ASIA FOCUS

R&D outsourcing

Manufacturing companies in Asia have access to local networks, which helps them integrate technologies and add more value for their outsourced customers.

Multinational companies (MNCs) are operating in an increasingly competitive marketplace. Rapid shifts in consumer preferences, the high rate of technical obsolescence and short product life cycles have forced them to cut costs, improve quality and shorten product development time.

These competitive pressures have transformed the R&D function into one of primary strategic importance. As a result, R&D management has become a key driver of business success.

- ollowing on the heels of the offshoring trend in manufacturing and assembly, MNCs over the past few years have outsourced progressively more strategic components of their operations, including design and R&D.

This has allowed them to focus their expertise and staff deployment on their core activities in sales and marketing. Issues relevant to this trend include:

- Why is there demand for outsourced R&D from Asia?

- What aspects of product development are being outsourced to Asia?

- How has supplying outsourced R&D helped Asian companies build competence?

The competitive advantages that have been associated with the recent trend of R&D outsourcing include improved time to market and time to volume (with product development times reduced by up to 30% to 40%), superior product differentiation and reduced product development costs and risks.

Recently, these trends have been increasingly manifested in the global high-tech industry. Benefits that are specific to this industry include cost savings coupled with high-quality outputs from the emerging markets' highly educated and skilled workforces. Furthermore, R&D outsourcing has enabled leaders in information technology to strengthen their process development expertise and develop new infrastructure, as well as supplier networks.

According to a survey by R&D Magazine in the United States, since 2002, multinationals have primarily outsourced the following aspects of product design and innovation:

- materials innovations;

- new product innovations;

- new process innovations;

- electronic design;

- component innovations;

- software design/development.

R&D rising. The trend to outsource R&D to lower-cost locales has been further magnified with the emergence of MNCs' global sourcing strategies, which have led to companies' establishing innovation and sourcing operations in multiple countries to serve multiple markets.

The world's leading technology vendors, such as Intel and Alcatel, have been assiduously increasing their R&D investments in emerging markets and leveraging these new product development bases to design new generations of high-tech components and infrastructure. Intel, for instance, has set up platform definition centres in India, China, Brazil and Egypt.

Leading technology companies have also recognised that markets in Asia need local developers that can produce specialised design for domestic users.

A new catch phrase, "the next billion customers", referring to the combined size of the emerging middle-class consumer segments in China and India, has been reverberating strongly across the global IT vendor community.

Indeed, the past few years have seen robust growth in the region's design and R&D capabilities. According to the Unesco Institute for Statistics 2005 Science Report, Asia's gross expenditure on R&D grew by about 4% between 1997 and 2002. During the same period, R&D expenditure in Europe and the US fell by approximately 1%.

In 2005, Asian R&D reached 38.7% of the global total, compared to North America's 37.5% and Europe's 23.8%. Increasingly, many western manufacturers - in product categories ranging from mobile handsets to digital cameras, MP3 players, laptops and high-definition TVs - are outsourcing the entire product design and manufacture to Asian R&D partners.

As illustrated in the previous chapter on building competence in product design, many local Asian companies that partnered with leading multinationals have managed to move up the value chain within the multinationals' ecosystems.

The alliances have enabled Asia's high-growth companies to further develop their expertise in custom design and manufacturing, customer service and project co-ordination.

Entering the R&D innovation cycle, their growing manufacturing competence produced process innovation, which in turn resulted in product innovation.

Furthermore, manufacturing companies in Asia have access to emerging indigenous R&D networks, such as local developers of peripheral technologies.

This helps them integrate technologies and therefore add more value to the customer of outsourced R&D.

Best practices emulated. As the global outsourcing trend in high-technology R&D intensifies, it is playing out not only in the advanced high-tech hubs such as Taiwan and South Korea, but increasingly in Asia's emerging manufacturing hot spots such as Vietnam.

In the near future, many new players in these countries' high-tech segments are likely to embark on a similar capability-building process for original design manufacturing (ODM).

In this globalised design and manufacturing landscape, where products can be defined everywhere and manufactured everywhere, what are some of the best practices that Asian companies can emulate among their peers?

Several of the high-growth Asian players interviewed by INSEAD have succeeded in creating and leveraging product platforms that they had established and proved, and on which they own the intellectual property.

The platforms have enabled Asian ODMs to scale up rapidly, thanks to supporting the definition and design of multiple products for different customers. At the same time, customers in effect share the cost of development with competition.

In addition, the proliferation of common platforms and design methodologies has been a powerful stimulus to the adoption of collaborative practices and process standardisation in global manufacturing.

Bangkok Post
Sunday February 11, 2007