China enters the innovation zone
24 September 2009
As four-letter acronyms go, HTDZ perhaps isn’t one that trips off the tongue quite as readily as say HTML, or NASA, but in the context of China’s future growth into a global economic and technological powerhouse, it could well be one that becomes a household term, or at least in the vocabulary of economic commentators.
China’s government has pinned many of the nation’s hopes for industrial transformation on its electronics and IT industries. In this respect, and on the surface at least, it appears to have backed a winner. China's US$753 billion electronics industry is already the world's largest cell phone, computer, and TV market, and has the second largest number of Internet users.
Exports of high-tech products account for nearly 30% of China's total exports. However, the government is not content, as added value is not as high as they’d like and the domestic electronics and IT industries are big but arguably need to be stronger; further, more of its companies need to compete internationally, and not just a select few, like Lenovo.
China’s National Development and Reform Commission has a stated aim to shift the country’s economy away from high-volume, low-end manufacturing base for exports and transform itself into an ‘innovation nation’. The goal is for domestic electronics and IT companies to come up with original ideas and to build their own branded products to exacting specifications that will compete in world markets. China’s companies are being encouraged to integrate into the global electronics supply chain by accelerating their product differentiation, design and product optimisation techniques.
They face huge challenges in doing so; apart from looking for leading technologies and strategic partnerships from overseas companies, they are also keenly promoting local innovation.
The government has stressed the importance of R&D as a key tool to transform its economy. China’s investment in R&D already ranks among the world's top five countries, at around 1.5% of GDP. Along with expedited technological innovation, investment structure has been further optimised.
Some of China’s economic ‘success’ so far can be partly attributed to the central government’s policy of establishing Investment Zones (IZs). In return for investment in China, foreign companies have received benefits such as generous tax holidays and discounts on rents of operating facilities, and access to cheap labour. Looking at China’s economy today, we can safely assume that the zones have succeeded in their aims to attract foreign investment, currency and jobs to China.
In fact, outsiders may argue that the China government went a little bit ‘zone crazy’ in its quest for economic progress. It appears that the Government has a zone for virtually everything: Special Economic Zones (SEZs); Economic and Technological Development Zones (ETDZs); Free-Trade Zones (FTZs); Export Processing Zones (EPZs); and, driving the electronics industry, the High Tech Development Zones (HTDZs) mentioned at the start of this piece.
China’s admission to the World Trade Organisation (WTO) has lessened the significance of some IZs due to the reduction of tariffs and other non-tariff barriers in the rest of China. However, this will far from spell the end of IZs, as they are typically well situated geographically to carry out international trade and will continue to offer superior infrastructure and facilities.
A WTO requirement states that local or foreign enterprises must operate under the same set of rules. For example, China’s draft ‘Unified Tax Laws’ indicate that a flat tax rate (between 25% to 28%) will be applied nationally, making no distinction between foreign enterprises and domestic firms.
However, these changes will have little impact on the electronics and IT industries or the HTDZs that they are located within. WTO rules still allow tax breaks if the operation is designated for industrial R&D activities which promote competition.
One IZ that is benefiting from these recent developments is the Xi'an High Tech Industrial Development Zone. Xi’an is the capital of Shaanxi province and is best known as the home of the world famous Terracotta Warriors. Its most recent claim to fame surrounds Xi’an’s HTDZ’s contribution to the development of the control systems used in the China's first manned spacecraft, the Shenzhou.
The Xi’an HTDZ was established and approved by the State Council under the guidance of the Chinese Ministry of Science and Technology (or ‘MOST’, if you’re not quite yet tired of the acronyms) back in 1991, and today it is a R&D hotbed for both domestic and foreign companies. The sprawling Xi'an HTDZ is home to about 12,000 companies; notably, of these, the largest proportion are R&D and design companies.
The focus of the HTDZ is on industries such as electronics and IT, along with equipment manufacturing and on industrial clusters that rely upon competitive advantages, such as ICs, software, communications, electronic components, optical-mechanical-electronic integration equipment, automotive (including electric vehicles), and aviation and space applications.
One of Xi'an HTDZ’s goals is to develop a 'headquarters economy' by positioning the zone as an attractive alternative for multinational companies and high-growth enterprises to set up regional headquarters for R&D, testing and administration. The administrators of the HTDZ have been tasked with increasing domestic participants' visibility and competitiveness while drawing more multinationals into the fold. They appear to be succeeding.
Applied Materials Inc. has invested $300 million in its Solar Energy R&D-Centre-Construction Project in Xi’an, which will be the world's most advanced and largest solar energy R&D centre. Applied Materials also has its 32-nanometer equipment under test in Xi’an, making it the first time that the company has developed such equipment outside the United States.
Infineon and Qimonda have both established IC design centers in Xi'an, Micron Semiconductor has a package testing facility there, while Nvidia has an R&D centre in the works. Large domestic players such as ZTE and Huawei also have a presence.
Additionally, NEC is expanding its Xi'an Software Development Base to become a R&D centre of global importance to the company, Amphenol has a $50 million investment in a joint venture project in Xi’an, and German drive automation company SEW-Eurodrive has finished the planning and design phases for a facility there.
From a national perspective though, Xi'an HTDZ’s success doesn’t come cheap. It spends around US$117 million annually on supporting its resident companies by funnelling tax revenue back into activities such as staff training, attracting further investment and promotion and marketing.
Xi'an's inland geographic location is isolated from the global markets that its resident companies serve. But, on the upside, the region has a deep talent pool and extensive R&D resources, both of which contribute to the area being home to more than 50 national laboratories, engineering research centres, and electronics and information technology research institutes, as well as 672 scientific institutions, and more than 30 electronics and information technology-related universities.
It should be noted that as one of 53 HTDZs, Xi’an enjoys exceptional success, but that this hasn’t been shared by all of the other zone projects. Many HTDZs were located in existing university precincts and, due to limited space, companies saw little scope to expand and develop operating facilities. This made these HTDZs decidedly less attractive, which in turn led to a number of low-tech foreign enterprises being allowed to operate, a compromise that not only fails to achieve the intended function of the zones, but also runs counter to the government’s stated desire to move China up the electronics supply chain away from low tech industries.
When we consider the strides that China has made in the past 30 years, and despite setbacks and having to readjust to address prevailing economic conditions, there’s one thing that can be predicted with almost certainty. China will reach its long term goal of transforming its electronics and IT industries and become an ‘innovation nation’ in the not too distant future.
TTFN.
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