The Trump administration has been highly critical of “Made in China 2025” — Beijing’s 2015 strategic plan to upgrade the nation’s manufacturing industry and technology sector. With negotiations in the U.S.-China trade war set to resume this week in Washington, Made in China 2025 remains a central concern for the United States.
At the top of the list of U.S. demands in the new round is ending forced technological transfers. In China, this is called “Trade-Technology-for-Market” (市场换技术), a strategy devised by Deng Xiaoping in the early 1980s. The policy requires foreign companies in strategic sectors to form joint ventures with Chinese state-owned partners — and share their technology as a condition to gain access to the Chinese market.
While Made in China 2025 does not explicitly advocate this policy, the worry on the U.S. side is that such practices exemplify the Chinese approach to coerce foreign companies into helping Chinese competitors attain global dominance in vital industrial sectors. But what has been the actual track record of China’s Trade-Technology-for-Market, given its long history? Should foreign companies fear that their Chinese joint-venture partners will become formidable competitors?
[interstitial_link url=”https://www.washingtonpost.com/news/monkey-cage/wp/2018/05/03/what-is-made-in-china-2025-and-why-is-it-a-threat-to-trumps-trade-goals/?utm_term=.56f9872cebb8″]What is ‘Made in China 2025’ — and why is it a threat to Trump’s trade goals?[/interstitial_link]
Our recent edited volume on innovation in China includes case studies in the automobile and semiconductor sectors — two sectors designated as “strategic” by the Chinese leadership since the 1990s, and where Trade-Market-for-Technology policy has been the rule. Here’s what we found.
1. Foreign technology and brands dominate China’s auto industry
The 1984 Shanghai Volkswagen joint venture between Volkswagen and the Shanghai Automotive Industry Corp. is well known. The Chinese government granted the venture a market monopoly until 2000. Yet Shanghai Auto was never able to shake off its dependence on Volkswagen for technology. It produced the same Chinese adaptation of outdated German models until the 2000s.
Today, the Santana brands are best sellers in China, favored by taxi companies and others as reliable and affordable. But these models are based primarily on an older German design and technological platform, with limited local adaption.
China now has a large number of joint-venture auto companies, as well as domestic carmakers. Foreign joint ventures claimed over 56 percent of the Chinese market in 2017, but dominated the premium market — showing continued leadership in technology.
The big change, announced in April, is that the government plans to remove the 50 percent cap on foreign ownership of joint ventures by 2022 — which effectively ends the Trade-Technology-for-Market rule in this sector. Analysts anticipate that most foreign auto companies will soon become wholly foreign-owned companies. In fact, Tesla’s first plant in China is already wholly owned. China’s JV partners, who have long hidden behind the foreign brands, have yet to face the market test of their own technological worth.
2. And China’s semiconductor industry lags behind
The experience in the semiconductor industry has been similar. The Chinese government invested heavily in the 1980s and 1990s in state-owned companies and established several joint ventures with European, Canadian and Japanese firms. Most of the joint ventures collapsed — with the exception of the 1991 Huahong partnership with Japanese firm NEC.
In 1995, Beijing launched “Project 909,” based on the Huahong-NEC joint venture. But Huahong was not able to shake off its dependence on NEC technology for over a decade. Only after 2001, when China turned to expertise from Taiwan and elsewhere, did the performance of Chinese domestic semiconductor firms improve.
Even so, China still lags behind industrial leaders in the United States, South Korea and Taiwan. China telecom giant ZTE nearly collapsed last year when the U.S. government threatened to cut off its supply of American-made semiconductors.
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The fundamental problem of the Trade-Technology-for-Market program is that it encourages Chinese partners to rely heavily on importing technology – rather than developing technology through their own research efforts. With foreign partners required to transfer the technology, why make the costly and risky effort to build up internal R&D capacity?
But the rapid pace of global innovation means even state-of-the-art technology transfers would become obsolete within a few years, leaving the Chinese partner in a perpetual state of dependency. In short, China’s past experiences showed that joint ventures with foreign enterprises proved no shortcut to technology leadership, but likely created entrenched dependency by Chinese partners.
In fact, some Chinese critics charged that this technology-transfer approach led to worse indigenous technological accomplishments than “self-reliance” policies during the Mao era. Since 2006, the Chinese government has shifted attention from foreign technological transfer to domestic R&D.
3. The real forces behind China’s technological innovation
Our book’s survey of China’s key high-tech sectors shows past official programs have not been as successful as outsiders often believe. China’s technological advances have been powered not just by top-down mandates or official programs, but also by bottom-up forces.
The best bottom-up case is cellphone manufacturing — where China’s domestic firms are building affordable and innovative phones. While the phones utilize core parts or platform from Qualcomm and Google, they are Chinese designed and incorporate market-leading features. In this industry, an innovation ecosystem created by the comprehensive global supply chain for hardware, a rapidly expanding universe of phone apps by companies such as Tencent, and the vast and dynamic domestic market provides a powerful synergy to nurture and implement new ideas and features in China’s market — creating diverging paths from foreign phone manufacturers.
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Critics of Made in China 2025 see Chinese state support as the determining factor for Chinese technological progress. The cellphone industry shows the power of market forces. China’s state policy on forced technology transfers, ironically, produced dependency and lags in technology development for Chinese joint-venture partners, which is why China has now signaled a move to pursue a more autonomous technological path.
The growing call in the United States to reduce or even block China’s access to U.S. technology, however, would likely backfire. Doing so is likely to encourage China to double down on this decision — choosing a technological path that is incompatible with products of U.S. tech companies. And that may mean fewer market prospects for U.S. companies in the long run.
Yu Zhou is a professor of economic geography at Vassar College.