Building Successful Research and Development Centers in China

Introduction

According to a recent United Nations report, China surpassed the United States and India in 2007 to become the world’s most attractive destination for research and development (R&D) investment. There are now approximately 1,000 R&D centers in China (of which 50 percent are attached to companies in the technology sector), and this number continues to rise thanks to the ongoing investment by multinational corporations (MNCs), the increasing need to be close to the local customer base and low labor costs. While a number of these R&D facilities have been very successful in terms of research results, product development and overall growth, others have never reached their targeted size or scope and have not provided the desired return on investment. 

We conducted interviews with more than 20 technology sector R&D center heads in China to identify what role the R&D center in China plays within the organization and the leadership requirements for success.

For multinational technology companies, if they haven’t set up their R&D facilities in China yet, the chances are that they will…but I have seen as many failures as successes so far.
- Vice President of Global Engineering/Greater China Engineering Lead, a leading IT company

The Role of the R&D Center in China and the Leadership Challenges

Multinational companies in China use the majority of their R&D budgets to fund product development and engineering activities. Only a small percentage of the budget and effort is dedicated to pure research. This is commonly known as “big D and small R.” When the first group of leading multinational companies set up their R&D facilities in China in the early or mid-1990s, they were motivated often by public and government relations considerations. These centers, sometimes referred to as “PR centers,” were given projects that had no apparent roadmap for product implementation. Over time, however, the existing and newly established facilities have evolved to take on more practical and important roles.

Respondents all noted that there are different types of R&D centers, each with a unique set of challenges. While our respondents each had their own definitions, we have divided the facilities into four categories based on the differences in scope: Extension Centers, Competence Centers, Product Centers and Research Centers.

Research Centers concentrate on truly ground-breaking innovations. Partly due to export control restrictions by foreign governments, very few facilities in China are exclusively engaged in research activities. There are usually significant product development efforts in these research labs. Our report therefore does not explore this area further.

Categorization of R&D Facilities

Type I. Extension Centers: Technical staff in this type of R&D facility typically act as an extension of core R&D teams located in other parts of the world. This is largely a cost play by the parent companies to perform relatively isolated and laborious functions, such as quality assurance, testing and maintenance, in a low-cost labor location. Many of the China R&D centers started in this category by providing a “localization” function targeting only the China market, i.e., double-byte Chinese language enablement, user interface translation, etc. Now, these organizations tend to perform such functions for all geographic regions. Cost, quality and on-time delivery are the overarching criteria of success for extension teams. These facilities require a limited amount of management integration with other parts of the business and have been relatively successful in hiring local talent as the head of R&D, who understands how to motivate local teams to deliver a very high-quality service.

Type II. Competence Centers: R&D centers in this category conduct relatively complete modules of the development process, typically including detailed design, coding and quality assurance. And, they possess technical expertise in specific functional areas or technologies, for example, in human interface (in hand-held devices), network management (in telecom equipment) or Linux development skills. The most critical success factor, in this case, lies in the ability of the leaders to establish and enhance these core competencies through the development of the local team to ensure sufficient critical mass and outstanding technological skills. The team needs a steady flow of projects, and consequently, many of the principals attach paramount importance to internal marketing and promotion. It is not uncommon for R&D heads in this category to spend more than 50 percent of their time on selling internally to ensure that the development team has the necessary pipeline of projects. The ability to build and leverage relationships locally and internationally is critical for the R&D leader to be successful.

Type III. Product Centers: R&D centers in the third category own the end-to-end life cycle of the product. The key difference versus a competence center is that the decisions regarding requirement analysis, functional definition and high-level design are performed locally in addition to other development activities. The business head responsible for this product is usually also located in China. Within some organizations, the head of the R&D facility is also the head of a business unit or product group. The product can be dedicated to China or for global consumption. The challenges for the development center leader, in this case, are understanding the customer and marketplace, and the ability to manage a large-scale development process.

It is important to note that R&D centers very rarely fit neatly into one definition; most combine a range of roles. For example, almost all the facilities that we visited had an “extension team,” performing testing for a range of products.

Three Types of Development Facilities

Reporting Structures

It is not unusual to have more than one product or business unit (BU), grouped together in a single location, funding multiple development teams in China. Most organizations take one of two approaches with regard to the location of the center and the reporting line of the local R&D leader.

The first approach, or “hoteling,” gives each development team manager a solid reporting line directly into the remote business unit for all business and people decisions, with the local R&D head performing an administrative function, including facility management and local relationship coordination.

The second approach, or “foster home,” gives each development team manager a solid reporting line to the local R&D head, in terms of hiring, staffing, promotion, training and all managerial functions, and a dotted reporting line to the business unit for project guidance. Essentially, the local leader becomes a business owner and service provider for the business unit.

Respondents acknowledged the advantages and disadvantages of both structures as outlined in the table below. Again, there is no right or wrong approach, and in a number of organizations, there are a combination of factors.

Foster Home Versus Hoteling

The Leadership Challenges and Core Competencies for Success

When we asked our respondents what were the critical factors for success, the answers were strikingly consistent. An in-depth understanding of the relevant technologies and industry as well as solid experience of managing development processes were considered prerequisites. In addition, they pointed to the following aspects:

Organizational savvy: Our respondents all agree that the most important factor for ongoing success is the leaders’ ability to win sustained support and sponsorship at the highest possible level within the broader organization. The principals need to understand how the headquarters work, know the key stakeholders, understand their respective business priorities, and the explicit and implicit processes of “getting things done” at headquarters. The leadership team then needs to aggregate and use this knowledge to build relationships and win support from the corporate executives as well as the heads of peer business units. For this reason, the current leaders of R&D centers in China are often longtime employees of the organization in the home country. But there are also some notable exceptions, in which successful leaders had little experience in the company prior to their current assignment. The common denominator of their success is the ability to develop strong relationships with a number of senior contacts and sponsors within the organization.

Correct positioning: The success of an R&D facility also hinges upon its leader’s ability to constantly define and redefine a clear positioning, i.e., to choose the technological and functional areas to focus upon, and build capability accordingly. Effective positioning requires a high level of business acumen, as it has to be based on a solid understanding of company strategy, product and technology trends, the legal and business restrictions, as well as the relative strengths of other R&D centers within the company.

Internal promotion and communication: The majority of R&D centers in China are funded to varying degrees by commercial business units. The level of funding is tied to the number and nature of projects that they receive. Consequently, R&D leaders need to proactively seek opportunities to promote their capabilities and success stories to potential stakeholders, e.g., corporate technologists and business unit leaders. Internal promotion is especially critical in the early stage of a facility but remains a crucial part of the R&D head’s job even after the business is established. One respondent reported spending up to 80 percent of his time on internal promotion in the early phase. A number of R&D heads in China now make a regular, often monthly, trip to Europe and the United States to meet with stakeholders in the head office.

Hands-on management and entrepreneurial approach: This is sometimes referred to as “flying at 30,000 feet and walking on the ground at the same time.” Running a newly established and fast-growing R&D center entails many detailed and mundane responsibilities. A successful R&D head needs to be equally effective at administrative tasks as at strategizing and influencing at a senior level. During the start-up stage, our respondents need to secure office space, deal with facility management,  recruit the first employees, establish management processes and typically lead the first project all at the same time. It is not a task for those comfortable only in well-structured and academic-like environments.

Drive for results and early wins: A number of our interviewees emphasized the importance of over-delivering in the early projects. When the off-shore development center is a few thousand miles away from the business units, the R&D heads need to go to extra lengths to establish the credibility that is vital to ensure a steady flow of future projects. Our respondents often personally manage the delivery of the first few projects to achieve early wins.

Hiring and recruitment: While universities in China produce large numbers of science and engineering graduates each year, the Chinese higher education system still places a lot of emphasis on theory memorization and test scores. University graduates and experienced hires in China are found to typically have less analytical rigor, less knowledge about methods and processes, and less practical business and project experience compared with their Western counterparts with comparable qualifications and experience. Their leadership and teamwork aptitudes are also less honed. As people are the most important asset of an R&D organization, successful leaders dedicate a huge amount of effort to the recruitment and retention of key individuals. All were heavily involved in the hiring of early employees and remain active in ongoing recruiting activities. In one case, our respondent personally interviewed all qualified candidates for the first 50 positions to be filled in China.

People development and cultural astuteness: The successful R&D leaders recognize the need to define people development goals in terms of not just technical skills but also managerial capability, communication skills and behavioral traits based on the strategic positioning of their facilities. They then focus on individual development through training sessions, talent cross-pollination, formal programs, constant coaching and feedback. Whether the leader can connect with his or her team to win their trust makes the ultimate difference between successful and unsuccessful people development. Terms like caring, understanding, embracing culture and personal charisma were often repeated by our respondents as key requirements for R&D heads. The leaders need to understand their team’s values, strengths and areas for development within their cultural context before they can come up with effective development programs. For example, a common observation is that Chinese developers tend to follow instructions and avoid risks. Once principals understand that such characteristics are a direct result of China’s test-centric education system, they find that they can often effectively teach innovation by developing award schemes, internal innovation showcases and bulletin boards to highlight achievements.

Process and procedures: As the majority of R&D facilities in China were set up less than five years ago, the commitment to people development must go hand in hand with world-class management procedures. Rather than addressing process and quality issues in a reactive and ad hoc manner, leaders of successful R&D centers tend to take methodical measures to establish best-of-breed management systems for development and quality control.

Conclusion: Russell Reynolds Associates’ Recommendations

One respondent noted that, “If your company hasn’t set up an R&D center in China, the chance is that it will do so very soon.” When a company is contemplating the set-up or expansion of its development facilities in China and the hiring of a new R&D leader, our study highlights a few important points for consideration.

• Conscious and clear positioning: Decide what type of center is most appropriate for the current stage of the business, based on a review of the company’s business strategy, the key stakeholders of this initiative and their motivation, as well as the market and talent situation in China. Understand the top three challenges the new facility will face.

• Competency-based hiring: Each of the above-mentioned characteristics of successful R&D leaders corresponds to a leadership competency. Look for candidates that best demonstrate the competencies that are relevant to the identified challenges. For example, if a company is to set up a “Competence Center,” it should seek individuals with strong track records of leading teams and delivering development projects. If a company is to build a Product Center, it needs someone with a much stronger vision and business leadership. But in both cases, strong evidence of building relationships and influencing skills as well as an entrepreneurial aptitude are critical, as you are hiring for a center that is far away from the business headquarters.

• Leadership induction and integration: Remember the most important challenge for the new leader will be to understand how the headquarters works and to build sponsorship at senior levels. The best investment that a company can make for the new leader is to help him or her integrate with the senior leadership team effectively. Having the principal working in the headquarters for a few months, to gain an exposure to its inner workings, has proven to be extremely important.

Appendix

Leadership Talent Perspective: Core Competencies of Successful Leaders

As a guideline, the following core competencies table may be useful: