It’s no secret that manufacturing has been at the heart of the Chinese economic miracle over the past four decades. Last year, it made up nearly a third of Chinese GDP – a staggering 25% of all products globally are made by the Asian superpower.
One sector particularly affected is chemical manufacturing – which produces huge amounts of the raw materials and chemicals needed to sustain the current economy.
By 2020, China is expected to account for 40% of the global chemicals market, with local companies increasingly dominating the market; latest figures show the number of foreign-owned chemical companies in China has fallen to less than 20%.
These statistics present a problem for major chemical firms. At a time when the Chinese market is becoming more important on a global stage than ever, they find themselves losing ground to local competitors.
Domestic Chinese firms have proven to be successful in capturing the growing middle market and narrowing the gap in quality with their international competitors. As a result, there is greater pressure for foreign firms to introduce new, high-quality products specifically designed for China, in order to maintain their price premium.
Meeting this need requires a deep understanding of the market, country and the culture that products are being designed for – demands which require research and development to be carried out in-country. To manage this shift, there are three key steps for companies looking to carry out effective in-country research on China:
Knowing the Market
Simply put, the first requirement of designing products for a specific market is understanding the landscape and customers. Yet, mastering China’s nuances is complicated. The competitive, dynamic landscape is changing faster than its more established Western counterparts.
This has created a complex patchwork of regulatory frameworks which can be tough to navigate. Before even thinking about opening up R&D centers, companies need to take the time to get to grips with the laws as they stand and what subsidies are currently available to support which research initiatives.
At the same time, the unique political environment must be taken into account. Innovation has been high on the agenda for the Chinese government. Various areas in which chemicals companies might look to conduct R&D – including fairly innocuous ones, such as new membranes for water treatment – can carry unexpected political implications not found in Western markets.
For example, given rapidly tightening emissions standards, any projects involving large amounts of CO2 production are likely to be problematic. Knowing this in advance can save huge headaches down the line.
Once a specialty has been decided on, the next step is finding a profitable niche in the market. For example, in electronic chemicals and textile chemicals, which are large Chinese markets, securing a sufficiently high-quality water supply is a challenge, and a key issue in China overall. Differences to Western markets mean that merely duplicating an international approach when working on China-specific projects is both impractical and wasteful.
Instead, companies must recognize that China is a market where the majority of end-users still lack the levels of disposable income of their Western counterparts, but are actively looking to improve their standard of living.
By embracing this difference, reviewing the needs which are currently unmet by existing products – and targeting such market sectors with ‘frugal innovation’ – companies can come up with unique offerings.
One highly cited example is GE Healthcare’s portable ECG diagnostic machine, the MAC 1. By analyzing the relative needs and cost restrictions of developing markets, the MAC 1 was able to be sold at a far more affordable price of $535 compared to far more expensive Western products. By emulating this approach in the chemicals market, companies can provide new ‘frugal’ products ideally suited to the Chinese market.
Boots on the Ground
Finally, there is the question of where to locate in-country facilities. Balancing concerns – such as cost and talent availability – demands substantial research. The question of which cities are best able to deliver the required talent will depend at least somewhat on the focus of their research.
In recent years, this has made Shanghai very popular for chemical companies due to the ease of sourcing both local and immigrant talent; whereas, due to its well-publicized pollution issues, Beijing has become less attractive. On the other hand, Apple recently eschewed both, preferring instead to locate its latest R&D center in Shenzhen – the ‘Chinese Silicon Valley.’
All of these factors combined mean that managing in-country R&D is not a simple matter. Yet multi-nationals cannot afford to delay. With its 1.3 billion consumers and 100 million degree-level educated workers, China is the future of the chemical manufacturing industry, and failure to pivot could be incredibly costly for today’s market leaders.
As China increases its share of both global demand and the international talent pool, companies cannot afford to wait on the sidelines – they need to get in-country R&D right or watch their competitors move ahead of them.
Christina Valimaki is senior director, Chemical Industry, at Elsevier R&D Solutions.