(Yicai Global) April 26 -- Shanghai has become the favorite spot for multinational companies to set up global research and development (R&D) centers, and a growing number are siting their R&D centers there.
In the first half of 2016, another six R&D centers were set up in Shanghai, increasing the total number to 402, with one-third founded by Fortune Global 500 enterprises, and over 40 global R&D centers, data from Shanghai's commerce commission shows.
A March report by corporate consulting firm KPMG LLP states that, apart from the US technological innovation leader Silicon Valley, Shanghai ranks first in technological innovation, followed by New York, Tokyo, Beijing and London.
"The Yangtze River Delta is the largest manufacturing base in China, and is home to many of our clients," said Huang Aimin, general manager of Shell (Shanghai) Technology Co., and thus the establishment of its third global lubricating oil R&D center in Shanghai is advantageous to clients for paying visits or holding meetings, he told Yicai Global.
"Shanghai is an international metropolis, and over 300 multinational companies have set up research and development institutes there, thus Shanghai has relatively complete infrastructure, and more talents than other cities," Shen Jiankun, former director of R&D center of Ecolab in Greater China and marketing director of National Aluminum Co. [NSE:NATIONALUM] (Nalco) in Greater China under Ecolab, said his company decided to settle one of its largest global R&D centers in Shanghai based on the many irreplaceable advantages there.
"One of our lube oil blending plants is in Zhapu near Shanghai, and we have formed an industrial chain of commerce, technology and production plus Shell's commercial and R&D centers in Shanghai," Huang said, adding clients value the impact of Shell's whole value chain on its profit.
Shanghai's R&D Advantages
Some Fortune Global 500 enterprises set up the global R&D center in Shanghai to establish a complete industrial chain here.
"Ecolab China is headquartered in Shanghai. During R&D, we not only need to develop appropriate technologies, but also need communication via information technology, as well as exchanges with the market and clients. Shanghai is an ideal place in all these respects." Over the past three years, the firm has welcomed nearly 1,000 visitors to its global R&D center in Shanghai, most of whom are Ecolab's clients or their clients' customers, Shen said.
High Cost of a Global R&D Center
However, for Xu Jun, Deputy Director of Communications and Sustainability at Unilever NV [AMS:UNA] North Asia, R&D call for patience as current investment targets returns years in the future. "Different operation links see costs differently. The production and sales sections definitely want to control costs and guarantee the quality and market access efficiency of products, but the R&D section considers long-term benefits."
The talent cost index also reflects the talent strength of a city, Xu said. Only top talents come at top prices and have corresponding demands, and this generates a higher tolerance for talent costs, as these are "viewed from a longer-term perspective."
Many companies establish R&D centers in Shanghai not to spare costs, but for timely identification of Chinese demand so as to effectively develop new products and technology for the market, said Shen Jiankun. "Shanghai has many excellent universities and research institutions, while we need labs from outside for in-depth analysis of chemicals during our research. The advantageous collaborative environment is of great importance in improving R&D efficiency."
Huang Aimin also noted that the Zhangjiang Hi-Tech Park where the Shell R&D Center lies also houses many of its suppliers. The park, which has attracted more than 200 international R&D centers, can significantly boost R&D efficiency and cut company costs.
Global R&D Center As a Bridge
How do the global R&D centers go 'global' in Shanghai? The answer is by acting as bridges.
The Shanghai-based Ecolab global R&D center has three missions, Shen Jiankun told Yicai. First, it delivers the world's most advanced Ecolab technological information to the domestic market via on-site consultation and allows Chinese customers to enjoy the most advanced technologies from Ecolab.
"Second, it alters the technologies based on the actual circumstances of the Chinese and Asia-Pacific markets. Because most Ecolab technologies develop in North America they are not applicable to all markets directly."
"Third, it develops new technology and products tailored for the Chinese market and promotes them in the region before launching them in the US and other parts of the world," Shen said. He noted that if Chinese customers require low or even no phosphorus in water treatment or cleaning solutions as China now sets high standards on environmental protection, and customers in North America and Europe have no such requirements, the Shanghai R&D center will quickly fill the gap.
"The whole Chinese market has changed. Simply bringing in overseas developed products or technology does not work anymore. The Chinese no longer go after foreign brands blindly, but are beginning to develop the hardware they need based on foreign technology," Huang said. The lubricant developed in the US cannot be used in China directly as trucks, road conditions, climate and loads in the US are different from those in China.
Huang also noted that the viscosity of lubricating oil must be reduced as vehicle emissions standards become more exacting in China. However, lubricant with lower viscosity may hamper oil film formation and thus compromise its protective function. This requires cooperation with Chinese customers to study the challenges and solve the problem.
Unilever's R&D results are not only of application in the local market. The Shanghai Unilever Global R&D Center has a basic R&D department which specializes in basic front-end R&D, such as mechanisms, composition, and other basic elements of products, Xu said. "The application of these basic R&D elements is not restricted by ethnicity, region, or skin type. Consumer demands in different markets are considered only at the final stage of product design, followed by production and marketing."
Supervisory Mechanism and Management Have Yet to Improve
"Shanghai's municipal government has instituted special preferential policies over the past few years to attract many scientific and technological talents to stay in Shanghai and to strongly support the establishment of R&D centers in Shanghai." When Nalco and Ecolab merged, over 20 scientific and technological personnel of Nalco in Suzhou needed to be transferred to Shanghai, Shen said. The government of Shanghai's Putuo district offered great help with household registrations.
The favorable measures for customs bonding of equipment and customs clearance of R&D results by relevant authorities in Shanghai really accelerate the speed of R&D, Xu asserted
Multi-national companies give credit for the establishment of their R&D centers in Shanghai, but also advance their suggestions.
Shanghai's transformation into an innovation center is still at the development stage in Shen's view. The establishment and implementation of management and supervisory mechanisms must be appropriately enhanced to build it up.
The current supervisory mechanism and management are still far from perfect, Shen advised. A complete system is needed, but government capital investment is inseparable from this.
While encouraging the development of the industries with high-grade, high-precision, and advanced technologies, Shanghai should also support mass entrepreneurship and innovation, because the fundamental purpose of scientific research is to improve the quality of life, Xu said. "Enterprises like ours can be considered 'innovative' or 'high-tech.' Actually, consumer goods cannot dispense with technical support."
Consumers can now buy products from around the world via 'overseas shopping,' Xu noted. "Domestic consumers follow some Unilever products overseas. If we produce these products in China, we need to undergo many procedures. For instance, a new product with direct skin contact needs to undergo many experiments before production in China. It takes at least 28 months, but opportunities may slip away after such a long time."
Shanghai is promoting the innovation of trade management model, Shen said. If it can recognize product certificates issued by mature markets such the US and the EU, enterprises can better grasp market opportunities.