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For chemical makers, R&D in China makes sense

Even as some companies leave, chemical firms have no choice but to build up in the world’s largest market

by Jean-François Tremblay
February 19, 2018 | A version of this story appeared in Volume 96, Issue 8

A photo of a young woman in a lab setting holding a sport shoe.
Credit: BASF
Shanghai is where BASF conducts its most advanced research in polyurethane materials used in footwear.

Judging from the headlines of the past few months, the appetite of international firms for doing R&D in China is fading. In October, General Electric said that it would close its R&D center in Shanghai, one of three big facilities that it operates worldwide. The following month, AstraZeneca said it was spinning off its China R&D into a joint venture with a Chinese partner.

Earlier last year, Eli Lilly & Co. said it would close the Shanghai R&D center it had opened five years before and GlaxoSmithKline announced that it was ending R&D in China on neuroscience, the company’s main research theme in the country. The quick succession of news gave the impression that international firms’ R&D investment in China was turning into divestment.

That would be the wrong conclusion, at least as far as chemical companies are concerned. For them, R&D in China continues to grow.

China is the world’s largest market for chemicals, and producers have no choice but to provide extensive technical support there. In many cases they even develop new materials in the country in collaboration with local manufacturers. For certain chemistry categories, China has become the default location for R&D.

“For some technologies, we have the global center of excellence in Shanghai and not anywhere else,” says Harald Lauke, president of BASF’s competence center in advanced materials and systems research, which is in Shanghai.

Over the past three years, chemical companies have expanded research in China

May 2016:
AkzoNobel opens $8 million paint and specialty chemical R&D center in Shanghai.

June 2016:
Henkel opens R&D center for adhesives in Shanghai.

September 2016:
Merck KGaA completes $6 million expansion of Shanghai liquid crystal R&D center.

May 2017:
Honeywell UOP announces R&D center in Zhangjiagang.

June 2017:
BASF announces $40 million automotive application center at its Shanghai campus.

November 2017:
Wacker announces R&D labs for silicone fluids and resins, pyrogenic silica, and silicone elastomers in Shanghai.

Note: List is not comprehensive.
Source: Companies, C&EN

When BASF competes in businesses whose main customers are in China, it makes strategic sense to base the R&D in China, Lauke says. Two examples of markets that are China centered, he notes, are flame retardants and polyurethane-based materials used in sport shoe soles.

Historically, BASF has conducted R&D at its giant complex in Ludwigshafen, Germany, and provided technical support, including minor customization, from smaller facilities around the world. The firm’s goal now is to regionalize, which means putting 25% of its R&D in Asia, Lauke says.

To support that goal, BASF opened its Innovation Campus Shanghai in 2012 at a cost of $175 million. The company is currently adding a $40 million automotive application center at the campus.

Regionalizing R&D requires shifting decision-making authority away from Germany, Lauke says. “This was something that was resisted internally, but we explained it was essential,” he recalls. In some industries, such as cosmetics, the most innovative and trend-setting firms are often Asian, Lauke notes.

“How can we have a good feel for this industry if our decision-makers are in Europe or the U.S.?” he asks.

Companies that think through their China R&D strategy usually move decision-makers to China, says Kai Pflug, president of the Shanghai-based advisory firm Management Consulting—Chemicals. The consequence of not doing so can be costly, he adds. As an example, Pflug cites the experience of a chemical firm in which headquarters executives ignored staff reports from China that the electric car market was taking off in the country.

“R&D management in Germany had gotten into their heads that electric bikes were the big deal in China,” he says. The company went on developing technologies for electric bicycles as China turned into the world’s largest market for electric cars.

Besides keeping up with market trends, an advantage of having a sizable R&D presence in China is the ability to tap into the country’s growing expertise in certain scientific fields, Lauke says. For instance, he notes that the Chinese government is putting billions of dollars into quantum computing. Having access to such advanced computing tools could enable BASF researchers to run more comprehensive simulations of how flame retardants behave in complex fire scenarios, he says.

But success at running an R&D center takes years and requires faith at the top of a company, Lauke cautions. “It’s not something where you have key performance indicators or other such numbers to provide to management,” he says. “You can count the number of patents registered by an R&D center, but few numbers can show a direct link between R&D and increases in sales.”

At the German silicon-based materials producer Wacker Chemie, Paul Lindblad, president for China and Taiwan, says his long-term R&D goal is not just to come up with new products. “Our goal is competence, creativity,” he says.

Wacker has two manufacturing plants in China. It started to conduct R&D there in 2011 as part of a strategy, like BASF’s, to decentralize research away from Germany. At its R&D facility in Shanghai’s Caohejing Hi-Tech Park, Wacker employs 100 people in both research and technical support. The Shanghai R&D center, where some space is still unused, is steadily expanding headcount.

“If I want a quick answer to a technical question, I could contact one of our experts in Germany,” Lindblad says. But doing so, he notes, would do little to raise the competency of the local staff.

Whenever possible, he says, R&D staffers in China solve problems locally. Over time, he expects, the Shanghai R&D staff’s level of competence—a key word for Lindblad—will equal that of the German staff. It takes at least 10 years to build up the capabilities of an R&D center, he says. But already, China is one of the key competence centers for Wacker’s consumer care business. Wacker chose to build competence in cosmetics in China, instead of the more advanced Japanese and Korean markets, simply because China’s potential is larger, he notes.

One of the challenges that companies face in ramping up R&D in China is that the country’s fast-growing economy provides multiple job opportunities for technical staff, resulting in an employee turnover rate that is notoriously high. But Lindblad says it’s a manageable problem that doesn’t distract from the long-term goal of raising competencies.

Wacker, he says, is able to retain staff because it’s a stable company that grows organically and tends not to lay off people. The firm provides training opportunities to its staff, such as internships in Germany.

More important, Lindblad claims, “We give them a compelling vision of how they’re helping China and the world.” For instance, Wacker’s polysilicon is used in solar cells. Children of Wacker employees can proudly tell their friends that their parents help create more sustainable energy, he says.

BASF and Wacker are two of the many chemistry-related companies that are expanding R&D in China. In 2016, Henkel opened a facility large enough for 170 researchers. UOP announced last summer that it is building an R&D center in Zhangjiagang.

Unlike drug firms that can develop their products almost anywhere in the world, chemical producers have no choice but to do at least some R&D in China, Pflug, the consultant, says. “Differentiation is the best way for multinational companies to keep their market share, and R&D is the most obvious way to differentiate,” he says.

For those end markets for which China has become the world’s innovator, Pflug adds, it “should be the default location for R&D.”


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