Ge china technology center

GE CHINA TECHNOLOGY CENTER: EVOLVING ROLE IN GLOBAL INNOVATION

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In mid-2014, Dr. Xiangli Chen, general manager of the General Electric (GE) China Technology Center (CTC), and chief technology officer and vice president of GE China, had just been promoted to GE officer status and was thinking about the next stage of the CTC.

Located in Shanghai, the CTC was formed in 2000 to work with GE’s other research and development (R&D) centers so that it could bring technology breakthroughs and product innovations to the market. It was not only one of the biggest foreign-invested R&D centers in China, but also one of the few enterprise R&D centers with fundamental research capabilities and activities in the country. With its “In China for China” (ICFC) strategy that was initiated in 2008, the CTC specifically launched new projects for the Chinese market, rather than only adapting GE’s U.S. products to the Chinese market. It then disrupted the anti-cannibalization paradigm by bringing innovations for the mid-range market in China back to the developed countries like the United States.

Given the growing importance of China as a market, and as an R&D base, Chen had to consider a few important issues in order to maintain the growth of the CTC: what would the role of the CTC be in the long run? How would the CTC continue its role when China was strategically shifting from being the “world’s factory” to a global innovation powerhouse? How could the CTC effectively coordinate with other GE innovation centers in China and with the rest of the GE Global Research network? GE had been moving very quickly, as was China; Chen needed to act accordingly.

GE AND GLOBAL RESEARCH

Headquartered in the U.S. state of Connecticut, GE was formed in 1892 when the Edison Electric Light Company, which was established by incandescent lamp inventor Thomas Edison in 1878, merged with the Thomson-Houston Electric Company. It had been listed on the Dow Jones Industrial Index since 1896.

Jeffrey Immelt, who joined GE in 1982, became GE’s chief executive officer (CEO) in 2000 and chairman of the board in 2001. The company’s businesses covered financial services via GE Capital and the following industrial segments: power and water, energy management, oil and gas, aviation, healthcare, transportation, appliances and lighting. As one of the largest employers in the United States and in the world, it had more than 300,000 employees working in over 100 countries, with over 10,000 employees who worked in China. In 2013, GE had total assets of US$654 billion, of which 50 per cent were based in the United States.1 It generated revenues of $146 billion, net earnings of $13 billion (see Exhibit 1) and 47 per cent of its revenues came from the United States (versus 70 per cent in 2002).

GE had a proven track record of innovation in many scientific disciplines and business areas and had obtained thousands of patents. Its scientists won two Nobel prizes. In 2012, Forbes named GE one of the world’s most innovative companies. In 2013, the company spent $5.4 billion on R&D (see Exhibit 1).

GE Global Research,2 headquartered on a 550-acre3 site in Niskayuna, New York, was one of the world’s largest and most diversified industrial research organizations. It was positioned to be the growth engine of the company by striving to drive technological breakthroughs and working with business units to introduce new technologies into the product pipeline. In addition to fundamental scientific disciplines such as aero- thermal and mechanical systems, chemical engineering, electrical technologies, materials technologies and software sciences and analytics, it focused on innovating in leading-edge areas such as molecular imaging and diagnostics, energy conversion, nanotechnology, advanced propulsion, organic electronics, security and sustainable energy. GE Global Research used about one-tenth of GE’s total R&D expenditure for fundamental research that was not tied to any specific requests made by the business units, while business units split the remaining budget for their own applied research and product development.

GE IN CHINA AND THE ESTABLISHMENT OF THE CTC

After starting to trade with China in 1906, GE became the first foreign multinational company (MNC) that conducted manufacturing activities in China. In 1979, the year after the advent of China’s open door policy, GE revived its operations in the country and started to develop its technologies in China.

In 1999, GE Global Research set up its first overseas technology center in Bangalore, India. The main reason for using this location was that Jack Welch, the former CEO and chairman of the board of GE, who had initiated globalization, was very impressed by the low-cost talent there and was attracted to the country’s outsourcing potential. In 1999, China spent 0.76 per cent of its gross domestic product (GDP) on R&D, while India spent 0.71 per cent.4 At that time, even though the Chinese government had encouraged foreign MNCs to set up R&D centers in China, most of these centers did not actively carry out fundamental research due to concerns about the lack of an innovation infrastructure, weak intellectual property protection and the lack of experienced scientists. Siemens founded a small R&D center in Beijing a year earlier, while Philips was planning to set one up in Shanghai the following year.

Chen believed that GE should also set up a technology center in China. He saw the market potential of China and the benefits of having a local technology center, such as the opportunity to cooperate with local government, universities and research institutes. He gained support from several pro-China colleagues, including the head of GE China, and then volunteered to perform the due diligence and to investigate the feasibility and benefits of such a center. He talked to many colleagues and went to China to speak with numerous people who ran R&D centers there. With enthusiasm and determination, his task force was able to convince the top management to approve a small investment of $200,000. Chen reflected, “At that time, the focus was on India. But I asked the business units whether they thought the availability of technical talent in China would help them grow. Based on their positive response, I asked the top management to let me try, even with a small budget.”

In 2000, Chen was relocated back to Shanghai to establish the CTC in order to conduct technology research, develop new products and support manufacturing and sourcing. As the most cosmopolitan city in China, Shanghai had the highest number of foreign R&D labs in the country and also had a relatively good talent pool. The CTC rented space in Caohejing Hi-Tech Park. Building a capable local team was challenging for Chen, and initially, he was given a team of only 10 people. According to a McKinsey report:5

China has 1.6 million young ones, more than any other country we examined. Indeed, 33 per cent of the university students in China study engineering, compared with 20 percent in Germany and just 4 per cent in India. But the main drawback of Chinese applicants for engineering jobs, our interviewees said, is the educational system’s bias toward theory. Compared with engineering graduates in Europe and North America, who work in teams to achieve practical solutions, Chinese students get little practical experience in projects or teamwork. The result of these differences is that China’s pool of young engineers considered suitable for work in multinationals is just 160,000 [people] — no larger than the United Kingdom’s. Hence the paradox of shortages amidst plenty.

Chen realized that, although China had a large supply of technical talent, most of these individuals lacked global communications skills. Thus, Chen had to relocate a few experienced colleagues from the GE Global Research headquarters and hire Chinese returnees. He also had to train new local recruits, who were either engineers from related industries or fresh graduates, by assigning them to international project teams.

At the initial stage, the priority for the CTC was to solve the specific local technology problems and support local businesses to develop products and suppliers. In 2001, Immelt, who was the CEO of GE Healthcare and who had successfully developed business in China, became GE’s chairman of the board. He aimed to develop multiple businesses in China. In support of the development of the CTC, Immelt invested in building facilities for the CTC. In late 2002, Michael Idelchik, who joined GE in 1978, took the role of managing director of the CTC. A few months later, Chen also moved to GE Healthcare China in Beijing to focus on developing new products for this business unit. In May 2003, the CTC’s own facility, a 47,000 square meter (m2) premises at Zhangjiang Hi-Tech Park in Pudong, was inaugurated.6 In 2004, Idelchik left, and Bijan Dorri, who joined GE Global Research in 1983, took over.

At the CTC, each R&D employee needed to report to multiple leaders: the head of the CTC, the global technology leader, who coordinated various laboratories for that technology and the leader of a special project that involved product development staff working in a business unit. In addition, scientists and engineers from the headquarters would come to the CTC on assignments to collaborate with the CTC. Their contribution was not immediate, however, because they needed to first understand the differences between the environments in the United States and China — such as the workflow in hospitals. Chen stated:

It’s only when you know the value-creation process well, [that] you can localize by changing the design and qualifying the supplier, etc. For example, the difference between wind speed in the [United States], and that in China, has a huge impact on the product design of our wind turbine.

ICFC STRATEGY
The CTC’s New Leadership

In August 2007, Chen rejoined the CTC to head up its operations, replacing Dorri. At that time, China’s central government had just announced that R&D was the country’s top priority, with a focus on areas such as energy, environmental protection, healthcare and transportation. In 2007, China’s R&D expenditure increased to CNY¥371 billion — 1.4 per cent of its GDP (versus ¥68 billion, 0.76 per cent of its GDP, in 1999). Chen noted:

I realized that China had become a good place for innovation, particularly in the healthcare industry. Healthcare innovation depends on user experiences and customer demands that are so different between developed countries and emerging markets. Immelt supported GE Healthcare China to develop new products suitable for the Chinese market.

To benefit from economies of scale and to start localizing, GE adapted its products that were designed for developed markets to China. The CTC, together with the business unit’s development staff, used a “partial re-design” approach to incrementally modify these upscale products. It typically took two to three years to complete a local development cycle.

However, local Chinese competitors were growing very fast and they were quickly moving up from the low-end market to the mid-range segment. Chen, and other senior executives in GE China, realized that the CTC had to originate projects that specifically met China’s unique needs as a means of speeding up its penetration. Yet, GE headquarters had never given real consideration to budgeting for China, partly because revenue generated from China was still relatively small to GE (less than 4 per cent). They did not see the immediate payoff of innovating “down” or “differently” for the low-end segments, and they worried about potential cannibalization. Nonetheless, Chen and several other executives at GE China decided to collectively approach Immelt to obtain his support. They proposed the initiation of ICFC R&D projects and received Immelt’s special funding of $15 million for 25 projects in the first year.

Project teams, however, faced various challenges. For example, initial products, developed from projects that were typically led by engineers and salesmen, did not sell well because these products were still too expensive in China. To solve this problem, the business unit adjusted the price and distribution channel. To ensure that the team understood the business unit’s marketing roadmap and customer needs, the CTC invited a product manager from a relevant business unit to join each project team, as well as to sell the innovative products back to headquarters. After implementing this solution, the CTC executed the ICFC strategy smoothly and continued to receive additional funding for more projects. Skeptical people also came on board in regard to this strategy. The CTC began to play a key role in working with business units in China and in developing goods and services that could meet the unique needs of this market.

Healthcare as an Example

History of GE Healthcare and Its China Operations

GE’s involvement in healthcare started in 1896, when Elihu Thomson built electrical equipment to produce X- rays, which manufactured images for diagnosing bone fractures and locating foreign objects in the body. X-ray technology was discovered and introduced only a year earlier.7 The company established GE Healthcare,8 headquartered in the United Kingdom, to provide medical technologies and services, including medical imaging and information technologies, medical diagnostics, patient monitoring systems, drug discovery, biopharmaceutical manufacturing technologies and performance improvement solutions. With more than 50,000 employees (by the end of 2014), GE Healthcare had sold its products to hospitals, medical facilities, pharmaceutical and biotechnological companies as well as life sciences research institutes worldwide.

In 1991, GE set up a joint venture, GE Hangwei Medical Systems, in Beijing to start manufacturing in the country. GE created two more joint ventures in 1996, and later combined these two with GE Hangwei to form GE Healthcare China. Its primary sectors included medical imaging, which covered ultrasound equipment9 and more technologically advanced equipment, such as X-ray, magnetic resonance imaging (MRI), computed tomography (CT) and positron emission tomography (PET). Its main customers were sophisticated hospitals in major cities.

In 2000, GE Healthcare China established an applied R&D and manufacturing base in Wuxi, Jiangsu Province, to develop and produce affordable ultrasound products. In 2001, by using the latest technologies developed at GE Global Research, it launched its first compact ultrasound product,10 the LOGIQ Book. This product was 30 to 40 per cent less expensive than the traditional console-type devices. Using the country’s low-cost advantage, the Wuxi plant started to manufacture the product and then export a significant portion of its production. In 2003, 80 per cent of the products made in Wuxi were exported.

In 2006, China’s total expenditure on healthcare was 4.6 per cent of its GDP, versus 15.9 per cent in the United States, and its total expenditure on healthcare per capita was $213, versus $7,110 (see Exhibit 2). Most of the hospitals and clinics in China were still poorly funded and equipped. However, there was market potential due to rising incomes, an aging population, increasing health consciousness and augmenting government expenditure. Domestic consumption of GE products made in Wuxi increased from 20 per cent in 2003 to 35 per cent in 2006.

GE Healthcare’s main competitors were Siemens Healthcare, Philips Healthcare and Toshiba Medical Systems. In 2006, these four players had a combined share of over 60 per cent of the high-end medical equipment market in China. Other foreign companies, such as Varian Medical Systems, Hitachi Medical Systems and Carestream Health, were niche players in several product categories.

Challenges from local Chinese competitors were also growing. Among them, Mindray Medical International Ltd. (Mindray) was the market leader for black-and-white scanners (see Exhibit 3). In 2006, Mindray launched its first color ultrasound scanner to target the mid-range market and was listed on the New York Stock Exchange. That same year, it made net revenues and a net income of $194 million and $46 million, respectively, growing at a five-year compound annual growth rate (CAGR) of 50 per cent and 58 per cent, respectively.

Of its net revenue, 49 per cent came from over 140 overseas countries, including growth markets that GE also targeted. Mindray had 30 per cent of its net revenue generated from the medical imaging sector that GE focused on. The company spent $19 million (10 per cent of its net revenue) on R&D (see Exhibit 4). Using an extensive network of third-party distributors in both urban and rural areas, Mindray sold medical devices to approximately 27,000 community hospitals and clinics in China.11 It also established service centers in every province to provide training as well as prompt, low-price repair and maintenance services. In contrast, GE’s third-party distributors were located primarily in large cities and provided limited after-sales services.

Moving Down the Pyramid and Reversing Innovation

In 2008, inaugurating its China headquarters next to the CTC in Zhangjiang Hi-Tech Park, GE focused on healthcare, energy and aviation in the country. The CTC started to develop technologies that helped GE Healthcare China target the mid-range market (see Exhibit 5). Historically, GE sought choices and precision when developing products. Using the ultrasound scanner as an example, GE tended to upgrade product performance by adding imaging modes, increasing picture resolution, specializing probes12 and improving ergonomics. The China project team made a great effort to understand customer needs by regularly visiting community hospitals and clinics, talking with administrators and doctors as well as observing their workflow. From these visits, the team realized that many of the features were not relevant to these healthcare institutes, which were often overloaded with patients and had limited space or were in remote locations. Instead, these customers preferred products that were affordable, compact, portable, easy to use and durable.