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Bringing R&D To China
Posted on November 28th, 2016 by Dr. Kai Pflug in Chemical R&D
CEFIC, a European association of chemical companies, expects China´s share of the global chemical market to increase further – from the current 39.9% (2015) to 44% in 2030. So, despite the slowdown of the Chinese economy, growth is still faster than the global average.
At the same time, global chemical companies increasingly realize that to be successful in China in the future, it is necessary to be innovative. For example, the CEO of Clariant recently stated: “Clariant believes that innovation is the main driver of China’s economy under the New Normal and is the core competitiveness to win in China.” Cabot, upon opening an R&D center, stated “China’s New Normal was a factor in the decision to locate the Asia Technology Center in Shanghai … The slowdown becomes a separator between the winners and the losers. The customers who are leaders in their area need more innovation.” And BASF, while admitting that the company will not meet their original China sales target for 2020, reacted by emphasizing innovation-driven parts of their portfolio: “[BASF has] shifted emphasis from commodity chemicals in the oversupplied markets to focus on specialties catering for industries that include transportation, consumer products, electronics, construction, packaging, and agriculture.”
The question is whether this will be enough. For example, Clariant has about 11% of its global sales in China. This figure seems to match well with the current Chinese share of their R&D staff of about 13% (140 out of a global total of 1100 R&D employees). But, on the other hand, Clariant has announced that in 2017 about 40% of its investment will be located in China.
Taking another set of data from CEFIC, 2015 total chemical capital investment in China was €95.6 billion compared to €20.7 in the EU and €32.5 billion in the US. Of course investment and R&D are not the same. Still, there seems to be a mismatch between China as a strong focus of investment but only a much less important location for R&D.
When talking to Chinese employees of Western chemical companies, many of them feel that the more innovative parts of R&D are still jealously guarded by the headquarters in the US or Europe, with only customer-specific application testing really fully localized. Obviously, the established R&D centers abroad have a huge head start in long-term expertise and resources. But they also are not ideally located to understand China´s product needs, and to develop the right products for them.
Some of the future success of foreign chemical companies will depend on how quickly they understand that much more of their R&D will need to be located in China. Many of their Chinese competitors – whose quality is in many segments already reaching the level of Western players – have started investing in R&D, and will naturally do so in China. Given that they tend to be 10-20% less expensive, and that buyers typically prefer local sourcing, MNCs will need to be quite successful with their R&D in China to maintain their market share.
All opinions shared in this post are the author’s own.
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Dr. Kai Pflug
CEO, Management Consulting – Chemicals
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