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How to take advantage of China knowledge base?

A CEIBS-SKEMA joint research projectBarcelona, November 2013.

102/12/2013Dominique Jolly, CEIBS/SKEMA, How to take

advantage of China knowledge base?

A changing landscape

“A new world order in innovation is taking hold, one in which rapidly developing economies (RDEs), led by China, India, and Brazil, will increasingly assume more prominent positions, while the United States and other mature economies continue to play major roles but gradually become less dominant.”

(The Boston Consulting Group, 2011, Innovation 2010 – A Return to Prominence and the Emergence of a New World Order).

02/12/2013 2Dominique Jolly, CEIBS/SKEMA, How to take


Our proposition: Drivers for foreign R&D centers in China have changed

02/12/2013 3

① COST DRIVEN

= outsource or support for local production

=> low-cost replicated products

② MARKET DRIVEN= adaptation of products or processes developed

outside China or full local development (China for

China)=> revised products

③ KNOWLEDGE DRIVEN= access to the knowledge

of the national & local systems of innovation

=> new products

Cont

ribu

tion

to v

alue

Past strategies Actual strategies Future strategiesDominique Jolly, CEIBS/SKEMA, How to take


Part 1Mapping the Chinese National

System of Innovation



Public research institutes



the locomotiveof national Innovation

Examples:- SIOC: Shanghai Institute of Organic Chemistry- SIBS: Shanghai Institute of Biological Science- SARI: Shanghai Advanced Research Institute, etc.

+ research institutes managed by ministries

Public universities



Program 211 (1995) = focus on 100

The best 10Research

universities

Teachinguniversities

A total of 2.183 universities

(in 2011)

The top 10 universities



Source: http://edu.sina.com.cn/focus/utop.html

(Hefei)

Scientific articles from China

Chinese Institute for Science and Technology

• Since 2007, China is 2d rank world-wide with 218.000 scientific articles

Thomson Reuters

• 1998: 20.000 scientific articles• 2006: 83.000 (outpace UK, Germany, Japan,

France)• 2009: 120.000 (USA = 350.000)


advantage of China knowledge base?8

02/12/2013 9

+100 science and technology parks

Beijing

Shanghai & Yangzi delta

Guangzhou & Shenzhen

Scientific and technology parks are concentrated in three

regions, and more generally, on the coastal area.

Dominique Jolly, CEIBS/SKEMA, How to take advantage of China knowledge base?

More and more Chinese companies investing in R&D



More and more foreign companies starting R&D centers in China

02/12/2013 11

Information technologies Pharmaceutical industry


More and more foreign companies starting R&D centers in China

02/12/2013 12

Chemical industry

Others: food, car, cosmetic, etc.

Electrical ind. & electronic


Technological intensity: Long-term trends for leading countries



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0,50

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2,50

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3,50

4,00

1990

1991

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2004

2005

2006

2007

2008

2009

2010

2011

R&

D s

pen

din

g /

GD

P

USA

Japan

Germany

United Kingdom

France

Italy

South Korea

China

Brazil

India

Sources: OECD and stats.gov.cn

China’s surge in patent activity



China > USA

In 2011, according to the World Intellectual Property Organization (WIPO), China surpassed the USA for patent applications: 526.000 were filed in China as 504.000 were filed in the USA and 343.000 in Japan.



There are nevertheless several restraints. One thing is volume, quality is quite another. This is domestic patenting; in 2010, China filed only 6% of the patent applications in the international system. And, it is alleged that much of the domestic patenting is not patenting of original innovations, but utility patents for an application, or patents of existing foreign innovations, which are intended to provide a basis for extortion with a foreign company to buy the patent right.

Chinese NSI in brief



Part 2From cost-driven R&D to market-driven R&D

to knowledge-driven R&D



Research question: How to foster the innovation output of MNCs foreign R&D units?

Innovation output = f ( location, interactions with the milieu, people management, organization, knowledge management, etc. )



What do we mean by R&D?

Fund.Res.

Applied research

DevelopmentUniversities and Public

Research

Institutes

Research and development

Company

Papers& Patents

Patents & Prototypes

Products & processes

02/12/2013 19

FactoryPrimary Development End of Development

Patents


Case studies: Nb. of companies visited12 industries 50 companies 71 interviews

Aeronautic 2 2

Electrical engineering 4 6

Electronic 2 6

Car industry 7 9

Chemical industry 12 18

Energy 1 1

Food Industry 2 2

Mechanical engineering 2 2

Construction materials 2 4

Pharmacy & Cosmetics 9 10

Information Technologies 5 9

Semiconductor industry 2 2



Sample



Country #

French 15

Germany 7

The Netherlands 6

The USA 9

Switzerland 3

United Kingdom 1

Sweden 2

Finland 1

Denmark 1

Japan 2

South Korea 2

Taiwan 1

Two types of results

Independent of the context:

A. The older the R&D unit, the larger the scope of activities.

B. The number of WOFEs outpaces the number of JVs.

C. The older the R&D unit, the less the percentage of expatriates.

Strongly dependent on the

driver for R&D:

1. Cost-driven2. Market-driven3. Knowledge-driven



Result (A): The older the R&D unit, the larger the scope of activities.

02/12/2013 23

Fund.Res.

Applied research


Research

Institutes

FactoryPrimary Development End of Development

Market driven

Knowledge driven

Cost driven


(4 exceptions / 40 companies = BM, F, MA, and MS)

Result (B): The number of WOFEs outpaces the number of JVs

�Predominantly Wofe (Wholly Owned Foreign Enterprise)

�3 x JVs�4 x Take-over of an existing Chinese company�Contracts with Chinese partners (pharma)



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5,00

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30,00

35,00

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Po

urc

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pa

trié

s d

an

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eff

ect

if

Année de création du laboratoire

Série1

Result (C): The older the R&D unit, the less the proportion of expatriates.

02/12/2013 25

Main path

Too much?

Too less?


(data available for 30 companies / 50) F

FF

F

F

F

FF

FF

F

G

GG

G

F: French, G: German

G G

Proposition: Cost > Market > Knowledge

How to foster innovation output of foreign R&D labs depends on the driver …

Innovation output = f ( location, interactions with the milieu, people management, knowledge management, etc. )



Driver

Done in China

1. Cost-driven: End of DevelopmentFew or no change to the product or process

Examples

Contribution to a global project: Outsourcing of testing Match with manufacturing: Small domestic appliances

Chinese Factory

02/12/2013 27

OtherAsian

countries

K

Activities carried in Europe, the USA, Japan, South Korea, etc.

Fund.Res.

Applied research


Research

Institutes Primary Development End of Development


Key Success Factors / cost driven

• Match with suppliers for adaptation to local raw materials and local conditions (temperature, humidity, etc.)

• Match with regulatory bodies for compliance• Need for high degree of connection between R&D and

production• Location: close to Chinese factories to provide technical

assistance or in a S&T park which offers cost advantage for space and/or tax abatement

• People: Local Bs and Ms• Most of the K comes from the HQ in developed countries,

few K is developed in China• Patent / processes



2. Marketing-Driven: Focus on Development

Products which need a local adaptation: Cosmetics, Car industry, Electrical engineering, Mechanical Engineering, Localized electronic products, Agro foodProduction processes which has to be adapted: Construction materials, Basic chemicals, Pharma clinical trials

Chinese Factory

OtherAsian

countries

Drivers: local demand and regulations

02/12/2013 29

Done in China

Done in Europe, the USA, Japan, South Korea, etc.

K

Fund.Res.

Applied research


Research

Institutes Primary Development End of Development

KReverseInnovation


Wrinkles or spots?



From a two-parts body to a three-parts body vehicle: Peugeot 308



Car industry: Stretched models



The Chinese 5-Series LWB (long wheel base) model is built at BMW’s plant in Shenyang .

In the land of Mao,90% of the Benz executive sedan trade

comprise long wheel base cars.

General Electric locomotive for Tibet



Based on a design developed outside China,adaptation of

diesel engines



Construction materials

• Available raw materials

• Temperature• Moisture

>>> need to adapt products and processes



Bayer Material Science Showroom

Key Success Factors / Market-driven R&DChina for China

• Cannot be done remotely: Need to match with local demand– Analyze consumers insights– Co-create with customers (B to B) – Make the market recognize the offer

• Match with regulatory bodies to fit with local standards and regulations

• Hire R&D managers with marketing abilities• Report knowledge developed locally to HQ• No need to be based in a S&T park, localize the center

close to sales people



3. Knowledge Driven:Development + Applied R. + Fundamental R.

Global business (same product all over the world, no need for local adaptation):

Software, Energy, Pharmaceutical companies for new drugs, Specialized chemicals, Global electronic products, Semiconductor industry

Chinese Factory

sub-contractors

HQ

The world

02/12/2013 37

KK

Done in China

HQ

Local start-ups

Fund.Res.

Applied research

Development

Primary Development End of Development

K K

K

Universities

and Public

Research

Institutes


Example: A petro-chemical company

• Target: to gain access to Chinese research knowledge and infrastructure on the conversion of coal into synthesis gas

• Formation of 50-50 JV with a Chinese engineering company well embedded into the Chinese NSI to develop the next generation of syngas production technology

• Joint project with a Chinese partner from development to deployment



Example : Microsoft, early investment in research• Started research (1999) before the Product

Development activity (2006)• 2013: 300 persons / Research, 3.000 / Product

Development• Intent for R: establish leading connections with

Chinese NSI – The 30 best universities: for hiring large numbers of

smart talents– The Chinese public research centers: for joint labs– The start-ups: The “Cloud integrator program”



Example: The case of the pharmaceutical industry

• Chinese stake-holders: catching up with the West– CAS research institutes– Independent research institutes affiliated to hospitals– Bio-tech companies– Contract Research Organizations (CROs)

• Context – Public research on life sciences in China has not produced tangible outputs– Business is highly fragmented (+ 3.000 domestic companies + 40 MNCs)

• Two activities– Tests on human beings of drugs developed and already approved (by the FDA in the USA, the

EMEA in Europe, etc.). Foreign MNCs look for China approval (CFDA)– Research on new drugs

• Two strategies for research– Implementation of a research laboratory– Implementation of a team having the responsibility to connect HQ research with Chinese

public research teams



Key Success Factors / Knowledge driven R&DChina for the world

• Need to gain the support of HQ• Foster collaboration with public universities and public research

institutes– Funding of initial research– Outsourcing R&D– Collaboration

• People: recruit good scientists (higher proportion of PhD than other modes and more returnees)

• Location: should facilitate access to local systems of innovation (LSI) and/or national system of innovation (NSI)

• Active patenting• Take-over is a possible option• Locally developed K transferred to other company locations

(networking) for worldwide use



Another China



Questions & Answers


4302/12/2013

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