June, 2018

The art of technology transfer

Original article: Huanqiu.com

In response to the U.S.'s Section 301 investigation of China's alleged misappropriation of American companies' intellectual property, Renmin University law professor Liu told Huanqiu.com that Washington has failed to present evidence of forced technology transfers. The U.S. has not cited any specific Chinese laws that require foreign firms to transfer technology to local partners, Liu said, adding that there is thus no proof that China has violated its WTO commitments. 


Liu is correct that the U.S. has not presented evidence that Chinese law requires foreign companies to transfer their technology to local joint-venture partners. That's because Chinese law doesn't stipulate any such thing. However, joint-venture requirements for certain industries, such as autos, mandate that foreign firms work with local partners. Without a JV, foreign automakers are denied market access. Once the foreign automaker is in the JV, at that point, it needs to produce vehicles together with a local Chinese partner. Some technology transfers are bound to take place. 

In Liu's view, such sharing of technology is normal. "The transfer of technology from American companies to Chinese companies is a normal business activity. It is based on mutual interests and decided independently by the companies involved" rather than due to pressure from the Chinese government, he says. Further, Liu says that as "a market economy," the U.S "will not easily pass up business opportunities in a developing country." 

That's a nice roundabout way of saying that U.S. firms want a big piece of the China pie. In a June 20 report, Politico notes that China is a $550 billion market for American goods and services. Therein lies the dilemma: China knows many U.S. firms increasingly depend on its markets to satisfy investors. The largest public U.S. companies focus on sustaining high quarterly earnings - the key to pushing up share prices and shareholder dividends. It only takes a few bad quarters and some panic among investors to wipe out billion of dollars in market capitalization. And then there's the potential for activist shareholders to mutiny. A company like US chipmaker Qualcomm, which earns 2/3 of its $22 billion in annual revenue from China, could be in hot water if its business in the PRC cratered. 

It's not just about money. Beijing wants a greater role in shaping global economic norms commensurate with its status as the world's second largest economy. In the decade since the global financial crisis, China has become the largest trading partner of most of the world's preeminent economies, including the U.S. 

That doesn't justify coercion of U.S. firms in China though, especially when Chinese firms - besides ZTE and Huawei - face amicable market conditions in the U.S. by comparison. 

Of equal concern is Chinese firms' continued outright theft of intellectual property from U.S. tech companies. The New York Times reported last week that engineers employed by the Taiwanese chipmaker UMC - which has, incidentally, bet the farm on the China market - allegedly conspired with its joint-venture partner Fujian Jinhua Integrated Circuit Company to pilfer world-leading chip designs from U.S. IC firm Micron. The China market accounts for 50% of Micron's revenue. 

The UMC engineers had formerly worked at Micron. The Idaho-based company became suspicious after learning the former employees sought Google's aid in "wiping" a laptop - rendering all data on its hard drive unreadable. Further, at a U.S. recruiting event for Micron employees, UMC and Jinhua gave a slide presentation about chips they would produce in the future; the presentation included Micron’s internal code names. 

Compelling Beijing to change its behavior won't be easy. Only sustained pressure from the U.S. in tandem with negotiations could persuade China to scrap market barriers. And even then, Beijing's techno-nationalism will endure. Some local companies eager to tap the benefits of Made In China 2025 are not above IP theft to achieve national objectives. 

With that in mind, U.S. companies active in China must spread out risk more evenly. They should diversify into other emerging markets: Southeast Asia, India, the Middle East and Africa. They could also consider investing more at home, helping President Trump to make America great again. The more that those companies plead for better treatment in China, the more leverage Beijing has over them. 

Reliance on the China market in the Trump era is an increasingly perilous endeavor. Should trade tensions escalate, Beijing could urge Chinese consumers to "stop shopping at KFC or stop buying American products whatever they might be,” Bill Reinsch, a senior adviser at the Center for Strategic and International Studies, told Politico.