing overseas.

There are multiple reasons that China has become an innovation hub that last year accounted for 12.3 per cent of global research and development (R&D) expenditure, which amounted to 1.5 per cent of the nation's GDP.

Although wages have risen, the cost base remains low, and the vast pool of people educated in science and technology means researchers can be hired for a fraction of the cost in the West. Universities are producing more than 6 million graduates annually, 10 per cent of them engineers. One report suggested that the wage of someone with a PhD in China is just one tenth what it is in the US.

Being close to a consumer market that is becoming increasingly important thanks to near double-digit economic growth is also key, as designers or software developers in China are better able to tailor products to local consumers.

Government incentives for multinationals are also a magnet.

"Cities like Shanghai and Beijing, they encourage these foreign direct investors to [open] headquarters. They encourage these kinds of centres and other service-related headquarters in these tier-one cities," says Ren Xianfang, an analyst with IHS Global Insight in Beijing.

"On the part of the multinationals, it makes sense for them to move these headquarters close to the markets and close to where the professionals [they want to recruit] are."

Financial incentives such as tax breaks for foreign-invested companies purchasing research and development equipment, and VAT and customs duty refunds, help to lure companies.

The concentration of expertise these initiatives have promoted is such that one analyst predicted that by the end of the 2010s, western companies could be doing as much as half their R&D in China.

Switzerland's Novartis is among several others in the pharmaceutical sector to have focused on China for research and development, announcing two years ago it was investing US$1 billion (Dh3.67bn) in a centre in Shanghai, as well as $250 million on a research and production facility in the nearby city of Changshu.

Other drug companies have followed suit, while Microsoft and other technology companies have also expanded R&D capabilities in China. In particular, Microsoft has used China to develop video games for the Chinese market.

Finland's Nokia now develops some of its mobile phones in China, especially the lower-end models that appeal to cost-conscious buyers.

Nokia has had a research centre in Beijing for more than a decade, and as far back as the mid-2000s, the company was promising to create designs for almost half of its handsets in China, the world's largest market for mobile phones.

China's R&D expertise is now moving into a wider array of sectors, illustrated by the opening in July of an "advanced design centre" by the car maker Mercedes-Benz.

This project is Mercedes's fifth such centre worldwide and will compete with its others in Germany, Japan, the US and Italy to design the next generation of vehicles for the high-end German company, whose sales in China jumped 38 per cent in the first nine months of this year.

While the Mercedes design hub is in Beijing, many other multinationals are looking further west in China, where wages and property are cheaper and still a pool of professional talent is available.

"There's a new trend. They're moving research and development centres from the east coast centres like Beijing and Shanghai to western centres like Chengdu and Chongqing due to the cost," says Ning Liu, a former consulting manager at the advisory company BDA and now research director for a Chinese IT company.

In July this year, Simon Leung, Microsoft's chairman and chief executive for greater China, described Chengdu, the capital of Sichuan province in south-west China, as "one of our key cities for future investigation".

Despite the multiple signs of China's increasing importance for research and development, Mr Ning believes the country has yet to establish itself as a key place for global innovation even for many of the companies that have set up innovation centres there.

"The research done here in China is relatively low level," he says. "Some research does not work with the core intellectual property of these companies and some research done is not important to China. The whole level of the research is not as high as in the headquarters."

Figures also indicate that weaknesses remain in China's innovation capacity, perhaps no surprise in a country with an education system that relies on rote learning and does not foster creativity.

Many companies, Mr Ning says, use China as an outsourcing centre for research and development work that could be done anywhere, but he predicted this would change.

"I truly believe the research level will increase or upgrade to a higher level due to the more educated people and, more importantly, these multinational companies realise how important the local market is to their global strategy," he said. "They need more localised products and services for China users. Then I believe more localisation will be done here."

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