Insight

Trade exchange between different cultures and countries has long yielded rich rewards for those who recognize the potential.

After all, as far back as the 1st century BC, merchants and caravans followed the Silk Road – the overland trade route from northern China to the Western World – and brought precious silks, tea and other resources from China to the rest of the world. Not only did linking different countries and cultures prove profitable, but new and greater products and ideas flowed between the countries.

The Silk Road of the 21st century is technology driven. This trade exchange, built on fiber-optic cable, sprang from the Telecommunications Act of 1996. Now, it is the R&D departments of companies from the United States and other countries that benefit from the resources and opportunity found in China.

Today’s China, the fastest growing country in the world, offers the:

• Biggest engineering talent pool

• Biggest emerging market

• World’s number one manufacturing industry

Strengthening ties, country-to-country, people-to-people, has shown time and time again that remarkable achievements, that otherwise would have been impossible, can come to fruition.

Long Circle urges you to explore the opportunities that exist in China today, especially if your business focus is embedded systems technologies for software and hardware.

With our global reach, we could see the importance of China, and we have grown significantly in the past five years in this critical market. Today, we have $5 billion in revenues and 12,000 employees.

GE 2005 Annual Report/

Letter to Stakeholders

Biggest Engineering Resource Pool

The last few years have convinced Fortune 100 companies and start-ups alike that China, home of the fastest growing economy in the world, is key to achieving their strategic plans, as well as the business objectives of their R&D departments. GE, Microsoft, Motorola, Intel, Nokia, Oracle, and SAP are just a few of the multinational companies with R&D operations in China, and for some important business drivers:

o Lower costs

o Lower wages

o Expanded productivity

o Reduced time-to-market

o Strengthened R&D embedded technology engineering resources

Wages are lower offshore, there’s no question about it, but the experience the workforce has must be in product research and development, not IT. With China’s deep pool of engineering talent, especially R&D embedded technology engineers, companies can expand and strengthen their R&D resources.

For example, the Microsoft Research (MSR) Asia lab has engineers working on a wide range of advanced technologies – from spoken-language technologies such as automatic speech recognition to face detection and tracking, face modeling and recognition, cartoon generation, image and video retrieval for MSN, and Xbox camera-based game interfaces. According to Forbes, Microsoft’s investment in all China-related R&D activities is approximately $100 million US dollars annually. In addition, with currently more than 800 employees in China, Microsoft is predicted to grow that number substantially over the next three to five years.

Biggest engineering talent pool; most engineering graduates each year

Engineering Graduates China India United States

Source: Duke University

352,000 112,000 137,000

Source: Unknown * 600,000 350,000 70,000

*Source: A study released in December, 2005 by Duke University (and also widely quoted in the media, including The Christian Science Monitor) citing the number of engineering graduates in each country yearly.

• Note: Statistics widely quoted, from Fortune Magazine to Senator Ted Kennedy’s speeches. However according to the Wall Street Journal online, these figures are misleading and no one can track down a concrete and reliable original source.

Biggest Emerging Market

How could any organization that wants to be successful in the global arena ignore China today?

China is the world’s most populous country – 1,313,973,713 (2006 est.) – and organizations like the Finnish mobile telecommunications giant Nokia expect China to be a key growth driver for their global operations. Nokia provides equipment, solutions and services for network operators and corporations’ mobile phones and network equipment.

According to Infoworld’s online Web site:

"China has 400 million mobile users and its 3G (third generation) networks are not yet switched on, providing a future avenue for further growth. " According to a study done by Norson (Hong Kong) Information Technology , ". . . after three years of 3G availability, more than 84 million Chinese will use 3G services."

Consequently, construction is underway on Nokia’s new and expanded China headquarters, scheduled to open in 2007, that will host over 1500 of Nokia's R&D, sales and marketing operations, pre-production, logistics, sourcing and manufacturing operations.

During China’s President Hu Jintao's recent visit to the United States, he attended a dinner at the home of Microsoft’s Bill Gates and called for broadening the relationship between the United States and China.

"Today, many cargo ships are very busy crossing the Pacific Ocean, laden with the rich fruit of our strong trade ties and friendship between our two peoples," Hu said. "I am sure that with the further deepening of China’s reform and opening up, we are going to see an even broader prospect for the economic cooperation and trade between China and Washington State and China and the United States as a whole." Source: Reuters

According to the US-China Business Council:

• China’s economy grew 10.2 % in the first quarter of 2006.

• The government’s new focus on balanced growth and its attempt to shift from an investment- and export-driven economy to a consumption-driven one will mean more policies to promote consumption.

• GDP (purchasing power parity): $8.158 trillion (2005 est.)

• GDP - per capita: purchasing power parity - $6,200 (2005 est.)

• GDP - real growth rate: 9.2% (official data) (2005 est.)

• GDP - composition by sector:

Agriculture: 14.4%

Industry and construction: 53.1%

Services: 32.5% (2005 est.) Source: [www.uschina.org]

World’s #1 Manufacturing Industry

China is "the world’s factory" and produces $60 billion worth of consumer electronic goods a year. The "Made in China" label is found everywhere.

When China became a member of the World Trade Organization (WTO), it agreed to abide by WTO standards and regulations, along with the rest of the WTO countries. And this opened up one of the world’s largest economies to the rest of the world. Forward-thinking organizations did not hesitate to capitalize on the unprecedented opportunity.

For example, GE has long regarded China as an essential piece in the company’s strategic plan. According to Jeff Immelt., "We have been there for 15 – 20 years, so we know how to do business. We have been on the ground. We have 12,000 employees. And I think at the end of the day, China is trending towards being a great global competitor and following the rules. And that is important to us and it’s a way that we can be successful as well."

Today, companies doing business in China find tax incentives, excellent civic infrastructure, government support, a political environment that encourages foreign business, rapid economic growth, a deep pool of engineering talent and college graduates, and improving legal, banking and financial systems.

China Strategy: Choose the Right Road to China

There are basically three paths an organization’s R&D department can follow to successfully gain entry into China. Take time to consider the best route for your company, especially if your focus is in R&D embedded technology.

 Single, Independent Project

Beginning by outsourcing a single, independent project is an excellent way to start on the path to China. Typically, these projects involve software and hardware development, testing, maintenance, or product enhancement. This transaction type outsourcing is turn-key, straightforward, and has a quick ramp up time. An R&D department can:

o Capture an opportunity within a short time frame.

o Boost bandwidth to meet short-term demand.

o Outsource clearly defined short-term projects.

Companies going this route find cost savings through transaction-type outsourcing and capitalize on short-term cost savings.

 Partner Program

A long term, relationship-based service program is another excellent way to leverage China’s technology resources. A dedicated team within the China outsourcing vendor’s R&D department can be created, trained, hosted, and managed exclusively for your embedded systems R&D technology projects. Clients take advantage of lower wages, while benefiting from a team educated on the Client’s corporate values and culture, providing a true business level alignment. A China R&D department can:

o Offload non-core functions.

o Fill in needed skills.

o Increase engineering efficiency.

o Increase return on R&D.

 Offshore R&D Center

Many companies find they benefit most from a one-of-a-kind incubation center that is an extension of their R&D department back home. Building a R&D facility from the beginning and introducing best practices provides the optimal solution to meet your company’s strategic goals.

Your company takes advantage of China’s low cost workforce, manufacturing capacity, and emerging markets and there are no intermediaries or third party costs.

A China R&D Center can:

• Provide confidence and security to handle sensitive data and intellectual property inhouse offshore.

• Train talent according to your company’s unique standards and values.

• Increase talent retention by providing attractive culture and a sense of belonging.

• Share services with other functions of the company.

• Engage in long term innovation-driven research that does not usually generate immediate profits.

• Access the China labor market directly.

Turn to China

Throughout history, new products, new ideas, and new opportunities have come about by crossing borders. The global exchange of trade, expertise, and capabilities means exciting ideas and innovations which benefit everyone.

China today is a country with unlimited opportunity. However, personal connections and relationships are essential to any successful business in China. Would your company like to expand into China, but is unsure about potential roadblocks such as regulations, recruiting, and setup? The right vendor can smooth your way.

In addition to entry into China, a potential vendor’s technology expertise must not be overlooked. For example, does the potential vendor focus on embedded technology? Do they have experience with manufacturers, original equipment manufacturers (OEMs), original design manufacturers (ODMs), independent software vendors (ISVs), system integrators (SI), and value added service providers (VASPs) who rely on embedded hardware and software technologies?

Intellectual property is a concern everywhere, but especially in a new environment. What are a potential vendor’s procedures for protecting your intellectual property?

Remember, when searching for the best route to leverage China’s vast resources and opportunities, it pays to make certain you have the best vendor as your guide.

A journey of a thousand miles

Begins with a single step.

Lao-tzu (604 BC – 531 BC)

Chinese philosopher

About the Author

Hayden Hong, the founder and CEO of Long Circle, has over a decade of outsourcing and consulting experience. Prior to founding Long Circle, Hong was the president and founder of MacaoDude, a consulting firm that counts among its clients Motorola, Nortel, and various high technology companies in the Boston 128 area. In 2005, Hong merged the two companies to provide U.S. companies with low-risk, convenient access to China’s engineering talent, manufacturing industry, and emerging markets. His background includes managing U.S.–China offshore R&D projects for GE, as well as management positions at Broad Reach Communications, a GE partner. Hong received a MSEE degree from Purdue University and a BSEE degree from Northeastern University, graduating magna cum laude.

About Long Circle

Long Circle provides outsourced engineering services to companies whose products and services rely on embedded software and hardware technology. Long Circle and the Long Circle China Center of Excellence enables U.S. companies to reduce costs, increase engineering bandwidth, and broaden market reach by providing low-risk, strategic access to China’s engineering talent, manufacturing industry, and emerging markets. To learn more about Long Circle, visit http://www.longcircle.com.