Selling China Long-Term Innovation Assets For Short-Term Profits: Not a Good Strategy

Posted by: Bruce Nussbaum on January 3, 2010

On my way back from Beijing in December, I sat in front of a corporate guy who was returning to the US after pitching a deal to sell tens of thousands of electric car charging stations in China. He was talking to a California software guy, also returning after pitching after pitching a deal. Their exchange was all about the polite fiction that US companies are selling products to China when they are really selling their best technologies—for the lower price and profits of products. It’s short-term real gains over long-term potential profits.

Here is the essence of what I heard:

1-China is demanding technology transfer for the deal for electric car charging stations pretty much for the price of entry and for the price of the product alone. US, European, Korean and Japanese companies have known this and done this for the past 20 years. Most countries pay extra for the technology and most companies refuse to sell their best. China is getting cutting edge technology at almost no cost.

2- China can do this not only because of its enormous market but because it is the ONLY market for many products and services. China is building large numbers of high speed trains. The US is not. China is building hundreds of thousands of urban electric car charging stations. The US is not. China is spending $800 billion to make its electric transmission lines “smart.” The US is spending $8 billion. Corporations go to expanding markets. They have no choice today.

3- China is running a national, mercantilist economy policy that both state-owned and privately owned companies follow. Technology transfer is focussed on building Chinese global companies that can compete with US, Japanese and European corporations. Investment and trade are not just about raising living standards (if they were, then Beijing would let the yuan rise, increase the buying power of China’s consumers, and boost their living standards). They are about building national and global economic and political strength.

4—US companies know they are building their own competitors in China but feel they have no choice. They need that choice or the future long-term growth prospects for the US will grow dimmer and dimmer. China is playing a serious national innovation game. Good for China. The US is not. Bad for America.

Reader Comments

Henry L.

January 3, 2010 6:56 PM

So we should paint China for wanting what's best for their country? You want to play in their market then you play by their rules. The same can be said for America for a long time. I know of a Canadian company that was blocked from getting into the American market unless it sets up the head-quarter in America and carry out technology transfer. Weather you like it or not, China will eventually move up the tech ladder and America should have tech friendly policy to compete and try to attract talent instead of being arrogant and treat people at the borders like criminals.

Jim Meredith

January 4, 2010 12:02 AM

Bruce –

I am not sure that the Chinese thing is an "innovation" game, but instead a "gaming" of others innovations. The impacts are enormous.

Hyundai's bald decade-long copying of the styling and technology of the Americans and Europeans gave them the ability to be "generous" and capture American auto market share in our financial and industrial collapse. It is difficult, however, to see any generosity in the Chinese moves.

Ford sells them Volvo, GM sells them Saab IP. Your "corporate guy" sells them the future of the electric car infrastructure. We imagine this to be the "price of entry" but, with the IP, China will rapidly and preferentially proliferate our technologies and projects.

Are we not, Bruce, commoditizing our creativity, knowledge and innovation in this strategy and process?

I think that understanding the tremendous power of American innovation – valued, developed, and managed by us instead of sold as the ante to markets we will not otherwise be able to control – should be your critical and editorial agenda for 2010.

Right now, guys with innovative balls-bombs are getting more attention and reactive financing than American innovators. And a distracted Government, now major "owner" of American corporations, is trading invention for pennies.

Daniel Christadoss

January 4, 2010 12:05 AM

Technology transfer will always be a sticky issue. But most savvy buyers will insist on it as they would not like to be held to ransom by vendors.
Technology transfer will help reverse innovation. I have seen most companies willing to do technology transfer profit from it in the long run.
So, rather than look at the negative impact on technology transfer let us focus on how we can make this work for the supplier (In this case American companies)Can we start thinking in global terms of a citizen of the world. Is there a way for all of us come out as winners in this game.
And again what can be so technologically advanced about a charging station. Most technologies can be understood and built from a simple search on the web. If we dont sell, some one else will.

JB

January 4, 2010 2:52 AM

Bruce, continue to parrot what others said about rising the yuan. Chinese look at the big picture and conclude that the yuan rising has more bads than goods, thanks to the Japanese experience. You blame them for looking out for their own citizens?

About technology transfer, nothing new there either. Those American/Canadian IT workers forced to teach Indian programmers all the ins and outs before they themselves were laid off is also technology transfer. That's life! Deal with it!

Bilanski

January 4, 2010 3:18 AM

"China is getting cutting edge technology at almost no cost."

My goodness. Such slandering statement can get you into lawsuits if you're talking about a company. How much is "no cost"? What is fair price? Care to elaborate?

America has been getting products made by workers getting peanut wages that you won't pay yours for flipping your burgers. Didn't see you crying about that.

Almost everything these day is on market price. If you complain you aren't getting your "fair" share, then your product is NOT in demand (even if only China gladly takes it). You wanted free market, now you get it. You can't have the cake and eat it too.

Johnson

January 4, 2010 5:03 AM

For past decades, China was regarded the rich fool and where you may gain lots of money with low quality products and obsolete techs. Now maybe something is changing and somebody may feel equal talk unfair since they used to past mode. Pls remember the belief, there is no free lunch in the world

Gong Szeto

January 4, 2010 7:41 AM

in the 17th and 18th centuries the west used their navies to force china to open their ports. then they killed thousands of chinese and made them eat opium. then they made china sign all kinds of treaties that privied the west's terms. the dynamic you're observing is simply payback for a century of humiliation, in that slow water torture kind of way. china will dictate many terms for the next century whether the west likes it or not. does this mean that the US will cease innovating? of course not. it simply means that *americans* may not be the beneficiaries of american innovation.

Dailydubya

January 4, 2010 10:36 AM

This is like selling milk, and then the largest customer says 'sell me the cow or I go elsewhere'. You'll make some money selling the cow, but you'd better not plan on staying in the milk business. The notion that the USA is going to sell all of their current industries and somehow innovate new replacement industries is a dream. Exporting your wealth creation systems is not a strategy for long term growth.

Joe

January 4, 2010 2:46 PM

Basically China has done nothing wrong in this article, it is the US that fail to capitalize on its own innovations.

JB

January 4, 2010 9:29 PM

Journalists should go easy on their China-bashing. More often than not, they come out as cry-babies, insecure, ignorant, naive, or all of the above. This article is one example: no specifics, no figures to quantify or substantiate.

D.B. Wells

January 5, 2010 1:02 PM

Fix our newfound inability to effectively take innovation to market, or sit back and watch our contribution to the world market fade. Nobody wants the "job" of rolling up their sleeves and actually bringing an idea to reality and putting it in the consumer's hand anymore...change that, or live with the consequences, and then get used to that place in the world economy.

Maersk

January 5, 2010 1:24 PM

There is a saying that goes like this: "A dog's mouth grows no ivory" This saying describes western news media such as Businessweek is absolutely appropriate.

Mike the Engineer

January 5, 2010 3:51 PM

Dailydubya nailed it. History teaches us that when a nation employs mercenaries to fight its wars, that nation eventually falls to those mercenaries. Modern international competition is more economic more than military. However, outsourcing technology, jobs, manufacturing, and innovation is like hiring those mercenaries. We are teaching our competitors how to beat us... and we are doing a fantastic job of it!

Jonathan Huneke

January 5, 2010 9:05 PM

There were loud and well publicized complaints from business groups in the US and elsewhere over the proposed Chinese innovation rules. See the joint letter signed by my organization: http://www.uscib.org/index.asp?documentID=3959. Also, report on the Chinese government's response: http://www.capitalfm.co.ke/business/International/China-defends-procurement-rule-3534.html. The Financial Times has an informative analysis at: http://www.ft.com/cms/s/0/502ea986-e987-11de-be51-00144feab49a.html?nclick_check=1

Chester

January 6, 2010 4:32 AM

I agree with Bruce. Giving your technology away is corporate suicide. And companies may not even receive short term profits. Communist and socialist countries have a long history of nationalizing companies.

But isn't it great that we can freely criticize our corporations, government, and media? Don't try that in China.

maglev

January 6, 2010 5:53 AM

The author pointed out "...China is the ONLY market for many products and services" As an example, take the Maglev technology developed by Germany in the 1960's. This technology had no market in Germany or in the rest of the world.

Towards the end of the last century because of the good Sino-German relationship, it was decided to revive this by building a commercial demonstration Maglev line in Shanghai which was completed in 2002. Although this Maglev line proved the Germany technology, it was still too expensive. It was obvious that this required joint German, Chinese co-operation to bring the Maglev concept into commercial fruition. To this end, China announced the building of the Shanghai to Hangzhou Maglev line in time for the 2010 Shanghai World Expo.

However, as soon as Merkel became Chancellor of Germany, she went to Beijing and lecture to China that doing business does not mean that technology must be transferred. From then on, China abandoned Maglev and diverted her attention on developing the high speed trains based on wheels. The highly regarded German Maglev technology is now simply "rotting away" and Germany is the loser.

The lesson to be learnt is that there are many Western innovations that require Chinese technical as well as commerical input in order to achieve a win-win situation for all parties concerned.

As far as the future of Maglev is concerned, it appears that China will continue to develop her own Maglev technology and the next generation of Chinese high speed train may well be of the Maglev type capable of travelling much faster than the current German Maglev trains now running in Shanghai.

Maglev

January 7, 2010 6:14 AM

China, like any other country, has limited resources. Consequently, she focuses her R&D on technology which the West refuses to sell to her. As seen in the past, China will succeed if she targets any particular area; it is a question of time. Knowing this, many far sighted companies rather sell the technology to China rather than losing the business altogether.

If we look at the high speed trains (HST) capable of averaging 350 km/h on wheels,
Bombardier of Canada and Siemens of Germany both gained from the huge $300 billion pie over the next 5 to 10 years leading to a win-win situation for these companies and China.

BTW, China had already developed a HST, the China Star,using her own technology. However, she chose to use the more mature Western technology and to use up some of her huge foreign trade surplus.

@chester

January 8, 2010 3:33 AM

Chester, what's the point of all that "Freedom of Speech" talks when we're talking about technology's worth and its transfer?

Sure, corporations here don't mind your laughing at their stupidity, as long as they're the ones laughing all the way to the bank. Isn't "freedom of speech" grand?

sylvie chen

January 8, 2010 4:16 PM

Should we worry? No, as China's future is estimated at less than 25 years.

Half their population will be sick, dead or suffering chronic diseases.

By that time internal strife will be so severe that no govt will be able to contain its people.

Why? China will run out of potable water in most of its rural areas.
In NW China most of the major rivers are going dry.

Populations will end up in dense urban areas increasing the problems.
This will cause intense needs for concentrated power mostly fueled by domestic coal followed by Russian gas pipelines.

The only solution for them will be to absorb countries like Laos, Vietnam, perhaps Cambodia.

Tibet will suffer from loss of glaciers and Mongolia will suffer major droughts.

If this sounds like a Tom clancy novel...perhaps but most of what I said is in UN documents.

www.businessweek.com

April 21, 2011 2:09 PM

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www.businessweek.com

April 22, 2011 5:35 AM

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www.businessweek.com

May 7, 2011 3:30 PM

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Want to stop talking about innovation and learn how to make it work for you? Bruce Nussbaum takes you deep into the latest thinking about innovation and design with daily scoops, provocative perspectives and case studies. Nussbaum is at the center of a global conversation on the growing discipline of innovation and the deepening field of design thinking. Read him to discover what social networking works—and what doesn’t. Discover where service innovation is going and how experience design is shaping up. Learn which schools are graduating the most creative talent and which consulting firms are the hottest. And get his take on what the smartest companies are doing in the U.S., Asia and Europe, far ahead of the pack.

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