Living Economics

Your Technology or Your Market Access
In a buyer's market with many potential sellers, China exacts technology transfers as a condition of entry into its lucrative mass market.

When China ordered a plane from Boeing, Boeing had to agree to buy up to a third of the needed parts from Chinese companies, or license the technology to make those parts. Boeing had little choice but to agree, unless it was willing to lose the sale to its arch rival, Europe's Airbus Industrie consortium.

When Chrysler1 refused to license the production of its minivan technology to China, the deal was awarded to Germany's Mercedes-Benz AG.

China's centralized restriction of foreign investment across a broad range of mature manufacturing industries and its fast-growing mass markets for many intermediate and consumer products put her in the driver's seat in coercing technology transfers as a price for market entry.

Though coercive in nature, many such technology transfers might well be efficiency-enhancing, and not trade-distorting. The efficiency of globalization lies in redistributing production to lower-cost producers. For many mature products with saturated domestic markets and declining profit margin, there is no competitive advantage to continue producing them in the home markets with much higher labor cost. The only reason that they have not been offshored is because of domestic union resistance. Moving the technology to lower-cost countries will not only open up new foreign markets but also preserve the domestic markets through cheaper import substitutes of components.

Transfer of mature technology also forces the parent companies to move up the technology ladder to maintain their technological leadership.

But not all technology transfers are so innocent. Some might involve the transfer of critical technology in which China's cheap labor offers little comparative advantage. For example, chip fabrication is a highly automated process involving little labor. But Motorola was coerced into setting up a wholly-owned $720 million silicon-wafer fabrication to teach Chinese engineers the intricate process of fabricating chips. At the risk of losing its position as the biggest seller of cellular phones in China, Motorola had little choice but to concede.

Technology transfers are not limited to civilian goods. Gone are the days when China under colonial domination was sold obsolete weapons that were useless against the colonial powers with more deadly weapons in the late 19th century. Today, weapon manufacturers from many countries are beating China's door down to sell her the latest deadly weapons and subcontract parts manufacturing by licensing technology. In other words, the once seller's market has been irreversibly transformed into a buyer's market.

Note:
  1. Chrysler and Mercedes have merged since 1995 when this story was first reported.
  2. Chrysler and Mercedes have merged since 1995 when this story was first reported.
References:
  • WSJ. 11/20/2006. "Booming Chinese auto market spurs car makers to stake claims."
  • WSJ. 11/7/2006. "As barriers fall in auto business, China jumps in."
  • WSJ. 12/19/1995. "Price of entry into China rises sharply."
  • WSJ. 10/9/1995. "Boeing strike is unlikely to end soon because of deep rift on array of issues."
  • WSJ. 9/10/1987. "As arms makers offer foreign buyers more, opposition is growing."
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