Instrument R&D in China

As the importance of the Chinese market has grown, so have foreign companies’ R&D efforts in the country. According to a survey of 477 US companies conducted by the American Chamber of Commerce in the People’s Republic of China (AmCham) and Bain & Company in February, 46% of the companies classified as R&D Intensive Industries or Resources & Industrial Industries have R&D centers in the nation.

Instrument and lab product firms are no exception. Among the instrument and lab product companies with R&D operations in China are Agilent Technologies, Danaher, Mettler-Toledo and Thermo Fisher Scientific. IBO spoke with Agilent Technologies’ Applied business and Thermo Fisher Scientific to discuss the companies’ R&D activities in the country. As they explained, their Chinese R&D efforts are steadily expanding and are integral to both global operations and local growth.

Both Agilent’s Applied business (formerly the Chemical Analysis Group [CAG]) and Thermo have increased their Chinese R&D. Agilent established its R&D operations there in 1995, when it was still part of Hewlett-Packard. Created as a joint venture with local manufacturer Shanghai Analytical Instrument Factory, the business focused on manufacturing, marketing and customer support. “The goal was neither cost nor capacity, but access to the market,” explained Shanya Kane, vice president and general manager of the Gas Phase Separations Division of Agilent’s Life Sciences & Applied Markets Group. “By working with the local partner, we could assess the size of the opportunity and how to capture it. By developing skills to develop and manufacture the products, we could begin building the other critical skills needed by the entire value chain.”

Thermo established its first R&D operations in China in 2010. At the time, its Chinese revenues totaled more than $350 million. “In 2010, Thermo Fisher Scientific began R&D work in China with a small group of instrument engineers located in one of its China Manufacturing Centers in Pudong, [Shanghai],” explained James LaDine, vice president of Thermo’s China Innovation Center (CIC). “Our R&D team there worked on some of our laboratory equipment products like hotplate stirrers. In addition, we had engineers working to customize some of our Analytical Instrument [division’s] radiation safety products and air quality instruments to the specific needs of the China market.”

The development of products “in China for China” is a key focus of many multinationals’ R&D efforts in the country. For the companies in the AmCham survey with R&D centers in China, the primary goal for 71% of these centers was “tailoring products or services to Chinese market needs.” Improving R&D cost competitiveness and access to local talent were cited by 62% and 59%, respectively.

Agilent introduced its first locally designed product for the Chinese market in 2003. At the time, China was the third-largest geographical market for the Life Sciences and Chemical Analysis business. Based on the company’s 6890 GC, the 6820 GC was designed for hydrocarbon processing, food safety and environmental applications in China. The 6820 was eventually introduced worldwide. Asked about how Agilent tailors products to the Chinese market, Ms. Kane told IBO, “One of the GC products developed is targeted for emerging market needs and included features which were defined as ‘just enough’ in terms of throughput, automation and user interface.”

Although products may be tailored to the market, Agilent Applied’s current Chinese R&D efforts are part of its worldwide R&D organization. “Today, the Chinese R&D operation has evolved to global development responsibilities for certain GC products, as well as they work as part of a decentralized global product development network.”

Based at the CIC, Thermo’s Chinese R&D efforts span lab equipment, analytical instruments and specialty diagnostics products. Opened in 2013 (see IBO 9/15/13), the $9.5 million CIC houses product development, training and demonstration facilities. Analytical instrument projects include GCs, atomic absorption spectrometers, UV/Vis spectrometers and air quality instruments, according to Mr. LaDine. The company currently has over 100 R&D employees in the country.

Chinese R&D also allows multinational firms to remain competitive with domestic and foreign firms that are similarly “close to the market.” According to an American Chamber of Commerce in Shanghai winter 2014 survey of its 377 members, for 51% of respondents, competition from Chinese firms (both private and state owned) had increased over the past year. Competition from foreign firms in China had increased for 54% of respondents.

Discussing the advantages of doing R&D in China, Ms. Kane told IBO, “Building global R&D including China R&D investment is essential to Agilent’s future and will continue to grow. Through our global presence we gain access to world-class talent, proximity to major customers, universities and partners, and insight into significant markets.”

Mr. LaDine also emphasized proximity as an advantage. “One obvious benefit is being close to our customers, [and] our manufacturing and supplier base. That proximity allows us to work through technical challenges more efficiently and in the local language faster,” he explained. “For example, on the supplier side, that might be working on a molded-part quality issue or, on the manufacturing side, that might mean working on a manufacturing yield or calibration issue.” Such capabilities also allow the company to adjust to changing market needs, he noted. “This opens up new opportunities to innovate and supply novel solutions and drive growth.”

Mr. LaDine also noted the importance of the CIC for application development now and in the future. “Going forward, CIC teams will be leveraging these [capabilities, processes, teams and skill] to do larger projects, where they own and control designs in China. This will allow the company to address analytical instrument opportunities from within the geographic ‘center of gravity’ of certain application markets.” These efforts are also enabled by the company’s regulatory presence in China and its Chinese Design, Verification and Validation lab in the country, according to him.

Hiring and talent retention are among the largest challenges faced by multinational companies conducting R&D in China. In the AmCham survey, respondents were asked about changes in the environment over the past year for attracting, developing and retaining staff. For “skilled workers and professionals,” 42% of respondents indicated it was “somewhat more difficult,” but 40% stated it “stayed the same.” For technical staff, 39% rated it as “somewhat more difficult” and 43% rated it as the same.

For both Agilent and Thermo, R&D hiring in China is a challenge. “As the Internet and consumer electronics industries have boomed in China, some of our biggest challenges are hiring and retention of talent, as well as project coordination processes and tools,” said Ms. Kane. “Investment in grooming a leadership pipeline is also critical to long-term success and stability. Investments are needed to build personal relationships and communications tools for remote team and headquarters teams.”

Mr. LaDine discussed the availability of engineering talent in the country “Getting good system-level knowledge is a challenge in China because deep skill in systems-level engineering often comes after decades of focused experience,” he told IBO. Thus, developing R&D experience is crucial. “Our CIC engineering leaders have worked with longer-standing R&D teams in the company, and we continue to develop the talent base in this way. For example, we have 2–3 month ‘bubble’ assignments for our CIC engineers within our business unit sites in the US and Europe.” But, he noted, access to talent may be improving. “With the economy of China moderating, we sense an improvement in the rate of talent turnover, and so we are living inside of a good opportunity to retain and build our talent base for the span of years necessary to establish deep expertise.”

Another challenge for multinational companies doing R&D in China is IP protection. In the US-China Business Council’s 2014 Business Climate Survey, conducted in fall 2014 with 110 companies responding, 48% of respondents indicated that they were “very concerned” about the country’s level of IP rights enforcement. Forty-eight percent indicated that China’s level of IP rights enforcement “limits R&D activities in China.”

As Mr. LaDine explained, Thermo is addressing the issue but not letting it constrain local R&D efforts. “IP protection and leakage of IP has been a concern of the corporation. We’ve implemented training on IP protection, proper data security and integrity, and put tactical measures in place as well,” he said. “We have been focusing our efforts on generating new IP in China relative to the technology programs the teams are working on.”

Likewise, Agilent emphasizes training and standards for IP protection. Asked how Agilent Applied addresses IP issues, Ms. Kane stated, “By ensuring that all employees are accountable to the same standards of business conduct, as well as regular training programs and proactive company IP and document policies and controls.”

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