Category Investing in China

Why Germany and China are winning

The Great Recession rolls on, but it’s not too early to single out the major powers that have come through the wreckage in the best shape. They are the ones the other major nations implore for help — to bail out weaker economies, to diminish their dominance of the world’s production and start consuming more themselves. There are just two such nations: China and Germany.

Global unemployment might remain stratospheric, but in China, long-suppressed wages are finally increasing for millions of industrial workers. China’s stimulus — effectively the world’s largest — has funded bullet trains, airports and wind turbines. In Germany, unemployment has been running a point or two below ours, and exports remain high. Thanks to its favorable trade balance, Germany’s finances are the strongest in Europe, which is why German monetary guarantees have been key to the future of both Greece and the euro.

Germany and China don’t have a lot in common. Germany has a mature economy and is a stultifyingly stable democracy. China has a rising economy and remains disturbingly authoritarian. What sets them apart from the world’s other major powers, purely and simply, is manufacturing. Their predominantly industrial economies meet their own needs and those of other nations, and have made them flourish while others flounder.

This used to be true of United States, too. In 1960, manufacturing accounted for a quarter of our gross domestic product and employed 26 percent of the labor force. Today, manufacturing has shriveled to 11 percent of GDP and employs a kindred percentage of the workforce.

For the past three decades, with few exceptions, America’s CEOs, financiers, establishment economists and editorialists assured us that the transition from a manufacturing to a post-industrial economy was both inevitable and positive: American workers would move to more productive jobs, and the nation’s financial security would only grow.

But after rising steadily during the quarter-century following World War II, wages have stagnated since the manufacturing sector began to contract.

Increasingly, it’s our most productive jobs that are being offshored. Until 2001, the United States exported more advanced technology than it imported, but since then, as Clyde Prestowitz reports in “The Betrayal of American Prosperity,” his persuasive new book on the need for an American industrial policy, we’ve been running annual high-tech deficits that reached $61 billion in 2008. Worse yet, as we lose manufacturing, which employed 63 percent of our scientists and engineers in 2007, we lose many of our most valuable professionals. Last year, reported Business Week, the number of employed scientists and engineers fell 6.3 percent while overall employment fell 4.1 percent.

Most Americans, I suspect, believe we’re losing manufacturing because we can’t compete against cheap Chinese labor. But Germany has remained a manufacturing giant notwithstanding the rise of East Asia, making high-end products with a workforce that is more unionized and better paid than ours. German exports came to $1.1 trillion in 2009 — roughly $125 billion more than we exported, though there are just 82 million Germans to our 310 million Americans. Germany’s yearly trade balance went from a deficit of $6 billion in 1998 to a surplus of $267 billion in 2008 — the same year the United States ran a trade deficit of $569 billion. Over those same 10 years, Germany’s annual growth rate per capita exceeded ours.

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Why Germany and China are winning
MICHAEL OSBUN / Tribune Media Services

By HAROLD MEYERSON

Published: Monday, July 5, 2010 at 3:00 a.m.
Last Modified: Friday, July 2, 2010 at 6:05 p.m.

( page 3 of 3 )

The Great Recession rolls on, but it’s not too early to single out the major powers that have come through the wreckage in the best shape. They are the ones the other major nations implore for help — to bail out weaker economies, to diminish their dominance of the world’s production and start consuming more themselves. There are just two such nations: China and Germany.

Global unemployment might remain stratospheric, but in China, long-suppressed wages are finally increasing for millions of industrial workers. China’s stimulus — effectively the world’s largest — has funded bullet trains, airports and wind turbines. In Germany, unemployment has been running a point or two below ours, and exports remain high. Thanks to its favorable trade balance, Germany’s finances are the strongest in Europe, which is why German monetary guarantees have been key to the future of both Greece and the euro.

Germany and China don’t have a lot in common. Germany has a mature economy and is a stultifyingly stable democracy. China has a rising economy and remains disturbingly authoritarian. What sets them apart from the world’s other major powers, purely and simply, is manufacturing. Their predominantly industrial economies meet their own needs and those of other nations, and have made them flourish while others flounder.

This used to be true of United States, too. In 1960, manufacturing accounted for a quarter of our gross domestic product and employed 26 percent of the labor force. Today, manufacturing has shriveled to 11 percent of GDP and employs a kindred percentage of the workforce.

For the past three decades, with few exceptions, America’s CEOs, financiers, establishment economists and editorialists assured us that the transition from a manufacturing to a post-industrial economy was both inevitable and positive: American workers would move to more productive jobs, and the nation’s financial security would only grow.

But after rising steadily during the quarter-century following World War II, wages have stagnated since the manufacturing sector began to contract.

Increasingly, it’s our most productive jobs that are being offshored. Until 2001, the United States exported more advanced technology than it imported, but since then, as Clyde Prestowitz reports in “The Betrayal of American Prosperity,” his persuasive new book on the need for an American industrial policy, we’ve been running annual high-tech deficits that reached $61 billion in 2008. Worse yet, as we lose manufacturing, which employed 63 percent of our scientists and engineers in 2007, we lose many of our most valuable professionals. Last year, reported Business Week, the number of employed scientists and engineers fell 6.3 percent while overall employment fell 4.1 percent.

Most Americans, I suspect, believe we’re losing manufacturing because we can’t compete against cheap Chinese labor. But Germany has remained a manufacturing giant notwithstanding the rise of East Asia, making high-end products with a workforce that is more unionized and better paid than ours. German exports came to $1.1 trillion in 2009 — roughly $125 billion more than we exported, though there are just 82 million Germans to our 310 million Americans. Germany’s yearly trade balance went from a deficit of $6 billion in 1998 to a surplus of $267 billion in 2008 — the same year the United States ran a trade deficit of $569 billion. Over those same 10 years, Germany’s annual growth rate per capita exceeded ours.

Germany has increased its edge in world-class manufacturing even as we have squandered ours because its model of capitalism is superior to our own. For one thing, its financial sector serves the larger economy, not just itself. The typical German company has a long-term relationship with a single bank — and for the smaller manufacturers that are the backbone of the German economy, those relationships are likely with one of Germany’s 431 savings banks, each of them a local institution with a municipally appointed board, that shun capital markets and invest their depositors’ savings in upgrading local enterprises. By American banking standards, the savings banks are incredibly dull. But they didn’t lose money in the financial panic of 2008 and have financed an industrial sector that makes ours look anemic by comparison.

So even as Germany and China have been busily building, and selling us, high-speed trains, photovoltaic cells and lithium-ion batteries, we’ve spent the past decade, at the direction of our CEOs and bankers, shuttering 50,000 factories and springing credit-default swaps on an unsuspecting world. That’s not to say our CEOs and bankers are conscious agents of foreign powers. But given what they’ve done to America, they might as well have been.

By HAROLD MEYERSON

Facebook steps up efforts to expand into China

After news last week that Facebook, the world’s largest social networking service (SNS), aims to enter the Chinese market, a domestic head-hunting company disclosed that Facebook has hired it to recruit the person to manage its business in China. This signals Facebook’s timetable to enter the Chinese market is drawing nearer.

According to the recruiter, Facebook wants to hire a general manager overseeing its Chinese operations and this person would be based in Beijing.

But according to the detailed description of the post, the company also wants this person to lead the SNS game lab team to make products for the western market, and the position may match the requirements for a person leading a research institute in the Chinese market.

Also, the head-hunting firm said that Facebook was hoping the person would be from its headquarters, but the firm does not want to exclude those who are interested in the post to apply.

According to last week’s information, Facebook may enter Chinese market as soon as in three months, and this latest recruitment announcement adds fuel to the possibility.

But according to local media reports, in order to enter the Chinese market now, Facebook may only just establish the research institute first. According to the requirements of the position, the products designed by the lab are mainly aimed for the western market, which means that Facebook will not launch products for the Chinese market for a while.

Nevertheless, an insider from the recruiting company said that if Facebook wants to enter the China market, it first needs to set up a management team and begin its relations with the Chinese government, which is only still in its preliminary stages.

Foxconn to hire in China

EMS-giant Foxconn is said to hire for its PC manufacturing factory in the Chongqing Xiyong Microelectronic Industrial Park in China.

EMS Foxconn is reportedly set to hire a further 6’000 staff over the next half year for the facility, with plans to reach a total work force of about 10’000 next year, reports CENS.

The EMS-provider currently employs around 1’000 staff at the Chongqing facility, which manufactures PC for various customers. The company aims for an annual production output of 10 million notebook.

Sanofi-aventis To Establish New Consumer Healthcare JV In China

Published: 29-Jan-2010

Sanofi-aventis has signed agreements with Minsheng Pharmaceutical to form a new consumer healthcare joint venture (JV). Sanofi-aventis will obtain a majority equity stake in the new entity. The agreements were signed in the presence of senior leaders of the Hangzhou municipal government.

The proposed Sanofi-aventis-Minsheng joint venture will primarily focus on vitamins and mineral supplements (VMS).

Recently, Sanofi-aventis had announced its planned acquisition of Chattem, a manufacturer and marketer of branded consumer healthcare products, toiletries and dietary supplements in the US.

Hanspeter Spek, president of global operations at Sanofi-aventis, said: “We are pleased to take a significant step toward establishing the new consumer healthcare joint venture with Minsheng, our long-standing partner. Combined with our leadership position in vaccines, we will continue to contribute to preventative healthcare in China. Entering the world’s second largest consumer healthcare market is also a strategic move for Sanofi-aventis to consolidate its position in consumer healthcare.”

Zhu Fujiang, chairman of Minsheng Pharmaceutical, said: “We are equally excited about the prospect of forming the new consumer healthcare joint venture with Sanofi-aventis, after more than ten years of successful partnership.Sanofi-aventis is an energetic and dynamic company. His success with pharmaceuticals and vaccines has demonstrated his strong marketing capability.

“We hope that once materialized, the new venture will revitalize our consumer healthcare business and expand the reach of our products to benefit more consumers. We also hope that the new venture will serve as a platform for us to develop more health products in order to contribute to the local economy and meet consumer needs.”

Service outsourcing industry robust in China, boosts employment

CHANGCHUN, Jan 03, 2010 (Xinhua via COMTEX) — The global economic meltdown impacted many of the clients of BT Frontline, which provides outsourcing services for the IT systems of docks and logistics companies. But its General Manager, Lawrence Low, is still satisfied with the company’s performance amid the financial crisis and confident about its future.

China’s service outsourcing industry, mostly about software outsourcing, bounced back in the second half of the year from a hard time of three months caused by shrinking demand from the global market, according to Yu Hengzhuang, vice president of Dalian Software Park.

“We have gained access to high-end market and recently entered the Middle East market, which more than offset the impact of the global downturn,” Low said.

“Our business not only survived, it grew and thrived,” Low said with a smile, keeping the exact figures as business secret.

RAPIDLY DEVELOPING INDUSTRY The software outsourcing park in Dalian, the industrial hub in China, attracted 63 new clients in 2009, bringing the overall number of businesses in the park to more than 400, and the park’s total sales are expected to top 20 billion yuan, up 32.9 percent year on year.

The sales of Dalian’s software outsourcing business grew from 200 million yuan (29.3 million U.S. dollars) to more than 30 billion yuan in the past 10 years. A total of 700 companies are in the industry, including 300 joint ventures and more than 40 Fortune 500 companies.

In the first ten months, the industry’s sales in Dalian grew by 33 percent to 33.7 billion yuan and its export grew by 34 percent to 1.1 billion U.S. dollars.

While Dalian has become a world famous hub of software outsourcing after Thomas Fridman compared it with Bangalore in India, another less known industrial hub with equally fast pace in east China’s Jiangsu Province, is taking shape.

The contract value of Jiangsu’s software outsourcing industry reached 3.28 billion U.S. dollars in the first 10 months of the year, a growth of 174 percent. The province has 2,470 companies in the industry, with 290,000 employees, according to statistics from the provincial department of commerce.

The provincial capital Nanjing’s software outsourcing industry had a contract value of 2.1 billion U.S. dollars in the first 11 months of the year, growing by 239 percent.

“The income of China’s software industry, which software outsourcing takes a major part, has been growing by 38 percent annually and its revenue is expected to top 1 trillion yuan in 2010,” said Hu Kunshan, vice chairman of China Software Industry Association.

China’s software industry earned 757.3 billion yuan in 2008, and the figure is expected to reach 900 billion yuan in 2009.

BOOSTING EMPLOYMENT The rapid development of outsourcing industry bears great significance in sustaining economic growth, restructuring economy, stabilizing export and boosting employment, said Chinese Vice Premier Wang Qishan during a visit to Dalian in November.

More than 60,000 people are working in the software outsourcing industry in Dalian.

China’s outsourcing industry recruited 690,000 new employees, 460,000 of whom were college graduates, in the first 11 months of 2009, according to statistics released on a national conference on commerce.

China’s Ministry of Human Resources and Social Security expects the outsourcing industry to create 1.2 million new jobs in five years, including 1 million jobs for college graduates.

At the end of Sept. 2009, 1.42 million people were working in 8,060 outsourcing companies in China, said Qian Fangli, deputy head of the foreign investment department of the Ministry of Commerce.

The software outsourcing companies in China have enough programmers but lack mature project managers and decision makers, who are on the top of the talent pyramid, said Yu Hengzhuang, vice president of Dalian Software Park.

The gap in talent pool limited the size of such companies to less than 300 people, which is a human resource threshold to carry out core projects with high added value. “That’s why Chinese companies are now the lowest ring of the world software outsourcing chain,” Yu added.

China’s Call Center Sector to Hit CNY 10bn Revenue in 2010

BEIJING, Oct 15, 2009 (SinoCast Daily Business Beat via COMTEX) — The Chinese call center industry is predicted to have a revenue of CNY 10 billion in all during 2010, Wang Jun, chief engineer of the government and enterprise customer division of China Telecom Corporation Ltd. (NYSE: CHA, SEHK: 0728), one of the nation’s Big Three telecommunications carriers, said at the China Call Center Industry Summit in Beijing on October 15.

The industry is expected to reach a 20% growth next year, the chief engineer estimated. The size of the call center outsourcing service market will rise to USD 20 billion in the Asia Pacific region in 2011.

However, China is weak in the competition for call center outsourcing services from Europe and the United States. The establishment of a call center is based on a similar culture environment, so Japan and South Korea choose China as their offshore outsourcing base.

In addition, the summit is held in Beijing on October 15 to 16.

Need staffing your call center in China? go to DaCare Staffing – the only specialized call center staffing agency in China

China’s Growing Talent for Innovation

As a business innovator, China has a wealth of advantages. These include a huge, adaptable population with an affinity for improvisation and reverse engineering; low-cost labor, operations and overhead; and mature industrial clusters ready to supply a variety of parts, components and subassemblies. These elements are creating a strong culture of innovation, one that companies from developed economies soon will either profit from, or compete against, as China moves beyond labor-intensive, low-value-added consumer goods.

Already, many large multinational corporations (MNCs) have set up R&D centers in China, and the government is encouraging the development of design capabilities among its workforce. But China is not an easy place for outsiders to be innovators. Companies from developed economies looking for R&D partners in China must learn to operate within an industrial structure quite different from their own, and take great care in selecting whom to work with and how, experts caution.

MNCs are likely to find that the best opportunities for harnessing Chinese-style innovation lie in two areas: discrete, targeted pieces of larger products and products for home-market consumption.

In this article, part of a special report on Chinese manufacturing, experts from The Boston Consulting Group (BCG) and Wharton look at how companies can profit from Chinese innovation, what drives this innovation, and what challenges they face in sourcing R&D in China.

Global Recession’s Role

Jim Andrew, a senior partner and managing director in BCG’s Chicago office and head of its global innovation practice, says that in the current recession, companies need to ensure that they are getting full benefit from every dollar they spend — including their investments in innovation. Andrew sees growing innovation in low-cost countries such as China and India as one way for companies to increase the cost-effectiveness of their innovation spending. “The crisis in the developed markets has accelerated the move to developing markets because they are lower-cost and now have a track record,” he says, noting that the changes afoot are redefining the innovation landscape. “We will look back on this time and say it was an inflection point with regard to the speed at which certain innovation activities were scaled up in China and India in particular. There is really a step-function change in the rate at which some of these activities are growing.”

Innovation in China before its economy opened up was limited to design institutes that were part of government departments, says David Michael, a senior partner and director of BCG’s Beijing office. Some of institutes have since been repurposed for new commercial goals. Such is the case with the state-owned oil company PetroChina, which has a large network of design institutes within it, according to Michael.

MNCs now realize that China has tremendous development capabilities, including the ability to size up opportunities and rapidly bring products to shelves at low cost. The availability of well-educated talent is particularly attractive, Andrew says. “You can access that talent to do a lot more of the ‘R’ (research) that is increasingly relevant not just to China’s domestic markets but to developed markets.” For MNCs that set up R&D centers in China, “It is more about accessing talent rather than some unique source of innovation,” Michael notes. That makes innovation in China substantially different from that in other global hubs such as the Silicon Valley. “There is low-cost engineering talent in China, but that’s different from saying that there is a whole fountain of innovation we can tap into,” he adds.

This raw engineering talent is a valuable resource for companies from developed economies. The best way for MNCs to tap into Chinese design skills is by sourcing select pieces of their product, Michael says. As is true for contract manufacturing, much of the advantage of Chinese R&D is in low-cost labor — but for brains, not brawn. “When Western or world-class business practices line up with low Chinese costs, new types of companies develop to take advantage of this opportunity,” he notes.

In health sciences, for instance, some Chinese companies are already responding to Western research needs with low-cost services. Michael offers WuXi PharmaTech in Shanghai’s Waigaoqiao Free Trade Zone as an example. WuXi, a leading provider of contract research work for the global pharmaceutical industry, has become adept at setting its engineers to work on Western pharma projects. “It’s run by people who understand the needs of Western pharmaceutical companies and know how to leverage local engineering talent to do the work.”

This kind of division of labor is common in such East-West partnerships. Western companies typically tap into Chinese design for parts or modules, Michael says. One global energy company gets “a lot of its design for oil exploration and drilling facilities in China at the local oil companies’ design institutes,” he notes. Microsoft and other Western and Korean gaming and software development companies have a network of local software developers. Michael also points to Perfect World, a Chinese gaming software writer that “is booming in the 3-D world.” It may not be a household name in the United States or Europe yet, but Perfect World is a leader in the country’s online game market, according to Morgan Stanley Research.

Development Attitude and Disruption

Such industry specialization is common. Corporate R&D in China tends to focus on specific industries and on product development rather than basic research, says Marshall Meyer, a Wharton management professor whose research focuses on China. “You see successes in China in machine tools and lasers, but it has been a combination of development and marketing more than basic research.”

Chinese companies have been good at the “D” (development) part, Andrew says. “You could grow very large very quickly by playing in existing markets if you developed new products that were just a little better than everybody else’s. But with increased competition everywhere, it takes products and services that are more innovative and targeted to needs that are not already being met.” One recent example is a soybean blender that produces a popular soy milk drink. Joyoung Co. in Jinan, China’s Shandong province, manufactures the blender, which has become “a big hit product.” The blender has no fancy technology — just a plastic body with an electric motor, but its “fundamental concept is what local consumers want,” he says.

More dramatically, according to Michael, Taiwanese computer manufacturer Asus used its development capabilities to “single-handedly invent the netbook segment of the PC market.” Producing computers stripped down in functionality and priced at $300 each, Asus “has completely disrupted the global PC market.”

As existing markets become saturated, however, China must invest more in the “R” part of R&D to compete differently or to expand into fundamentally new markets, Andrew says. And while piracy has eroded profit opportunities in China’s traditional gaming software industry, Michael points out that it has not similarly affected online games. “People are paying for the experience of playing games with each other, and that turns out to be profitable despite some piracy.”

Longer-term, the capacity to innovate seems likely to grow. “The culture is very, very good at devising quick and often effective solutions to problems,” Meyer explains. “I see a lot of improvisation.” An increasing demand for a Chinese language card in computers, for example, prompted Lenovo years ago to create one for its products. Chinese white-goods manufacturer Haier found that potato farmers in China were using their washing machines to clean produce, so it designed a heavy-duty, special-purpose machine that can be used outdoors and will “wash your clothes or your potatoes,” Meyer notes. Electronic and electrical manufacturers often design products that work with “very heavy-duty power supplies because of the poor quality of electricity” in the country.

Nor are Chinese innovators focused entirely on their domestic market. According to David Jin, managing director and head of BCG’s Shanghai office, some Chinese companies have already tried to out-innovate large MNCs — and succeeded. In one highly publicized case in 2006, Chinese electrical products maker Chint won a lawsuit over its patent for a circuit breaker against the Chinese unit of the French company Schneider Electric. “Usually, it is the other way around,” Jin says, alluding to Western companies accusing those in developing countries of patent infringements. Many high-tech operations are succeeding abroad as well. China Medical Technologies, a supplier of in-vitro diagnosis and treatment systems, competes with MNCs and commands a market share of more than 90% in at least one product segment and 70% in another, according to a July 2008 report from Citigroup Global Markets.

Choosing a Business Model

For companies in developed economies that want to harness Chinese innovation, Wharton and BCG experts say it’s important to select the right business model. These models range from plain-vanilla purchasing through a series of one-off orders, to joint technological collaborations through supplier development programs, to taking an equity position in Chinese suppliers, says David Lee, partner and managing director in BCG’s Beijing office and a supply chain and procurement specialist.

No one-size-fits-all formula exists for such partnerships, Lee adds. He has seen several MNCs invest in their suppliers, but “a lot of them don’t like the idea,” in part because of potential management disagreements. Some Chinese companies “are reluctant to change the way they have worked historically,” he says, adding that the handling of human resources and material waste, in particular, could be points of friction. However, many of them have begun reining in waste of materials in manufacturing processes and increasing wage levels have got them to focus on lean manufacturing and productivity enhancement, he adds.

Many MNCs have rolled out supplier development programs, transferring pieces of technology and attempting to transfer their best practices to Chinese partners. But this, too, is unfamiliar territory for some. Companies from developed economies typically haven’t had to worry much about quality control in their home markets “because suppliers themselves take the initiative to invest in quality-control processes,” Lee says.

Markets are so competitive and dynamic in China that innovation is likely to continue relentlessly. Companies are being pressured for ever more gains in productivity. And where Chinese manufacturing wages were relatively flat for many decades — allowing wage productivity to grow — labor markets have tightened and wages have started rising, Michael points out.

The challenge going forward will be to accelerate productivity growth ahead of any inflationary pressure on wages, he says. The available labor supply in the medium term will not be as large as it was in the past — although the global economic slowdown has idled millions of workers for the moment. But the release of large blocks of talent through the restructuring of state-owned enterprises is almost complete. At the same time, rising farm incomes — at least until very recently — had constrained the supply of migrant rural labor to the industrial centers, Michael explains. That gave labor more leverage. Ultimately, as labor increasingly absorbs more manufacturing resources in the long run, companies will have to push even further for innovative solutions with “a focus on driving more productivity increases in Chinese operations.” The global economic downturn will likely slow the pace of these trends — and even reverse some — in the short term. But over the mid-term and beyond, expect China to build upon its already substantial innovative capabilities in manufacturing and services.

Innovation and Intellectual Property

Does porous intellectual property protection have a negative impact on r innovation? Not necessarily, says Harold Sirkin, senior partner at BCG in Chicago and global leader of the firm’s operations practice. When you innovate, “you’re creating a brand, and that’s a different kind of intellectual property (IP) than a patent.” IP protection is growing less important to innovation, even in the West, Sirkin notes. “The world has gotten so small that even if you invent the next iTunes, you can’t rely on patent protection,” he notes. “It’s readily copied now, everywhere. A lot of the [market appeal with] iTunes and the iPod is about [their] installed base.”

However, innovation and protection of IP have long been connected, and China has duly noted that linkage in its attempts to transform itself from a low value-added manufacturing center to recognized innovation leader, particularly as lower-cost countries compete for China’s core business. Mike Chao, a Principal at BCG in Beijing, notes that, “The IP laws have always been there, but what’s changed in the last 20 years is how they have been interpreted and enforced. There’s a big difference between policy and enforcement.” One notable example is the software industry, where Chao battled piracy with Microsoft China for over five years before joining BCG. After strong lobbying by Microsoft in partnership with the US government, China declared in 2003 that the government would only use legal software. That announcement was followed by two additional decrees requiring that PC manufacturers only preinstall genuine software and Chinese enterprises only use legal software. “While that’s absolutely a step in the right direction, there’s still work to do in terms of bringing up the levels of enforcement and awareness to comply with the policies,” Chao says.

On another front, however, he notes the Chinese government’s tendency to provide research grants to projects that have the same time frame as the tenure of bureaucrats, thus sacrificing long-term horizons for short-term gains. “Innovation requires a long-term approach, and companies need to know their hard work won’t just be stolen right away.” Therein lies the difference between betting the company on the “R” or the “D”: “Research is never a sure thing, but development can consistently result in realizable output,” Chao explains. “With the recently announced government stimulus programs, there is hope that more funding will go to the companies that can actually productize that research and bring it to market.” Academic institutions that have traditionally received such grants have “not had a great track record in commercialization,” Chao points out.

Evolving IP policies, however, will not necessarily be the savior to spurring a wave of innovation in China. “At the end of the day, the market will force you to innovate and differentiate, and if your company isn’t doing that, someone else will.” Chao points to the PC industry as an example. Prices of notebook computers dropped 13% on average in China last year, in large part due to pressure from netbooks, other low-cost offerings, and a general lack of differentiation. “Asus saw an opportunity to disrupt the industry with the netbook, and now PC companies are dropping prices and scrambling to catch up.” Innovation is and has always been the key to competition. China’s ability to do so effectively will undoubtedly determine its future in the global economy.

Source: Knowledge@Wharton

Sanofi-Aventis to Invest USD90mn More in China

PowerRating — Sanofi-Aventis SA (NYSE:SNY), one of the top pharmaceuticals producer in Europe, will additionally pour USD 90 million into China, and an insulin glargine pre-filled injection production line is scheduled to break earth in the Beijing Economic-technological Development Area.

Presently, the company still has great confidence in China’s development prospect, so it decides to invest more in such a market with growth potential. Sanofi-Aventis intends to spend a lot of money building or expanding its factories and seeking more partners locally, in accordance with the country’s increasing public health demand.

The Sanofi-Aventis CEO Chris Viehbacher also revealed that the European pharmaceutical giant and the Society of Diabetes of Chinese Medical Association would cooperate in a sizable type-2 diabetes gene research, in which about 46,000 diabetes patients and non-diabetes individuals are invited to participate.

So far, Sanofi-Aventis has invested more than USD 300 million in China, hiring over 3,300 employees, and its production bases are dotted in Beijing, Hangzhou, and Shenzhen.

Novartis plans more investment in China

The world’s third largest pharmaceutical company Novartis Group will invest heavily in Chinese market through its innovated drugs arm despite the global recession.

The Swiss drug giant will put money into overall strength enhancement in China, including sectors of research and development (R&D), marketing, and sales. And to meet the demand of expanded facilities, larger recruitment scheme is expected this year, according to Joseph Jimenez, CEO of the Novartis Pharmaceuticals Division.

He denied to revealing the exact amount of the investment, only saying that it is a considerable amount.

Novartis Pharmaceuticals will launch six new innovated products in China and is significantly increasing the number of clinical trials conducting in China in 2009 versus 2008.

Novartis Group posted net sales of $41.5 billion and net income of $8.2 billion yuan in 2008, while its investment on R&D reached $7.2 billion.
“We are continuing investing in our R&D center in Shanghai and it’s a long-term and scaled investment,” said Jimenez. The company’s R&D center in Zhangjiang Hi-tech Zone, set up in November 2006, is one of three core R&D facilities it has around the world. The other two are in Basel and Cambridge, Massachusetts of the US.

The Basel-based company will further strengthen its cooperation with the Chinese government and hospitals, eyeing the Chinese central government’s 850-billion-yuan medical system reform package.

It will also pay more attention to community clinics and started carrying out community residents education and grass-root physician training on some common chronic diseases, such as cardiovascular diseases.

The pharmaceutical firm owns a series of products targeted at chronic diseases, including Diovan/Co-Diovan and Exforge for hypertension, Exelon for Alzheier’s diseases, Xolair for asthma as well as Voltaren/Cataflam for pain relief.

Novartis has 3,500 employees in China, around 2,700 of whom work for Novartis Pharmaceuticals (its pharmaceutical arm). Some 500 of them joined in 2008. The global CEO said that a larger recruitment scheme is expected this year. A bulk of the new positions will be sales staff, he added.

“We are investing heavily at the time when others are starting to pull back. We are doing it because we believe if we invest now, at the end of the recession and along with the continuing economic acceleration of China, we will emerge as a much stronger company,” the CEO said, adding that Novartis balances investment in China with reduction of investments in other markets, which do not have the same growth potential as China.

“We are reducing the number of people that we have selling, for example, in the US,” he said. Novartis announced a restructuring of its US sales force last November, resulting in the elimination of 560 sales positions.

The company’s China unit, which covers patent drugs, generics, healthcare products and vaccine sectors, generated turnover of 3.3 billion yuan last year, a 29 percent jump from 2007. It expected to achieve 30 percent year-on-year growth in 2009. Its pharmaceutical arm is growling at a similar pace in China.

Novartis Group had invested a total of over 3.3 billion yuan in China as of the end of last year.

China’s R&D offshore outsourcing market growing: Zinnov

BANGALORE, INDIA: Zinnov Management Consulting, a leading management consulting firm, today launched an in-depth study on China’s R&D Service Provider Landscape titled “R&D Globalization – R&D Service Provider Landscape in China”.

The study in totality brought to light the entire R&D service provider market in China and estimated the market to be USD 1.3 billion as opposed to a market of about USD 3.5 billion in India. It read that revenues related to R&D services for top 3 players in the China market is growing at a much faster rate than the industry average of 46.6 percent.

The China R&D offshore outsourcing market is dominated by Chinese service providers with relatively small presence of India and US based service providers. Though the overall R&D offshore outsourcing market is growing fast, most revenues come from low-end QA/ testing work.

“We have noticed that a majority of customers of China-based service providers are very uncertain about the capabilities of their partners owing to the nascent stage at which the market is in. However, at the same time, we do see an up-swing in the growth of US based companies trying to offshore their R&D related work to third party service providers in China”, said Praveen Bhadada, Engagement Manager, Zinnov.

The report highlighted that the R&D offshore outsourcing market in China is highly fragmented with the top 10 service providers accounting for about 28 percent of the total market share. It also read that there are more than 10,000 large to small sized outsourcing service providers in China providing IT services/ ITeS / R&D services. Divulging specifics on how Indian service providers have fared in the market, the report said that the Indian players have not been able to scale up their operations in China, in spite of having ambitious ramp up plans since their inception.

“MNCs who were looking at diversifying risks related to R&D Globalization, chose Chinese service providers as a risk mitigation strategy for the market. Additionally, reasons like cultural and language differences, coupled with issues around recruitment and retention of key employees, acted as deterrents to their growth. “Therefore today, most of the top Indian service providers in China do not offer a broad array of R&D services as opposed to their Chinese competitors and the focus is primarily on IT services”, said Chandramouli, Director-Advisory Services, Zinnov.

The report additionally highlighted that the cumulative revenues for top 4 Indian service providers is about USD 65 million of which R&D services constitutes only about USD 7.7 million.It read that the billing rates of service providers for R&D related work oscillates widely and primarily depends upon the kind of work, also adding that the rates for top 5 service providers are relatively higher owing to their experience, capabilities and quality of talent.

The strong ability of overcoming some of the most difficult challenges, coupled with favorable growth drivers have contributed towards the current state of the China offshore outsourcing market. Even today, communication issues with lack of scalability are primary reasons that are restraining its growth. However, low cost of operations along with the proximity to certain key markets in APAC region are some of the key drivers of growth.

The report also stated that in the near future, Chinese service providers would surely increase their focus on the US/ European markets by extending their sales operations in those geographies. The current high fragmentation would surely prompt the market, which is undoubtedly passing through a growth phase at the moment, to enter the integration phase observing increased M&A activities, as the top players would like to grow both organically and inorganically in a market which is expanding fast. Initiatives from Government and enterprises will also improve the talent capability which might act as a key driver in unleashing the market potential in the years to come.