November 13, 2012 2:28 pm

China offers a taste of R&D to come

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Fancy some purple sweet potato oatmeal or hot-and-sour-fish-soup-flavoured potato crisps? For multinational companies such as PepsiCo, which on Tuesday opened its largest research and development centre outside the US in Shanghai, this is the taste of R&D to come – ideas from China, for China (and eventually, the world).

The need to give the Chinese what they want, and more quickly, is driving a wave of R&D centre openings on the mainland, including two in the past week in Shanghai, by Pepsi (owner of the Frito-Lay and Quaker brands) and BASF, the German chemicals company.

For decades, the world’s companies have been tempted by the sheer size of China’s market, which many have serviced with products created elsewhere, and adapted for mainland sale. But increasingly, multinationals have been moving R&D closer to the target market, to get nearer not just to shoppers but also to the country’s pool of research talent.

Multinationals including Pepsi and BASF have been conducting R&D in China for years already. But often such activities have been scattered.

BASF had 10 R&D centres in Shanghai alone, before opening its new, €55m pan-Asian innovation centre and greater China headquarters in the city, where special incentives are available from the local government. In the past few years, hundreds of multinational companies have created innovation centres in China, which now has at least 1,600 R&D centres of various kinds.

McKinsey, in a recent report on pharmaceutical R&D in China, says that multinational drug companies have invested more than $2bn in R&D in the country in the past five years. “Chinese R&D sites are opening or growing almost as quickly as European and US sites are closing or shrinking,” the report says.

Pepsi’s $40m-$45m new facility includes kitchens where Pepsi chefs develop new flavours from traditional Chinese cuisine, laboratories where they taste-test them on consumers, and plants where prototypes are produced.

Doing all that in China means products can hit the shelves in as little as two weeks, Pepsi says. This is the kind of speed that multinationals need in order to compete with nimble homegrown competitors.

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Beyond brics

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It is not just snacks and drinks, which are traditionally highly localised, that need to be tailored for the local market. BASF says it also needs to be closer to Asian requirements, and faster to market. “As our customers invest more in Asia, they ask us for solutions from Asia,” says Martin Brudermüller, vice-chairman of the BASF board of executive directors, at the opening of its Shanghai centre.

One advantage that Chinese R&D centres no longer have, though, is cost. China is not the cheapest place to manufacture products, nor is it the cheapest place to invent them.

“It’s not the advantage you might think,” says Bruce McKern, co-director of the Centre on China Innovation at the China Europe International Business School. “The big advantage is the availability of good people, though it’s another question whether you can keep them.”

BASF agrees, insisting that though construction costs are lower in China, its decision to locate one-quarter of R&D staff in Asia by 2020 “is not a cost-containing exercise”.

Steven Veldhoen of Booz & Co, which has studied innovation in China, says that while junior staff may be 25 to 30 per cent cheaper than in the US or Europe, middle managers cost as much, and senior managers can cost 20 to 25 per cent more, because they are in short supply and because domestic rivals are bidding their salaries up.

Recruiting quality staff is not as hard as it used to be, most multinationals say. But keeping them is another story. According to one survey cited by McKinsey, out of about 100 MBAs working for multinationals in China, four-fifths did not plan to stay in their current jobs for more than two years.

Innovating in China for the world, which is the eventual goal of such centres, will not happen overnight. Pepsi points to the “dragon boat” tray developed in China to hold Lays “Stax” potato chips. The tray will soon be introduced in the US. But the purple sweet potato oatmeal available in China may not overtake maple and brown sugar in the US in the near future.

For the moment, Chinese R&D centres are busy enough just coming up with ideas for China.

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