In 1987 when I was teaching a consumer behavior course in Chengdu, China, I was asked by a senior Chinese professor about how the Chinese might become better buyers of technology from western companies.
Thinking that he was referring to advanced technologies, I said that western companies were not interested in selling technology, only goods and services. He replied somewhat gravely that that was a pity because China was only interested in buying technology. Later I realized the Chinese were simply trying to replicate Japan's post-war success in buying technology from the west and developing high-tech products and production facilities. In the early 1950s the founders of what became Sony purchased the rights to make and sell the transistor in Japan for $25,000!
Recently the Harvard Business Review ran a major article, "China Vs the World: Whose Technology is It?" by Thomas M. Hout and Pankaj Ghemawat, which explains how China is forcing foreign companies to divulge their technologies and lists such industries as avionics, semiconductors, and nuclear reactors as targets. In two Wall Street Journal (WSJ) articles this fall, the Chinese approach to technology transfer is made clear in the cases of electric cars and high-speed trains.
In "China Spooks Auto Makers", a front page WSJ article, Norihiko Shirouzu states, "China's government is considering plans that could force foreign auto makers to hand over cutting-edge electric vehicle technology to Chinese companies in exchange for access to the nation's huge market, international auto executives say." The mechanism for "forcing' this hand-over is quite simple: foreign auto companies must team up with Chinese partners in joint-ventures and share their advanced technology. These joint ventures will make electric cars in China for the Chinese market which will soon be the second largest in the world. The message is clear: if you want to sell into this market, here are the terms.
Foreign auto makers of electric cars fear that they will share the fate of the developers of fast trains. "When the Japanese and European companies that pioneered high-speed rail agreed to build trains for China, they thought they'd be getting access to a booming new market, billions of dollars worth of contracts and the cachet of creating the most ambitious rapid rail system in history," observed Shirouzu in another WSJ piece.
In 2004 Kawasaki, a Japanese fast-train maker shipped such trains fully assembled for $760 million. As part of the deal it agreed to share technology and know-how. European companies fearing they would be shut of the Chinese market quickly followed suit.
Now in 2010, only six years later, Chinese companies are competing worldwide in the high-speed train market and participating in projects in Turkey, Venezuela, and are looking for business in Brazil, Russia, Saudi Arabia, and Poland.
Shirouzu claims, "On a recent visit to China, Gov. Arnold Schwarzenegger said he is interested in Chinese help to build a planned high-speed line in his state." As Pout and Ghemawat observe CEO's of multinationals are in a terrible bind, "they can either comply with the rules and share their technologies with Chinese competitors-or refuse and miss out on the world's fastest-growing market."
"China, Korea, and other rising economies are often reproached for using government money and influence to bolster home industries to the disadvantage of foreign competitors, a practice that is known as 'industrial policy,' and is frowned on by international trade law" notes John Cassidy in "Enter the Dragon" a book review in The New Yorker. That is clearly what China is engaging in by picking certain high-tech industries it wants Chinese companies to develop through their joint ventures with western partners who must deliver their technology if they want access to Chinese markets. As Robert Walpole, First Lord of Treasury of Great Britain, wrote, "Nothing so much contributes to promote the public well-being as the exportation of manufactured goods," and his government in 1721 placed tariffs on all manufactured imports.
As I noted earlier, by the 1980s, the Chinese were aware that they needed to import western technology to develop their economy rapidly.
The problem was that western companies were only interested in employing low-cost Chinese labor and not in sharing their technology, a perfectly understandable competitive strategy. Now they have the economic muscle to demand access to the latest technology. Western companies are paid through the profits their joint-ventures make.
Ironically, some of the technologies the Chinese want to develop for their home markets and international markets are the very ones we need for a greener world: electric cars, high-speed trains, and nuclear power. That doesn't sound like China Versus the World.
Michael Taylor is a McCoy Professor of Leadership and Management at Marietta College.
