China R&D Overview

June 2013

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CHINA OVERVIEW
China is rapidly evolving in its R&D globalization journey and is competing head on with other emerging nation
MNC R&D Landscape in China Year on Year Cost Savings by China R&D Centers (USD Billion)

Parameter MNC R&D Globalization Market Market Growth Since FY 2009 Total Number of MNCs # of Top 1,000 Global R&D Spenders Total Number of MNC Centers

China US $7.65 Billion 15.9% 1,046

FY 2010 9.3 Net Saving ~USD 28 Bn FY 2011 10.6

342 1,300

Total MNC R&D Talent Pool

R&D Suitable Fresh Talent Pool Average Cost/ Person/ Year

~152,000
~56,000 ~US $50,400

FY 2009

8.3

10

15

20

China is generating significant cost savings to the Head quarters

Note: *MSA Metropolitan Statistical Area Source: Doing Business in Chengdu; Invest in Chengdu government website; Government of Chengdu. 2011-05-13. Retrieved 2012-03-16; Government of Suzhou. 2011-03-18. Retrieved 2012-03-18; Doing business in Suzhou

Zinnov

CHINA OVERVIEW
The growth of MNC R&D centers in China has been phenomenal in the last decade
MNC R&D Centers* in China (till 2011)

1,400 1,200 1,000 800 600 400 200 0 363 199

2011 1046 MNCs 1300 R&D Centers

266 904 163 629

275 1,100

1,300

300 250 200

138

196

200 150 100 50 0

Before '00 01-'02 03-'04 Total Number of MNC R&D Centers (till March 2011)

05-'06 07-'08 09-'11 Number of New MNC R&D Centers (till March 2011)

Microsoft, Fujitsu, Ericsson, Intel, Nortel

Samsung, Motorola, Panasonic, Toshiba, TI

Cisco, Broadcom, IBM, Electrolux, Logitech

nVidia, EMC, Nokia, Kronos, McAfee

ARM, British Telecom, SanDisk, Avaya

Yahoo, BMW, Eli Lilly, Foxconn, Esri

Of the Fortune 500 companies worldwide, over 400 already have R&D centers in China

Note: *A company can have more than one R&D centers Source: Economist Intelligence Unit (EIU); Ministry of Commerce (MOFCOM), China, Newspaper Articles; Talent Neuron Analysis

Zinnov

CHINA OVERVIEW
Manufacturing vertical is the single largest contributor towards offshore R&D to China, followed by semiconductor, software and telecom
Vertical Wise Split of MNC R&D Centers
30% 25% 20% 16% 15% 10% 5% 0%
Manufacturing* Semiconductor Software Telecom Chemicals FMCG Computer Hardware Others**
2011 1046 MNCs 1300 R&D Centers

27% 24% 2008 2011

16% 16% 14% 14% 13% 8% 8% 5% 5% 4% 4% 13% 13%

China is increasingly becoming an R&D destination for many of the auto OEMs such as Audi, Toyota, Volvo, because of the fact that it is one of the biggest market for these OEMs presently
R&D in new technology areas such as Cloud, Mobile/ Telecom and Internet/ e-commerce is prevalent due to a large market, access to potential customers and increased government support More and more Pharma Giants (like Pfizer, Novartis etc.) are increasingly expanding their R&D base in China . 15 of the top Pharma giants have expanded presence in China lately
Note: *Manufacturing includes Automotive, Aerospace & Defense, Industrial & Electronic Equipment ; ** Others include Pharmaceuticals, Construction & Materials, Energy, Zinnov Biotechnology, Media & Entertainment, etc. Source: Ministry of Commerce (MOFCOM), China, Newspaper Articles; Talent Neuron Analysis

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CHINA OVERVIEW
China is witnessing rapid expansion of secondary locations as these are increasingly becoming viable for MNCs and domestic companies to set up their R&D centers
Growth Drivers for Emergence of Tier-2 Cities
Tier-1 locations Established secondary locations Emerging secondary locations Cost arbitrage over tier-1 Cities Improved R&D infrastructure Improved rail-road connectivity Rapid pace of China urbanization Economic & cultural development Availability of talent pool Incentives by the local governments 20-30% difference in salaries. Cost of living very high in Beijing, Shanghai Suzhou and Chengdu have one of the largest high tech parks in China China has the worlds longest High speed rail (HSR), Wuhan-Guangzhou HSR etc. Huge sums of money being invested in Tier - II cities to urbanize the population Suzhou is the second biggest industrial city after Shanghai
Beijing Dalian Tianjin

IT

China
Telecom

Suzhou Nanjing

Some Tier-II cities have good Universities. More Xian talent is migrating into these cities Electronics In addition to the waiver of Corporate taxes, Local taxes (about 3%) are exempted For the companies which already have centers in Tier I cities, further increase might not be sustainable. Hence, more companies are looking to scale in Tier II cities
Chengdu

Electronics
Shanghai Hangzhou Xiamen

Wuhan

Wuxi

Chongqing

Fuzhou

Software
Guangzhou

Scalability

Shenzhen

Infocomm
Zinnov 11

Note: This is generic to the technology sector. We will provide the specific details for online technology companies in the final report Source: Ministry of Commerce (MOFCOM), China Primary Interviews, Company web sites and press releases, News Articles, Talent Neuron Analysis

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CHINA OVERVIEW
Tier - II cities in China are going out of their way to develop infrastructure, incubate start-up companies and provide incentives to attract more hi-tech companies
Rapid Infrastructure Growth
There is a rapid infrastructure growth in all cities across China. In future, moving around in China will get better and faster. Tier I and tier II cities are connected by high speed rail links and expressways, which has reduced the travel time drastically

Theme Based Focus

Certain Tier - II cities are planning their center of excellence. For example, Wuxi is focusing on Nanotech, Shenzhen in Gene Research, Nanjing on Clean tech, etc. This provides a lot of planning capability for companies to go to areas of excellence

Energy Advantage
Tier - II cities have gone all way out to use solar power and other forms of renewable energy. They are preparing well for future energy requirements. A solar panel is visible in every lamp post and home in a Tier - II city

Reduction in IP related concerns Other Drivers

Intellectual property-related concerns have reduced among the MNCs once they move long-term employees of Chinese origin back to China

Incentives for Headquarter Enterprises

The Suzhou and Chengdu municipal governments recently released investment incentives to speed up the economic growth of headquarter enterprises in the city. The objective is to get more than 200 qualified and competent headquarter enterprises to set up business operations in the cities by 2015

Rapidly Incubating Startup Ecosystems

The cities are going out of their way to incubate startup companies. Nanjing, for example, provides grant of 10 million RMB for the right kind of startups. Suzhou government provides incentives for start-up companies, headquartered in Suzhou. The aspiration is very high

Note: Source: Ministry of Science and Technology (MOST), China, Ministry of Commerce (MOFCOM), China Primary Interviews, press releases, News Articles, Talent Neuron Analysis Zinnov

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CHINA OVERVIEW
The government has come up with visionary policies and plans to promote R&D activities in tier II cities
Achieved goals in the 11th 5 year plan
Stepping up the development of manufacturing industry

Projected outcomes in the 12th 5 year plan

To develop seven new strategic industries with favorable policies focusing on innovation led growth

Leveraging new technologies to develop Chinas indigenous brands with proprietary IPRs

Successful implementation of the National Patent Development Strategy

Priority given to 11 major sectors through Sci.-Tech Development Guidelines to encourage innovation

Cultivation of human resources via the deployment of National Talent Development Plan

Developing tier-II cities in terms of R&D, giving incentives to companies which set up centers there

To improve the IPR landscape by the introduction of National campaigns against IPR infringement activities

5 National S&T* programs engulfed 2,500 projects in 2010 with a sum worth RMB 40 billion 56 National High Tech parks churned out a combined revenue of RMB 10.6 Trillion in 2010

Strategic S&T* focus of the Chinese government

Focus on scientific development, environment and energy efficiency Concentration of R&D centers from similar industries in key strategic locations Replicating success of tier -1 cities like Shanghai in tier-2 cities like Suzhou, Chengdu, etc.

Note: S&T *Science and Tehnology Source: Ministry of Science and Technology (MOST), China, Primary Interviews, Company web sites and press releases, News Articles, Talent Neuron Analysis

Zinnov

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CHINA OVERVIEW

Country Overview

Providing assistance to MNC R&D centers in the form of tax benefits and financial incentives has been a key functional feature of the government

Income Tax Exemptions & Reductions Business Tax Exemptions Import Duty Exemptions Depreciation Benefits

Government Support

Subsidies for certifications Training subsidies for personnel Rental waivers free land for fixed time period Special funding schemes

Apart from the stipulated 25% Income Tax, the Local state income tax typically 3% is usually exempted during the preferential period of 5 years in most of the cities If the annual increase of expenses on R&D is 10% and above, MNC R&D centers enjoy the deduction of taxable income by 50% of the actual amount in accordance with relevant regulations in many states MNC R&D centers are exempt from customs duties and import added value tax for R&D and up-gradation equipment which is not available in China or the performance of which cannot meet its requirements MNC R&D centers can be exempted from business tax on their incomes gained from the business concerning transfer of technology, technical development and related technical consultation and services, etc.

MNCs R&D firms can enjoy preferential treatment in buying or renting office buildings. Employees of the enterprises can get preferential treatment in buying residential property. Preferential treatment includes waiver of the rentals and lease deposits for a fixed period of time, In some cases the infrastructure is also built by the government MNC R&D centers may obtain scientific and research projects of governments at all levels and projects entrusted by social organizations, enterprises and individuals through competitive bidding and tendering. Funding and grants are often provided

Note: Source: Ministry of Science and Technology (MOST), China, Ministry of Commerce (MOFCOM), China Primary Interviews, press releases, News Articles, Talent Neuron Analysis Zinnov

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