You might have noticed a big moving van with the words "China" parked outside some U.S. companies these days.
Growing numbers of U.S. and other foreign firms are shifting key operations to China — including R&D centers, regional offices and other corporate units. The list includes tech, drug and bank giants.
The idea is to move some key facilities and activities to take full advantage of what analysts say will be the world's largest and fastest- growing consumer market. Firms also want to tap China's lower cost base and the rising expertise of Chinese scientists and engineers.
Chinese employees work at a Hewlett-Packard call center in Dalian, China, in 2007. Growing numbers of U.S. and other foreign firms are shifting key...View Enlarged Image
"It's a question of moving from supply to demand," said Keith Rabin, a New York-based Asia business consultant. "China used to be a supply platform where U.S. companies made things to ship back here. Now, the (real) demand is in China. U.S. companies without a China distribution presence are going to miss the boat."
Tom Manning, a Hong Kong-based private equity adviser, predicts Western companies might be doing a third to half of their R&D in China in 10 years as confidence in the country's economy and talent base grows.
"I think we're likely to see China mushroom as a haven for Western R&D investment," he said.
Drugmakers Dive In
Some U.S. and foreign drug giants have already made the move.
New York-based Pfizer (PFE) said last month it's expanding R&D operations in Wuhan, China. At the same time, it's closing a big R&D center in New London, Conn., and consolidating research at its Groton, Conn., lab. Pfizer is also sharply expanding its R&D facility in Shanghai and raising drug output in Dalian, in Liaoning Province.
Britain's AstraZeneca (AZN) said in late November that it's moving all British production of "active pharmaceutical ingredients" to China.
Swiss drugmaker Novartis (NVS) said Nov. 3 it's investing $1 billion in Shanghai to build what's billed as China's largest pharmaceutical research plant. Novartis also is investing $250 million in a second R&D and drug production facility in Changshu, in eastern China.
Microsoft (MSFT), Google (GOOG), Motorola (MOT) and other U.S. tech leaders already run large R&D centers in China. Big U.S. tech firms will likely keep expanding their China-based research.
The main reason to shift some operations to China is because the nation's middle class of 300 million already matches the entire U.S. population in size. If an annual income of at least $9,000 is considered middle class in China, then it could double to more than 600 million by 2015, according to the official People's Daily Online.
Chinese are on track to buy more cars this year than Americans for the first time ever. They're also buying more desktop PCs.
This is a huge concentration of buying power that few companies outside China can afford to miss.
Skilled, Cheap Labor
Salaries, wages and other operating costs also are lower in China. Like India, which has become a center for tech outsourcing, some U.S. firms will find it cost-effective to move some operations to China. Example: Researchers and Chinese officials say the cost of doing drug trials in China is one-tenth what it is in the U.S.
Matt Adler, a China M&A specialist, says U.S. firms can also hire Ph.D.s in China at one-tenth of what they cost in the U.S.
"It's the kind of technical development that can be done by highly skilled engineers regardless of what language they speak," said Adler, who founded global law firm DLA Piper's Beijing office and now works in its corporate and securities practice in Seattle.
He says the shift of R&D to China involves both U.S. firms opening their own facilities and Chinese firms doing outsourced work for U.S. clients.
Chinese outsourcers are growing quickly by doing R&D for U.S. software and drug firms, Adler says. He cites VanceInfo Technologies (VIT), a Beijing-based provider of outsourced software research that does contract work for Microsoft. Another is WuXi Pharma-Tech (WX), a Cayman Islands provider of outsourced drug research with U.S. and China facilities.
Real estate is also relatively cheap in China vs. more advanced nations. Though commercial property prices have surged in cities such as Beijing, property in prime economic areas near major cities is still cheaper than similar U.S. locales.
There is some growing concern about a property bubble in some cities as China's economy gathers steam and speculation rises.
But, for now, it's still cheaper for Western firms to launch factories, offices and other centers, though China's government curbs foreign property ownership.
Expanding R&D and joint manufacturing in China also makes it easier for U.S. companies to develop products and services aimed at Chinese consumers. U.S. tech and drug firms do this by hiring Chinese staffers who have a homegrown sense of what local consumers want.
Officials estimate about 600,000 engineers graduate from Chinese universities each year, more than any other country in the world.
The upshot is China teems with graduates in computer science, robotics, genetic engineering and other fields. U.S. companies want to move closer to tapping this talent by opening research centers in China.
Returning Home?
More U.S.-trained Chinese scientists at U.S. labs also are returning home, soured by a recession here and China's growing prosperity.
China's government is wooing many top Chinese-born scientists from the U.S. with relocation allowances up to $146,000 and annual salaries of $250,000, the Christian Science Monitor reported in May.
China's economy also is exerting a magnetic pull on the Asia-based operations of U.S. and foreign multinationals. Many are relocating regional headquarters from other Pacific Rim cities — including Singapore and Sydney — to Shanghai and Beijing to be closer to the action in China.
The mass relocation of Asian regional HQs to China began early this decade and is expected to accelerate.
Wal-Mart (WMT), for example, opened an Asian regional head office in Hong Kong in September 2008. It oversees the global retailer's business in Japan, India and China.
HSBC (HBC), Europe's largest bank with a long-standing Asia presence, said in November it's creating a dual headquarters in Hong Kong and London to stress the importance it places on China and the rest of Asia.
Dozens of other multinationals are opening regional headquarters in Shanghai and Beijing.
This shift of U.S. corporate facilities and other assets to China does have its potential downside, watchers say. Rising Chinese nationalism, and the government's sometimes-fickle stance toward foreign investments, might deter or even derail these plans. Outside firms might think twice if trade frictions escalate between the U.S. and China.
One negative scenario involves China retaliating on a large scale vs. local operations of U.S. companies if Washington moves against Chinese firms active in the U.S.
U.S. tech firms must also be careful about doing research that has a defense or national security angle in China, lest such research fall into the hands of the Chinese military.
Another issue is U.S. regulatory approval of drugs developed and produced in China. Assuming that drugs made in China are exported back to the U.S., it's unclear how the Food and Drug Administration will certify that these products are safe.
The U.S. government is working with Chinese officials to let quality testers in China certify the safety of food and drugs exported to the U.S. But then-Health and Human Services Secretary Michael Leavitt said in 2008 that the plan will take "years" to implement.
By DOUG TSURUOKA, INVESTOR'S BUSINESS DAILY