We seem to be at the brink of a trade war, with the Trump administration’s planned tariffs based on the section 301 investigation, China’s response, and Trump’s response to that. The main justification for the U.S. tariffs is the Chinese government’s “technology for markets” policy, which involves asking foreign companies to hand over their technology in return for access to China’s lucrative markets. But ironically, many of China’s technologically successful established companies owe their success not to this policy, but to having survived it; most new technological stars have never had anything to do with it.
The technology for markets policy made its debut in China after 1983 with the opening of the Chinese automobile market to foreign producers, conditional on forming 50-50 joint ventures with large state auto companies, and presumably transferring technology to them in the process. Initially four such joint ventures were formed, with the number ballooning afterwards.
However, by the turn of the century the Chinese companies did not appeared to have acquired much technology from their foreign partners. In 2000, the most successful of the initial joint ventures, the Shanghai-Volkswagen Automotive Co., was still producing a 1981 model Volkswagen Santana, and with most critical components imported. More than 10 years later, in the early 2010s, these JVs were still essentially assembling the international models of their foreign partners, which made up 70 percent of the passenger car sales in the country. None of the Chinese partners of the JVs had become a competitive auto producer on its own right.
In the early 2010s companies like Geely, BYD, and Cherry were also competing in the domestic, and to some extent in the international, market with their own models. However, none of them was a beneficiary of the government’s technology transfer policies. Forming joint ventures with foreign producers was a privilege of the large state-owned companies; these producers had to go on their own. Moreover, the Chinese government, whose technology policy was built on large state-foreign JVs, did everything it could to prevent small companies, which presumably would not have the resources to develop technology, from entering into the market.
China’s first private car maker, Geely, in trying to get into automobile production in the early 1990s, could not get the permit to do so and had to start its activities without one. Geely eventually acquired a permit by acquiring a minibus producer that went bankrupt. The company produced its first automobile in 1998, but now could not get the permit for it to go out into traffic. Only with great effort and support from the local government was that hurdle also overcome and the company became an officially registered producer in 2001. The stories of the other indigenous Chinese auto makers are not much different.
China’s best known technology champion, Huawei, has a similar story. Established in the late 1980s, reportedly with expensive financing from unofficial channels, it went into telephone exchange production in the early ’90s. Like the automobile industry, government arranged state-foreign JVs like Shanghai Bell had 90 percent of the market in the country, so the company went for the remaining 10 percent, located in the rural areas and small towns the JVs did not bother with. Building on internal R&D, the firm quickly developed its technology and products, expanded its business from rural areas toward cities, and by the early 2000s had beaten the state-foreign JVs to market leadership. Huawei expanded to the mobile communication equipment sector in the ’90s, not in the Chinese market (which was dominated by foreign suppliers) but in low-income markets, where it built expertise and reputation before moving on to the European markets, and eventually to its home market. The company attracted the attention and probably support of the government only after becoming a success.
Starting in the late 1980s, multiple state-led attempts were made to raise the capabilities of the Chinese semiconductor industry by arranging joint ventures between large state-owned entities and foreign producers like Lucent Technologies, ITT, Phillips, and NEC. None of them succeeded. But in the 2000s there were many internationally competitive, mostly private, Chinese firms in semiconductor-related industries. These included start-ups like Spreadtrum and RDA — which designed the chips that go into the smart phones of Chinese producers, helping them claim the domestic market leadership from the foreign brands — as well as some of the top solar energy module producers in the world. The solar companies had benefited from abundant (but not cheap) availability of credit, but none of these companies had anything to do with government technology transfer initiatives. Their success was based on self-generated technology evidenced in large number of patents they generated, their mostly foreign educated/experienced founders, and the big Chinese market.
Why have state-sponsored technology transfer policies not been successful in China? First of all, because technology is not easily transferrable; it is not composed just of blueprints and formulas that can be handed over on demand. The knowledge to produce anything but the simplest products consists not only of codified knowledge that can be represented in blueprints and formulas, but more importantly, the knowledge of myriads of problems encountered in the design and production processes and their solutions, which is acquired through experience. Such tacit knowledge is embedded in the minds of the people and culture of organizations. This kind of knowledge can be transferred only through transferer and transferee working together for extended periods of time. Success is hard to come by and depends on the willingness and motivation of the transferer as well as the size of the gap between the capabilities of the transferer and the transferee.
In their technological catch up processes, Japan, South Korea, and Taiwan have not opened up their economies to foreign investment and have not offered their markets for technology, like China has. In technological capability building, their use of cooperation with foreign companies has been limited, and in the form of projects with well-defined goals. They have instead emphasized self-learning through choreographed series of national projects. With this approach they have been able to bring the technology levels of their auto, semiconductor, and other industries near international frontiers within time spans of decades.
The more market-oriented mainland Chinese approach of pulling together and incentivizing partnerships between state-owned enterprises and foreign companies, and hoping for technology diffusion, has not been effective, as seen above. Why didn’t the reform era Chinese leadership adopt more self-reliant technology policies? Probably because China, before the reforms, had already been through the extreme self-reliance of the Mao era. Later, with a development policy based on opening up to the world, especially after WTO accession, the range of such policies was limited.
The Trump administration’s section 301 measures seem to be driven by the possibility of China dominating the whole technology scene as a result of its government’s technology transfer policies. But those policies don’t even seem to work. But if the existing rule-based trade environment disappears, China might begin pursuing more protectionist and self-reliant policies, which at its present technological state may well produce results. The Trump administration’s policies would be making the possibility that is motivating them a reality.
Are we moving toward a trade war for nothing?
Fatih Oktay is the author of an acclaimed book, China: A New Power and Changing Global Balances, in Turkish. He has taught Chinese Economy and Politics in Koç University and Sabancı University in Turkey, has worked as an information technology executive in various banks and companies in Turkey. Follow him on Twitter: @fatih_oktay_eng