According to Farashuddin, this strategy is essentially demand-driven, not cost-driven: “The primary reason we have facilities and engineers in emerging markets like China, India, Brazil, and the Czech Republic is because that’s where an increasing number of cars are being made and sold,” he says. “Our customers, the automotive manufacturers, demand engineering and technical development support for their growing emerging-market customer base.”
By 2011, he points out, China is expected to be the largest auto market in the world, and India to be the fifth-largest. It’s incumbent on his company to sell these markets while maintaining a globally competitive technology base. “In China and India,” says Farashuddin, “a lot of people who own vehicles, especially the larger vehicles, have chauffeurs, and the owners sit in the back seat. So you have to design audio systems and climate control systems so they can be controlled from the back seat, as well as from the front seat. That’s a piece of insight that you pick up only when you’re in China and India working with local engineers.”
Visteon is organized into four product lines: interiors, climate control, electronics, and lighting. Each group keeps its product development function separate. That makes them easier to manage, but significant challenges remain. Each group struggles to find and retain engineering talent around the world. Although the talent pools outside North America and Europe are growing rapidly, wages are rising along with the talent. Meanwhile, in these other countries, local players are building out their own R&D facilities, so local engineers have more choices about where to work. That’s made it more difficult for companies like Visteon to retain talent — a problem that is exacerbated, Farashuddin believes, by the growing sense of national pride local engineers feel in working for homegrown automotive firms.
As auto sales in emerging markets increase, the auto industry will continue to move R&D to these markets. Our analysis shows that China is already the largest importer of automotive R&D, and its share will keep growing. Tough as the auto business is, however, the goal is no longer simply to cut costs. Farashuddin likes to use the term “automotive intellect” to describe the knowledge gained through the process of designing cars and the components that go into them. Until recently, the flow of automotive intellect has been going from the West to the emerging markets. But, says Farashuddin, “there’s a lot of automotive intellect that’s being generated now in the emerging markets, and you have to be in these markets to stay on top of your game. And five years from now, you’ll see some leading technology being developed first in India or China, and flowing back to the West.”
Computing and Electronics: Bright Ideas
Unlike cars, the same computing and electronics products can be sold in just about any market, with little regard for local needs and tastes. That’s why, unlike the auto industry, the C&E sector is motivated less by demand and more by the search for talent and new ideas. To that end, companies worldwide are spreading their R&D resources across a wide swath of the globe, in both developed and emerging markets.
Overall, 252 C&E companies that made the Global Innovation 1000 this year led those in all other industries in terms of raw dollars invested in R&D; in 2007, the industry spent $142 billion, or 29 percent of the total. That figure is up 8.5 percent from the year before, although R&D spending as a percentage of sales remained the same, at 7 percent, about in line with the sector’s average R&D intensity over the past five years. Among the 50 C&E companies we analyzed closely, the U.S. was, again, the largest “net exporter” of R&D spending, at $16.9 billion, while China was the largest “importer,” taking in $14.3 billion. The U.K. and India imported about $5.5 and $6.8 billion, respectively, while fourth-ranked Israel took in $4.9 billion — indicating that R&D in this sector is spread much more evenly between developed and emerging nations. Indeed, R&D in the C&E sector as a whole is significantly more diversified than it is in the auto sector. Fully 70 percent of the sector’s R&D spending originates in just the U.S. and Japan, yet only 40 percent of spending takes place in those two countries. The rest is spread among more than 20 different countries.