OUTSOURCING INNOVATION
First came manufacturing. Now companies are farming out R&D to cut costs and get new products to market faster. Are theygoing too far?
As the Mediterranean sun bathed the festive cafés and shops of the Côte d'Azur town of Cannes, banners with the logos of Motorola,Royal Philips Electronics, palmOne, and Samsung fluttered from the masts of plush yachts moored in the harbor. On board, top execshosted nonstop sales meetings during the day and champagne dinners at night to push their latest wireless gadgets. Outside the city'sconvention hall, carnival barkers, clowns on stilts, and vivacious models with bright red wigs lured passersby into flashy exhibits. Foranyone in the telecom industry wanting to shout their achievements to the world, there was no more glamorous spot than the sprawling3GSM World Congress in Southern France in February.
Yet many of the most intriguing product launches in Cannes took place far from the limelight. HTC Corp., a redhot developer ofmultimedia handsets, didn't even have its own booth. Instead, the Taiwanese company showed off its latest wireless devices alongside partners that sell HTC'smodels under their own brand names. Flextronics Corp. demonstrated several concept phones exclusively behind closed doors. And Cellon International rented adiscrete threeroom apartment across from the convention center to unveil its new devices to a steady stream of telecom executives. The new offerings included theC8000, featuring eyepopping software. Cradle the device to your ear and it goes into telephone mode. Peer through the viewfinder and it automatically shifts intocamera mode. Hold the end of the device to your eye and it morphs into a videocam.
HTC? Flextronics? Cellon? There's a good reason these are hardly household names. The multimedia devices produced from their prototypes will end up on retailshelves under the brands of companies that don't want you to know who designs their products. Yet these and other littleknown companies, with names such asQuanta Computer, Premier Imaging, Wipro Technologies, and Compal Electronics, are fast emerging as hidden powers of the technology industry.
They are the vanguard of the next step in outsourcing - of innovation itself. When Western corporations began selling their factories and farming out manufacturingin the '80s and '90s to boost efficiency and focus their energies, most insisted all the important research and development would remain in-house.
But that pledge is now passé. Today, the likes of Dell, Motorola, and Philips are buying complete designs of some digital devices from Asian developers, tweakingthem to their own specifications, and slapping on their own brand names. It's not just cell phones. Asian contract manufacturers and independent design houseshave become forces in nearly every tech device, from laptops and high-definition TVs to MP3 music players and digital cameras. "Customers used to participate indesign two or three years back," says Jack Hsieh, vicepresident for finance at Taiwan's Premier Imaging Technology Corp., a major supplier of digital cameras toleading U.S. and Japanese brands. "But starting last year, many just take our product. Because of price competition, they have to."
While the electronics sector is furthest down this road, the search for offshore help with innovation is spreading to nearly every corner of the economy. On Feb. 8,Boeing Co. said it is working with India's HCL Technologies to codevelop software for everything from the navigation systems and landing gear to the cockpitcontrols for its upcoming 7E7 Dreamliner jet. Pharmaceutical giants such as GlaxoSmithKline and Eli Lilly are teaming up with Asian biotech research companies ina bid to cut the average $500 million cost of bringing a new drug to market. And Procter & Gamble Co. says it wants half of its new product ideas to be generatedfrom outside by 2010, compared with 20% now.
Competitive Dangers
Underlying this trend is a growing