China is the West’s corporate R&D lab. Can it remain so?

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China is the West’s corporate R&D lab. Can it remain so?

The Economist | July 18, 2024

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China is, famously, the world’s factory and a giant market for the world’s companies. More unremarked is its growing role as the world’s research-and-development laboratory. Between 2012 and 2021 foreign firms increased their collective Chinese research personnel by a fifth, to 716,000. Their annual R&D spending in the country almost doubled, to 338bn yuan ($52bn). Add investments by local firms and China now matches Europe’s R&D tally. Only America splurges more.

In 2022, despite harsh COVID-19 lockdowns, 25 new foreign R&D centres opened in Shanghai. Last year, when overall foreign direct investments in China shrivelled by 80%, those in R&D rose by 4%. In the process, Western R&D centres in China have been re-engineered, from places to learn about the domestic market into hotbeds of innovation whose fruits can be found in products sold everywhere.

Foreign chief executives now believe that China’s brainpower and its innovation-curious regulatory regime are crucial ingredients of their companies’ global success. Nowhere else in the world can newfangled technologies, from novel drugs to flying taxis, be tested as quickly as in China, marvels a foreign diplomat. So even as the Chinese economy slows—it grew by a surprisingly tepid 4.7% in the second quarter, year on year—and multinational businesses try to reduce their reliance on Chinese supply chains amid mounting geopolitical tension, global CEOs are desperate to protect this critical third function of their Chinese operations.

A big reason for doing lots of R&D in China is the country’s surplus of young engineers and scientists. Southern China is full of small companies developing all manner of clever technologies, from new chemicals to artificial intelligence (AI). This is a giant talent pool in which foreign multinationals can fish.

The Chinese boffins are certainly quite a catch. They are no less talented than their counterparts in the West, where many of them studied and worked, but still command considerably lower pay. The average monthly salary for a newly minted PhD at a foreign company in China is around 13,000 yuan, a third of what they would make in America. One multinational’s China boss reckons he gets 30% more working hours out of his research staff in China than his company manages to coax from similar workers in Europe.

A lot of this work is focused on D rather than R. In many areas China still produces less basic research than America but, by many accounts, more applications.    Trials, whether of cosmetics, apps, medicines or autonomous vehicles, are made simpler by China’s regulatory forbearance. Local governments vie with each other, and with other countries, to be leaders in emerging industries that will undergird what Xi Jinping, China’s president, calls “high-quality growth”.  Products which pass the Chinese test can then be offered abroad.

Western companies would understandably hate to be shut out of this R&D paradise.  In anticipation of tougher American and Chinese IP regimes, some foreign companies have started to move research staff out of China.

3 key takeaways from the article

1. China is, famously, the world’s factory and a giant market for the world’s companies. More unremarked is its growing role as the world’s research-and-development laboratory. Between 2012 and 2021 foreign firms increased their collective Chinese research personnel by a fifth, to 716,000. Their annual R&D spending in the country almost doubled, to 338bn yuan ($52bn). Add investments by local firms and China now matches Europe’s R&D tally. Only America splurges more.
2. Foreign chief executives now believe that China’s brainpower and its innovation-curious regulatory regime are crucial ingredients of their companies’ global success. Nowhere else in the world can newfangled technologies, from novel drugs to flying taxis, be tested as quickly as in China.  The cherry on the cake is Chinese scientists are available at lower pay and willing to work more number of hrs than their counterparts in USA or Europe.
3. Western companies would understandably hate to be shut out of this R&D paradise. Nevertheless, in anticipation of tougher American and Chinese IP regimes, some foreign companies have started to move research staff out of China.

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Topics:  Technology, Research and Development, China, USA, Europe, Manufacturing, Political Risk