On the Fast-Track: Technology Transfer in China

September 3, 2012 Posted by China Briefing Reading Time: 5 minutes

Over the past four years, China has switched from being an importer of high-speed trains to the world’s largest manufacturer. Much of this can be attributed to the transfer of foreign technology to Chinese state-owned enterprises. How have Chinese government policies and economic heft aided this effort?

By Spike Nowak

Sept. 3 – Traveling at 300 kilometers per hour, a passenger on China’s domestically-manufactured high-speed trains can go from Beijing to Shanghai, approximately the same distance as Delhi to Mumbai, in less than five hours. Four years ago, the same trip on an older Chinese-manufactured train would have taken more than 12 hours.

China has now become one of the largest manufacturers of high-speed trains in the world. How has it achieved this in such a short time? The same question could be asked of windmills, automobiles, computers, software, and various other products manufactured in China.

Technology transfer – a process by which technology, knowledge, skills and manufacturing methodologies are transferred from one country to another – has made all this possible.

When China began to develop a high-speed rail network in 2004, Kawasaki, a Japanese company, transferred high-speed train technology to China South Locomotive & Rolling Stock (CSR), a state-owned company and China’s largest train manufacturer by market value. As part of a US$740 million deal, Kawasaki exported and helped manufacture trains in China, training Chinese engineers along the way. Now CSR is planning to export its own bullet trains.

Another high-speed train manufacturer, Siemens, of Germany, entered into an agreement with China CNR Corporation Limited in 2005, also a state-owned company, to construct a high-speed rail link between Beijing and Tianjin. Siemens constructed three high-speed trains in Germany and 57 in China, and trained 1,000 engineers from CNR. Now, due to production shortages, Siemens is purchasing high-speed rail components from CNR, and the Chinese company is planning to compete with the German company for international contracts.

This kind of technology transfer is not a new phenomenon. Industrialization in most countries is built on this process. For example, Samuel Slater, a cotton mill worker, jump-started mass production in the United States in the early 19th Century by importing ideas for textile technology. He memorized designs for the Arkwright cotton-spinning machine while working in England, and used this knowledge to modernize the textile industry in the United States.

Development in East Asian countries, starting from the 1950s, was also rooted in the process of technology transfer. Taiwan and South Korea imitated foreign technology from Japan, which had become one of the most technologically advanced economies in the world after itself benefiting from technology transfer from the United States. Both South Korea and Taiwan eventually became innovators in their own right.

This process came to be described as the “flying geese model,” in which technology is transferred from an advanced to a developing economy, thereby enabling the advanced economy to free up resources to focus on newer technologies and industries.

The Chinese government has taken a more active role than its East Asian predecessors in directing economic growth. It promotes specific industries and supports companies which use globally-competitive technologies. Unlike its East Asian neighbours, China also has a more determined approach to technology transfer, which is actively enabled by the government. Plans to develop specific technologies are dictated by the central government in Beijing as part of China’s five-year plans, and through campaigns to promote indigenous innovation.

Development plans and industrial policies in China are also driven by the heft of its economy. China is now the second largest economy in the world, with more than 1.3 billion people. That is 20 percent of the world’s population. In the 1980s, when the economies of Japan, South Korea and Taiwan were booming, their combined population accounted for less than 10 percent of the world’s population. The incomes of China’s broad base of consumers are increasing rapidly; this gives the Chinese market substantial global influence.

All this sets China apart from previous development stories.

The 12th Five-Year Plan (2011-2015) in China makes it clear that advancing high-technology industry is a national priority. The plan names seven strategic industries – new-generation information technology, energy-saving and environment protection, new energy, biotechnology, high-end equipment manufacturing, new materials and new-energy vehicles. Xinhua, the official news agency in China, stated in 2010 that these industries will be “nurtured” with fiscal and tax policies to “improve industry core competitiveness” and promote “domestic indigenous innovation.”

The 2006 “Medium and Long-Term Plan for Science and Technology Development (MLP)” issued by China’s State Council, is another example of state support. The plan identified four basic research programmes and 27 breakthrough technologies to be promoted, including high-speed rail, electric cars, and robotics. Chinese companies were given preferential treatment when bidding for government procurement contracts if they owned the technology and the intellectual property (IP) rights they would use for manufacture. This plan was central to China’s policy of promoting “indigenous innovation.”

According to the MLP, if foreign companies want to compete for government contracts and subsidies promoted under indigenous innovation policies, they have to transfer their proprietary technology and IP to their Chinese partners. Such policies provoked the ire of foreign governments and companies because they gave Chinese companies an unfair advantage.

In July 2011, under mounting pressure from foreign companies, governments, and commercial interest groups like the American and European Union Chambers of Commerce, the policy of “forcing” foreign companies to transfer their IP to Chinese companies in order to bid for government contracts was officially abolished.

Regardless of such policy-mandated restrictions, Chinese companies face no shortage of sophisticated suitors. If one company is unwilling to share its technology, others will. This is evident in the numbers. According to the Chinese Ministry of Commerce, in 2011 the number of newly-approved foreign-funded enterprises in China was 27,712, and foreign investment increased 9.72 percent year-on-year to a little more than US$116 billion. For most large companies the risk of not getting into the Chinese market is bigger than the risk of sharing technology. With more than 1.3 billion consumers and per capita GDP doubling from 2007 to 2011, this is a business opportunity that cannot be missed.

At the same time, occasional disagreements continue to surface. Kawasaki has publicly complained that CSR’s high-speed rail technology is based on their design, and has threatened to sue CSR if it begins to export trains based on that design. When Germany’s Chancellor Angela Merkel was on an official visit to China in 2010, executives from Siemens and BASF complained directly to Premier Wen Jiabao about “forced” technology transfer. Despite these disagreements, Siemens conducted nearly €6.4 billion in sales in China in the 2011 fiscal year.

Another common criticism of China’s technology policies is that many of the transfers occur through corporate espionage. Despite international laws like the WTO’s “Agreement on Trade-Related Aspects of International Property Rights (TRIPS),” which requires all members to meet a minimum level of IP protection and enforcement, technology is illegally transferred. However, most of the technology transferred to China by international companies moves through legal channels like joint ventures, patent licenses, and mergers and acquisitions.

If the “flying geese model” is any indication, and considering the advances made by China—as exemplified by its rapid rise as a global manufacturer of high-speed trains—the Chinese economy will continue to move up the value chain. Other emerging markets such as India, Vietnam and Bangladesh will imitate Chinese technology; and countries that have close trade and economic relationships with China will benefit from the next round of technology transfer.

Spike Nowak is a research intern at Gateway House: Indian Council on Global Relations, where this article was originally published.

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