PA Consulting: Manufacturing R&D moving to China

03 June 2015

Emerging markets are gaining considerable traction in terms of attracting the R&D investment dollar, with nearly 40% of high-tech and 43% of automotive R&D to occur in emerging markets by 2025, a survey from PA Consulting finds. Especially China is seen as very appealing. However, while big players (>€5 billion) are making the move to emerging markets to take advantage of their know-how and proximity to growing markets, small players (<€1 billion) are less likely to make the move.

In a recent survey from PA Consulting and the ESB Business School*, titled ‘Innovation for peak performance’, the authors seek to determine the key components of a successful innovation strategy in engineering intensive industries. The survey involved 61 participants from 4 industries, with respondents from automotive 17%, consumer goods 22%, high-tech 26% and mechanical engineering 35%. Most of the respondents came from Europe (83%), with Germany providing 38% of respondents and the UK 17%. Over a third (36%) of those surveyed has revenues of more than €5 billion and 25% have less than a billion.

Participants by country

Emerging R&D investment
The survey results show that the R&D footprint, in terms of investment, is set to shift away from developed markets towards emerging markets. High-tech and mechanical engineering companies particularly are likely to see major demographic shifts in terms of their local activity – with high-tech increasing its emerging market presence by 20%, while mechanical engineering will increase its emerging market share by 18%. The automotive industry will see the smallest gain in changing R&D investment, up from 21% to 29%.

Global R&D Investment Distribution - Today and 2025

Motivating R&D relocation
The biggest motivation for companies making R&D investment allocations – on average – is the proximity to market, followed by access to know-how, with cost reduction coming in third. Among top players, ranked highest in the new product vs. revenue spend per industry, access to know-how is by far the most important, followed by proximity to market, with cost reduction a close third.

Drivers and motivation for R&D investment allocation

With a breakdown of the movement of investment to emerging markets in terms of respondents by revenue size, a considerable disparity occurs between those of revenue of <€1 billion (small players) and those with revenue of more than €5 billion (big players).

Only 11% of those of less than a billion expecting to move their R&D activity to emerging markets while those between €1 – €5 billion expand their emerging market share by 20%, with potential consequences of further from the market and production, and those with revenue of more than five billion by 19%.

Global R&D investment distribution - Today and 2025

The Chinese development
In term of countries set to see the largest allocation of new R&D investment, China is set to enjoy massive growth over the coming years, with 70% of respondents ranking China as the country where the highest growth in R&D investment might occur. This compares to 16% ranking the US and 16% Europe. Africa, while an emerging market, has the smallest share of respondents ranking the area – at 4%. India too remains relatively unattractively ranked, with 19% of respondents indicating it as a place for growth in R&D investment.

Respondents ranking R&D growth potential

* The ESB Business School is the business school of Reutlingen University in Baden-Württemberg, Germany.