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The drive from the center of Beijing to the suburban home of one of China's most important new industries takes about 45 minutes. That isn't bad, given that the distance traversed spans two countries—Old China, with one foot in the poor, developing world, and New China, a nation close to the forefront of biotechnology and genetic engineering. Turn off from the main highway—where many Chinese still ride bikes or trudge by foot along the side of the road—and drive into the sparkling new Zhongguancun Life Science Park (replete with two man-made lakes, one in the shape of a human heart, the other a liver), and you've gone from somewhere back in the 20th century to somewhere deep into the 21st, where inside the sleek glass buildings, young Ph.D.s manipulate DNA and clone small animals.
China's economic miracle, the 25 years of breakneck growth that have made it the world's sixth largest economy, is a familiar tale by now: a vast, low-wage work force transforms a nation into a manufacturing colossus, resulting in surging exports and soaring incomes. But the Chinese government, ever burdened by the need to meet the rising expectations of its 1.3 billion people, has understood for some time that the next stage in its economic development would require another great leap forward: China would need to progress from making cheap goods for the rest of the world to creating things that no one else has yet conceived. "The government knows very well that this is the next, crucial stage of China's development," says Jim Hemerling, vice president and director at the Boston Consulting Group (BCG) in Shanghai. "China has to innovate, or eventually this economy will face trouble."
Can China innovate? On its face, the question is faintly ludicrous. Centuries ago, China was the center of innovation, inventing everything from paper to gunpowder. And today, this is a country that produces about four times as many engineers as the United States does. "Our kids go to two-a-day football and cheerleading practices," says Juan Enriquez, former director of the Life Sciences Project at Harvard Business School and now a venture capitalist in the U.S. "Their kids go to two-a-day math classes." But shifting from a focus on low-cost manufacturing to one on painstaking, expensive and often fruitless research requires a major change in mind-set. And, of course, innovation is dependent on the protection of ideas: few entrepreneurs or companies will devote the time and resources needed for innovation unless they know that they, "and not six guys down the street," as BCG's Hemerling puts it, will earn the spoils.
China, of course, is notorious for its lack of intellectual-property (IP) protection. In the last two years alone, companies like Cisco, Sony and General Motors have complained bitterly about alleged IP rip-offs. Last July, the State Intellectual Property Office in Beijing invalidated the patent for Pfizer's blockbuster sexual-enhancement drug Viagra because the original patent application supposedly didn't include sufficient technical data. Pfizer is appealing in a Beijing court, arguing that the information wasn't required or requested when its application was first submitted in 1994. The company says it has become much more cautious about future research-and-development investments in China because it's difficult to operate in such an unpredictable and untransparent environment. Indeed, says Anne Stevenson Yang, managing director of the U.S. Information Technology Organization in Beijing, China's ability to become a technological superpower hinges "on its ability to get a grip on issues of ownership," including intellectual property.
Partly because of IP theft—which can damage domestic as well as foreign companies—China is still in its infancy as an innovator. It spent an estimated $60 billion on R&D in 2003, the most recent year for which figures are available, or 1.3% of its GDP. That compares with $265 billion in the U.S., or 2.7% of GDP.
Yet China, however haltingly, has begun to develop its own innovative companies, particularly in industries the government has targeted as critical for future growth. CapitalBio Corp., the anchor tenant in the science park outside Beijing, is but one example. Its CEO is Jing Cheng, a 42-year-old returnee from the U.S. who used to run a small biotech firm in San Diego. Started five years ago as a government-funded research organization at Beijing's Tsinghua University, CapitalBio has since morphed into a holding company that has already raised $30 million from domestic venture capitalists and is now raising more from foreign investors. Among other things, it produces biochips, whose applications range from food safety to drug testing. Earlier this year, the government gave CapitalBio the high-profile assignment of screening athletes at the 2008 Beijing Olympics for prohibited substances such as steroids. Corner-cutting athletes beware: in the past, drug testing at the Olympics was random partly because it's a slow and expensive process. But CapitalBio has developed chips containing 16 prohibited substances, which can be overlaid with the samples to be tested. A banned substance in a sample shows up immediately on the chip. As a result, just 25 of CapitalBio's chips are needed to screen 10,000 samples a day. The U.S. scientific journal Nature Methods recently hailed this innovation as "a first step" toward "the advent of systematic and reliable screening for every athlete."
CapitalBio also produces sophisticated laser scanners that can read the results of tests using biochips. Already it has begun selling these scanners abroad—so far, in the U.S. and South Korea, with Europe to follow later this year. Overall, CapitalBio, which employs nearly 300 life-science engineers, expects its revenues to reach $12 million by 2007—up from less than $250,000 in 2003.
What's striking is that, far from ripping off another company's groundbreaking technology, CapitalBio has done all of its R&D in-house and has come up with products and processes that are both innovative and competitively priced. Cheng says its laser scanner undercuts its rivals by 50%. In many ways, CapitalBio represents a template for China's R&D future: just as companies have used China's huge pools of labor to turn the country into the workshop of the world, so too can they take advantage of the nation's enormous supply of cheap but talented engineers and scientists.
And take advantage they are. About half an hour from the science park where CapitalBio's headquarters is located, the scene at the Beijing Genomics Institute could hardly be more different. Instead of working out of a gleaming, glass-sheathed building, Beijing Genomics sits in a dingy, badly lit structure in a 5-year-old industrial park. Nonetheless, it houses 400 researchers, and one of the most powerful nonmilitary supercomputing centers in China. Like CapitalBio, Beijing Genomics started as a pure research organization—it was one of the key players in China's 2001 decoding of the rice genome. Since then, it too has veered into the commercial world, and it's also now poised to benefit from the next big change in medical diagnostics: the rollout of small-scale genetic sequencing kits to hospitals all over the developed world. Industry experts, such as former Harvard director Enriquez, expect gene sequencing to experience a revolution akin to what the PC meant to the computer industry: as the cost of computing drops, more powerful machines will end up in the hands of millions of medical professionals at hospitals, so that they can, for example, "find the genetic background of certain hereditary diseases in a patient, or even infectious diseases like HIV," says Darren Cai, a former Booz Allen Hamilton consultant who is a vice president at Beijing Genomics. "We think this gives us a great opportunity."
Life sciences are not the only area where Chinese research is leading to commercial success. Telecommunications is another, and it's not Chinese companies doing the heavy R&D lifting here but foreign multinationals. In the late 1990s, fear of IP theft in China seemed an insuperable stumbling block. But the explosive growth of China's telecom market and the success of foreign companies like Nokia in tapping it forced their hand. Or rather, the Chinese government forced it. According to Nokia China president David Ho, the government "came to us and said, 'You've been so successful manufacturing in China that it would be good if you increased your R&D effort here.'" Nokia got the message that it should view the country not just as a cheap manufacturing site but as a source of technological expertise. The firm now does 40% of its global R&D for the cell-phone business in its Beijing research center. Just last month, its researchers there unveiled a new system that significantly boosts the speed and capacity of Nokia's cell-phone network to handle huge chunks of data. "In two to three years this market may be Nokia's biggest overall," says Ho. "For us it wouldn't make sense not to do real R&D here."
Because of persistent piracy worries, that's not a faith yet shared by many multinationals. Piracy, skeptics believe, may be the one thing that could derail—or, at least, dent—the economic miracle. Perhaps so, says CapitalBio's Jing Cheng, but not in his industry. Eating his lunch in a cafeteria overlooking the liver-shaped lake, Cheng is the picture of optimism. Because of what's going on in life sciences, he says, "it's very possible that in our lifetimes we'll find a cure for cancer." He pauses, then smiles. "And maybe we'll do it right here in China."
- Bill Powell | Beijing
- It's already the workshop of the world, But what China really wants to be is the world's laboratory