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Fitting China into your global footprint

(chinadaily.com.cn)
Updated: 2008-05-23 15:20

China is increasingly attracting other business activities than low-cost manufacturing. Conducting state-of-the-art R&D and producing latest-generation products in China is the next big thing. As the mix of business activities conducted in China becomes more complex, deciding which products or technologies have the best fit for development or production there becomes equally complicated. Global business executives need an effective decision logic for fitting China into their global manufacturing and R&D footprint. The logic should start from competencies ("what capabilities should we master?") rather than products ("what components should we have?"). This avoids the common mistake of looking at China merely as an offshore destination for otherwise unprofitable business. In this article we present the key principles and benefits of such a "China fit" logic.

Going beyond manufacturing

Manufacturing in China is nothing new. Most manufacturing companies that compete in a global industry are already doing it or have at least thought about it. However, a common mistake is to conclude that the most viable "China strategy" is to move manufacturing of low-end products or simple parts to China to take advantage of low labour costs, whilst keeping manufacturing of high-end products and complex parts at home in an attempt to protect intellectual property and ensure high quality.

An Arthur D. Little study conducted in 2004 (see Prism 2004, no. 2, "Go East: How to Make it in China") already laid out how China could be more than just a simple low-cost manufacturing base. Many companies are broadening their scope in China. They now also manufacture advanced products, conduct R&D, set up global service centers and operate back-offices in China. For instance, locally designed and manufactured Chinese commercial aircrafts will soon hit the skies. The OECD states that China was the second biggest R&D spender in the world in 2006. With an R&D expenditure growth rate of 20 percent annually, 350,000 science and technology graduates pouring out of its universities each year, and US$22 billion spent on importing foreign technology through licenses in 2006, China is bound to keep that second place and could even move up to the top spot.

China's R&D now goes far beyond the copycat activities of a decade ago, as it has become the fifth largest source of filings in the global ranking of patent applications. Not surprisingly, two recent Arthur D. Little studies showed that large multinational companies nearly all want a significant R&D presence in China (see Prism 2006, no. 2, "Global R&D: Where to Place the Bets?"). In short, "developed and made in China" labels on products ranging from space rockets to cars will make us forget the simple "made in China" seen on teddy bears and running shoes.

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