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MNC R&D Landscape: A China Perspective

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Overview

SCOPE
This report is intended to provide an overview of the MNC R&D landscape in China More specifically, the report maps the evolution of R&D in China, how it compares with India and the following key trends in the local R&D ecosystem: Continuous growth of MNC R&D centers in China Emergence of Tier-2 locations as new centers of growth Rising competition for MNCs from domestic Chinese firms Change in innovation philosophy of MNCs in emerging geographies Expansion of work portfolio by MNCs in China Diminishing cost arbitrage advantage for MNCs in China In addition the report looks at the role of the government for the rising R&D investment in the region

CONTENTS
The current document is a preview to the complete study and covers the evolution history of R&D in China with focus on 2 key trends: Growth of MNC R&D centers & Emergence of new locations for R&D in China

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China has evolved as a premier destination for R&D offshoring in the last few decades
Evolution of R&D Globalization in China
Pre-Historic Era
1949 1965: China adopts Soviet S&T System and signs Sino-Soviet Treaty of Friendship, Alliance & Mutual Assistance R&D initiatives in Defense & Heavy Industries begin 1966 1976: Sino-Soviet Split in 1960s Over dependency on Soviet aid & technology gives major setbacks to Chinese R&D Cold War limits technological aid & trade sanctions Political Instability & radical steps by Mao disrupt growth of R&D

Reforms Era
1977 1988: Reforms in Economic, Legal and Education fields, foreign trade and import of Science & Technology (S&T) from West In 1979, Deng Xiaoping signs a bilateral agreement on S&T cooperation with US, which is renewed every 5 years henceforth 1979, Special Economic Zones introduced in Fujian & Guangdong entry of low-tech & light industry

Exploratory Era
Early Mid 1990s: MNCs setup China centers as a test case for R&D off-shoring Most of these centers involve local partners in technology transfer for leveraging tax & other financial benefits Mid Late 1990s: Booming IT sector and Inter firm competition for R&D forces MNCs to look for market expansion

Expansion Era
Late 1990s 2000: Mature stage for MNCs with successful test cases Growing global competition for international R&D

2001 Current:
In 2006, Introduction of National Medium & Long term program for S&T Development China plans to invest 2.5 percent of its GDP in R&D by 2020 from 1.45 percent in 2006 By the end of 2008 multinational corporations had established over 1,100 R&D centers in China from all the industries Despite downtime, China added 200 new centers between 2009 to March 2011

Program 863 launched in 1986 concentrating on basic & applied research in 8 key areas
Torch program launched in 1988, 53 High Tech Development Zones launched

Number of Joint Venture firms in China for R&D gradually increase

Work profile is localization of products than creation of new More D (development) than R (research)

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Source: Ministry of Commerce (MOFCOM), China; Ministry of Science & Technology (MOST), China; National Bureau of Statistics (NBS); Zinnov Analysi

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Though offshoring of R&D to China started way back in90s, recent trends indicate that the landscape is currently undergoing a paradigm shift a b

Continuous growth of MNC R&D centers

Government Influence

Expansion to secondary locations to perform R&D

Rising MNC competition with domestic Chinese firms Transformation & innovation in R&D
d

Diminishing cost arbitrage advantage

Key Trends

e
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Maturity and expansion of work portfolio

Government Influence

Source: Primary interviews with stakeholders, News aticles, Zinnov Analysis

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One of the key contributors to the rapidly evolving R&D landscape in China is the phenomenal growth of MNC R&D centers in the last decade
2011 1046 MNCs 1300 R&D Centers

MNC R&D Centers* in China (Till 2011)

266 904 163 275 1,100 1,300 300 250 200 196 629 200 150 100 50 0

1,400 1,200 1,000 800 600 400 200 0 199 138

363

Before '00

01-'02

03-'04

05-'06

07-'08

09-'11

Total Number of MNC R&D Centers (till March 2011)

Number of New MNC R&D Centers (till March 2011)

Microsoft, Fujitsu, Ericsson, Intel, Nortel

Samsung, Motorola, Panasonic, Toshiba, TI

Cisco, Broadcom, IBM, Electrolux, Logitech

nVidia, EMC, Nokia, Kronos, McAfee

ARM, British Telecom, SanDisk, Avaya

Yahoo, BMW, Eli Lilly, Foxconn, Esri

Of the Fortune 500 companies worldwide, over 400 already have R&D centers in China
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Note: *A company can have more than one R&D centers Source: Economist Intelligence Unit (EIU); Ministry of Commerce (MOFCOM), China, Newspaper Articles; Zinnov Analysis

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Growth in MNC R&D centers is being significantly driven by Global top 1000 R&D spenders who have shown increased interest in extending their presence in China
Distribution of MNCs Having R&D Centres in China in Comparison to Worlds Top 1,000 MNC R&D Spenders, 2008

China 620

Worlds Top 1,000 R&D Spenders 700

China 704

Worlds Top 1,000 R&D Spenders 658

300 Number of MNCs: 920

342

2008

Number of MNCs: 1046

2011

There is an increasing interest of the top global R&D spenders in the China domestic market opportunities, abundant talent pool, quality infrastructure and government support
These companies are working on an in China for China strategy along with a global focus of their R&D centers

Some of the recent entrants include Yahoo, Toyota, Eli Lilly, Volvo etc.
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Source: EIU; Ministry of Commerce (MOFCOM), China, Zinnov Analysis

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MNCs in China have increased their R&D presence not just through opening new centers but by also increasing the headcount in existing setups
Distribution of MNC R&D Centers in China by Headcount Range
120
The R&D centers are gaining in head count growth over the years and are slowly building up a mature talent pool. Ex. UTStarcom, Infineon Technologies, NEC etc. This group represents firms who have over the years have accumulated the best of the talent from China and have increasingly grown with a fast pace in headcount year over year. Eg. EMC, Microsoft, IBM, Bosch, Nortel etc.

100

Number of Centers

80

Average Headcount Per Center (2008) = 117

60

40

2011 2008 Average Headcount Per Center (2008) = 105

20

0 0 - 30 31 - 60 61 - 100 101 - 200 201 - 300 301 - 400 401 - 500 501 - 600 601 - 1000 1001 - 2000 2000+

Headcount Range
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Source: Primary Interviews, Company web sites and press releases, News Articles, Zinnov Analysis

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China is witnessing rapid expansion of secondary locations as these are increasingly becoming viable for MNCs to set up their R&D centers
Growth Drivers for Emergence of Tier-2 Cities
Tier-1 locations Established secondary locations Emerging secondary locations

Cost arbitrage over tier-1 Cities

20-30% saving in total cost Suzhou and Chengdu have one of the largest high tech parks in China China has the worlds longest HSR1 Wuhan-Guangzhou HSR etc. Wuxi: Microelectronics Shenzhen: Infocomm Products Suzhou is the second biggest industrial city after Shanghai About 50% of the installed talent pool of MNC R&D centers is in tier-2 cities In addition to the waiver of Corporate taxes Local taxes (about 3%) are exempted in Shenzhen, Wuxi etc.
Tianjin

Improved R&D infrastructure

Improved rail-road connectivity Concentration of industries Economic and cultural development Availability of talent pool

IT
Beijing Dalian

China
Electronics
Chengdu

Telecom
Xian Wuhan

Suzhou Nanjing

Electronics
Shanghai Hangzhou Xiamen

Wuxi

Chongqing

Fuzhou

Incentives given by the local governments

Software
Guangzhou

Shenzhen

Infocomm

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Note: 1 High Speed Rail Source: Ministry of Commerce (MOFCOM), China Primary Interviews, Company web sites and press releases, News Articles, Zinnov Analysis

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Secondary locations now account for nearly half of the total number of MNC R&D center establishments
Headquarter Location Wise Distribution of MNC R&D Centers Across Key China Locations (2011)

China Location

100% ROC

Dalian 75% Chengdu

Per Cent

Suzhou

50% Guangzhou

Shenzhen 25%

Beijing

Shanghai 0%

US (54%) Headquarter Location

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Source: Ministry of Commerce (MOFCOM), China, News Articles, Zinnov Analysis

EU (28%)

Japan (9%)

SEA ROW (6%) (3%)

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Additional Information

The current document is a preview to the complete study and covers the evolution history of R&D in China with focus on 2 key trends: Growth of MNC R&D centers & Emergence of new locations for R&D in China The full report provides information on other key trends in the MNC R&D landscape in China including Rising competition for MNCs from domestic Chinese firms Change in innovation philosophy of MNCs in emerging geographies Expansion of work portfolio by MNCs in China Diminishing cost arbitrage advantage for MNCs in China In addition, the role of the government in driving R&D investment in the region is analyzed Full report on China MNC R&D landscape can be accessed at Zinnov s Global Location & Talent Pool Portal. Sign up today for a free trial account http://zinnov.com/US/demo_signup.php Or, email us at info@zinnov.com

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