Five tips for dealing with China

Attracted by the pool of hard-working, highly qualified and badly paid engineers, many Western companies are turning to China for help in R&D. But mistakes can cost millions. Herewith, from two innovation consultants, five things to think about when considering an R&D collaboration in China.

1) Don’t help to create your future competitor

Many companies see their Western rivals going to China, setting up training centres and R&D facilities. But blindly following the pack is very dangerous. Building up your own future Chinese competitor is the greatest commercial risk when cooperating in the field of R&D. A Dutch electronics company learned a hard lessen after moving its R&D department to a Chinese joint-venture partner. After seeing that some of the good, Chinese, qualified engineers just started their own businesses in the neighbourhood to produce almost the same kind of products, the Dutch company had to move its core new research projects back to the Netherlands. For this kind of company, keeping the core technology research at home and at the same time sourcing bulk R&D work to a low-labour cost land is a better choice.

2) To protect your IP, focus on business partners rather than lawyers

Protecting knowledge is the Western Pavlov reaction to any substantial invention. But in China the basic cultural view is that knowledge does not belong to an individual person or organisation; it belongs to everyone. So those who are better or faster will win. This is one of the causes of the East-West dispute over IP – a cause not always understood by Western entrepreneurs and regulators. As a consequence, the solution isn’t in legal protection but in choosing and building the right business relations in China. Recently, a French dairy champion saw its manufacturing processes being copied by its Chinese partners. It is a fight in court about the interpretation of contracts. But even if the French company wins in the short term, it remains to be seen what’s left over in the long term.

3) Recognise the government is everywhere

Innovation and therefore R&D is in China part of both the public and the private sector. In the West, most companies manage their own R&D privately. In China, while companies also have stand-alone R&D, the central government as well and the provincial governments play a role in the direction, content and relevant partners for China’s R&D uprising. So to succeed, Western firms must intermingle China’s private and public organisations. A few years ago, a German automotive OEM manufacturer chose a private Chinese car manufacturer as its business partner. This partner was preferred by the Germans because it seemed to look like a more or less private operating company. However, the Chinese automotive industry is a key industry which always is under the influence of governmental decisions and priorities. The outcome: the alliance could not be operated as a stand-alone private entity.

4) Focus on the R&D process, rather than the technology

The Chinese are fond of high tech. Recognising this, many Western companies and institutes try to gain market entrance by focusing on technology. But the biggest deficit in China isn’t in hard technology knowledge but in the soft skills of managing the R&D process. Being part of the Chinese efforts to set up an R&D system with added value will in the end be much more rewarding than focusing on technology. For example, in the water industry, technology has to be combined with state of the art water management practices. Otherwise the technology will not be used very effectively.

5) How you package the deal matters

Surviving in China means using the method of the stick and the carrot. For many managers, this is normal business practice – but in China, the sticks and carrots can look different than in the West. For instance, Western technical knowledge is prized by the Chinese but its attractiveness depends on how it is “packaged.” Carrot options include adding complementary trainings, educational programs at Western institutions, future updates, and governmental support. New industries like biotechnology offer rewarding perspectives because Western governments and institutions also have their own development programmes. Using a stick in China should have a long-term effect. In this way, it is not necessary to grab it every week and keep relations upright.