Shaping the new economy

R&D centers in China provide an opportunity for companies to re-think design, innovation

It has long been acknowledged that access to the Chinese market came with a price - technology. If a foreign firm wants to play within the Chinese domestic market, it has to play by China's rules and in many sectors, these rules are designed to transfer technological skills to Chinese firms.

The auto sector has often been seen as a classic example. Beginning in the 1980s, a foreign firm could only assemble automobiles in China through a joint venture (JV) with a Chinese firm, and it was not allowed to have a majority stake in these JVs. Local content regulations mandated that a gradually increasing percentage of the components that went into the car had to be purchased from firms operating in China. Winning approval for new contracts often hinged on a willingness to establish research and development centers (R&D) in China.

What was the outcome of these efforts to strong-arm foreign firms? Critics say very little. Rather than create "R&D" centers in China, foreign firms created what skeptics called "PR&D" centers, ones that achieved more for the firm's public (and government) relations than actual research and development. Although this skeptical view is overstated, it does capture an important point: in a world of global production and virtually-linked R&D efforts, it is not always easy to force a multinational firm to locate R&D in any particular location. It is a game of cat-and-mouse.

But a strange thing happened during this game of cat-and-mouse: somewhere along the way, the mouse stopped running away. In certain strategic sectors (e.g. aeronautics, new energy vehicles, high-speed rail), the traditional view continues to be correct - the Chinese government exerts leverage where it can and foreign firms do what they can to limit the loss of their core technologies - but in other sectors, R&D centers in China have become a normal part of a multinational's portfolio of activities in China and the activities they undertake are far more substantial than in the past.

This shift is largely a result of self-interest as multinational firms find it difficult to compete in the Chinese market without an R&D operation to support the effort.

First, the Chinese market often demands products that are significantly different from global products. Whether due to the particular features of the product or the cost of the product, it is no longer possible to assume that slight adaptations of a global product will be sufficient.

Second, the Chinese market changes rapidly, and it is difficult to keep up with the change without having a design center in China. This is partly organizational - a global design center that is located on the other side of the world has many demands on its resources - but it is also the "feel" for the market. A European engineer working on the design of construction equipment such as a wheel-loader, for example, will instinctually add more features to the machine if it will improve quality and performance even if this comes at a higher cost. A Chinese engineer will think about the balance between cost and performance very differently. Engineering is more "frugal" as a result.

Third, controlling cost in China requires aggressive localization, and localization necessitates extensive coordination and cooperation with low-cost Chinese suppliers. The engineers in an R&D center will adapt component designs so that they are more readily manufactured by local suppliers and their supplier development teams will go into the field to ensure that suppliers are able to meet the quality standards.

Although the domestic market in China usually drives the growth of R&D centers, they often will quickly become integrated in global R&D efforts and support activities outside of China.

In the longer-term, the knowledge that is gained about "frugal engineering" will be more important. In a global economy in which the primary engines of growth are in developing countries, China provides an opportunity to re-think design and innovation. Ironically, rather than fearing the loss of technology from China-based R&D centers, global firms may end up utilizing these centers as critical listening posts in a new world of innovation.

The author is a lecturer in Chinese business studies at the Said Business School, Oxford University.