The $10m Material Science’s polymer research and development centre is located in Shanghai’s Zhangjiang high-tech zone. The lab is built using the chemical giant’s well-known material Makrolon, a high-tech plastic used in many everyday items, such as cellular phones, pipes, sports gear, engines and eye glasses.

The centre, opened by German Chancellor Gerhard Schroeder and Chinese Prime Minister Zhu Rongji in November 2001, is a showcase for the Bayer group in China. It has four labs, testing and developing technologies for polyeurethane raw materials, plastic, coating, rubber and other new materials. It has sophisticated equipment and researchers with doctoral degrees, just like Bayer’s labs in Germany, the US and Japan.

Bayer’s centre is the new face of foreign investment in China, high-tech and knowledge-intensive, a far cry from the image of China as a sweatshop of low-skilled labour and cut-price services.

Technology hub

After two decades of pursuing high-tech investment, China is now home to dozens of R&D centres of multinationals – a phenomenon that has led to suggestions that China is competing with India as the technology hub of Asia. Almost all the global giants in automobile, telecommunications technology, computer, software, machinery, electronics, biotechnology, pharmaceuticals and other major industries have made such high-tech investments in China. These companies include General Electric (GE), General Motors, P&G, Unilever, Microsoft, Intel, IBM, Motorola, Siemens, Ericsson, Nortel, AT&T, Lucent Bell and Samsung.

Even Japanese firms, which have been conservative in investing in China, have increased their R&D spending substantially. Since 2001, at least six major Japanese firms – NEC, Oki Electric, Sony, Toshiba, Hitachi, Fujitsu and Matsushita Electric – have either set up new R&D centres or concluded R&D joint ventures with Chinese partners. These projects involve work in integrated circuit design, system software, cellular phones and other digital products.

In the country’s many high-tech areas, modern-looking laboratories like Bayer’s are being built or upgraded all the time in well laid-out and pollution-free zones far from busy city centres. These R&D centres, with their landscaped gardens, spacious halls and modern amenities, could be mistaken as being in Germany or the US.

To be sure, many of these centres do not handle cutting-edge technologies; core research stays at corporate headquarters. Local labs usually work on adaptations to suit the taste of local customers. Cynics would say R&D in China is often more D than R.

“Many such R&D centres are not doing genuine research,” notes Chen Yun-chung, an assistant professor at the Hong Kong University of Science and Technology (HKUST). “Some companies rename their branch offices ‘R&D’ centres to improve their corporate image or apply for tax exemptions available for R&D investment. Municipal governments are also competing to have the largest number of R&D centres in their cities. My guess is that less than 50% of the so-called R&D centres are actually doing R&D activities,” said Mr Chen, who has done extensive studies on the subject.

Still, some, like those of General Electric and IBM, are labs on a par in terms of skills and technology with similar centres at the headquarters of the parent firm, conducting research not only for local but also global projects. General Electric’s China Technology Centre in Shanghai is one of the group’s four global R&D centres; the other three are in New York, Bangalore and Munich. IBM’s China Research Lab in Beijing is one of its eight major centres worldwide.

The trend is for R&D centres in China to move up the technology ladder, says Mr Chen. “More and more multinationals are involving their China labs in advanced product innovation and even basic research, all of which used to exist only in more advanced economies.”

Such R&D activity, low or high-tech, has propelled China to the world’s number three spot in terms of R&D spending, according to a report published by the Organization for Economic Co-operation and Development (OECD) in October 2003. In 2001, OECD said China’s R&D expenditure reached $60bn, after the US ($282bn) and Japan ($104bn). About 60% of such spending came from domestic and foreign firms and the rest from the government.

Growing home market

Multinationals are beefing up their R&D facilities in China because of the demand of the fast-growing mainland market. Two decades ago, technical centres and outsourcing of R&D work to local researchers were sufficient to solve problems that emerged in the still small China market. Now, it has grown too big and too important. “Once production reaches a certain volume, manufacturers will face R&D problems that need to be resolved promptly and locally. They will also need to come up with new product features to meet the fast-changing tastes of Chinese consumers,” notes Dr Ma Lin, a manager at BASF in China. BASF itself has no R&D units in China, but has two application centres in Shanghai, one to develop leather and textile chemicals, and another for organic pigments. The group, the largest chemical investor in China, also has a Chinese-German fund, overseen by Dr Ma, to finance research work by selected Chinese scientists.

Bayer, a close rival of BASF, built R&D centres like the polymer lab to support the group’s $500m-a-year business in China. Bayer is building a $3.1bn polycarbonate plant at the Shanghai Chemical Industrial Park. “The great advantage of the R&D centre is its nearness to our customers and the opportunity it provides for developing system and application solutions,” says Dr Ron Commander, head of Business Development at Bayer MaterialScience in Asia.

His firm, one of Bayer’s sub-groups, aims to double sales in China in the next decade. In the first nine months of 2003, its sales of polymers in China rose a year-on-year 37%.

General Electric’s China Technology Centre in Shanghai is another example of market-driven R&D investment. Last November, the conglomerate consolidated its various R&D units to form the centre to help the group reach its sales target of $5bn in China by 2005, up from $3bn in 2003. The $64m 470,000sqm, 28-lab facility, is expected to double the number of researchers to 1200 by 2005. Its job is to develop technologies in advanced manufacturing, electronic and photonic systems, medical imaging and new materials – sectors in which GE has a booming business.

“This new centre is at the heart of the strategy [to meet our revenue target of 2005] because it brings advanced R&D, broad-based technology sourcing and a means to attract and develop the best talent,” says Steve Schneider, chairman and CEO of GE China.

Low-cost workers

Another reason multinationals are putting up R&D facilities in China is the country’s big pool of low-cost researchers and engineers. The OECD study estimates that China has 743,000 people involved in R&D, compared to 1.3 million in the US and 648,000 in Japan. Chinese software engineers are paid around $1500 a month, a fraction of what their western counterparts earn.

“Our R&D facilities in China make full use of the country’s world-class talent. It has the largest number of college students – up to 15 million in 2002 – in the world. Look at that number and you will get an idea of the huge size of the pool of talent here,” says Dr Lin Yuan-hao, chief operating officer of Nortel Networks (China). One source of important talent available in China is the growing number of mainland Chinese returning to the country after advanced studies overseas. Many successful IT firms, like Sohu, Sina.com and Netease, are started by these so-called “returnees”.

Intellectual property

One issue that is holding back some companies from relocating more R&D work to China is the country’s weak enforcement of intellectual property rights. Piracy is rampant in China, especially with software and industrial designs.

Mr Chen at HKUST notes: “Many multinational firms know that it is difficult to protect their intellectual property in China. Their strategy therefore is to stay one step ahead of the local competitors. More conservative companies will localise their R&D activities more slowly, as an experiment. If it does not work, they will withdraw from the market. On the whole, I think the situation will improve over time, as even local Chinese firms, especially software ones, are suffering from the problem.”