|Source: Brookings Institution |
China's focus on developing what it terms ‘Indigenous
Innovation' is putting
foreign multinationals in a bind.
The electronics sector is dominated by foreign firms and last year Foxconn,
the giant Taiwanese contractor for firms such as Apple and Nokia, got unwelcome
attention because of a series of suicides among its almost 1m strong workforce
The Chinese market has been a difficult one for MNCs to crack and just as
some companies are at last making a profit, they are concerned about China's
'National Medium- and Long-Term Plan for the Development of Science and
Technology (2006-2020)' report, which says China will build its dominance by
"enhancing original innovation through co-innovation and re-innovation based on
the assimilation of imported technologies." This key report is known as
Korean electronics giant, Samsung, says the Chinese market accounts for more than 25% of total
global sales; 19% of Nokia's revenues were generated in China in Q4 2010; the 10 markets in which Nokia generated the greatest net sales in all of 2010
were (in descending order): China, India, Germany, Russia, the United States,
Brazil, the United Kingdom, Spain, Italy and Indonesia, together representing
approximately 52% of total net sales in 2010.
Samsung had long prepared for a “big jump” in the booming Chinese
market. “In China, now we have 24 research and development centers and more
than 4,000 R&D staffs to develop new products for Chinese consumers," the
German cars - - Mercedes, BMW and Volkswagen's Audi - - are popular with
wealthy Chinese consumers.
Last year, almost on-third of VW's global sales were in China; General Motors
also has a similar sales ratio.
US industrial giant, General electric (GE), targeted $10bn of sales in China
in 2010. The outturn was over $6bn compared with total revenues of
European rival Siemens can be compared with GE if GE Finance and the media
businesses are separated.
Siemens reported revenues of €76bn in fiscal 2010 (October 1, 2009 –
September 30, 2010). Siemens’ sales in China amounted to €5.8bn and new orders
totaled €5.6bn. With a workforce of over 33,600 from a total of over 400,000,
Siemens is one of the largest foreign-invested employers in the country.
Jeff Immelt, General Electric’s chairman and chief executive, was appointed
last month as chairman of President Barack Obama’s new Council on Jobs and
Competitiveness. Immelt said the US needed to be “a country that builds
things” if it was to create sustainable growth and good middle-class jobs.
On China and intellectual property, Immelt said:
“It’s going to be in the
Chinese interest to have better IP protection, over time. It’s got slightly
better, but there’s still more room for improvement on IP protection. We’ve got
to be careful about that.
“When I talk to some of my friends in high-tech companies, they have legitimate
concerns. I have a lot of empathy for those guys.”
The US restricts high-tech exports to China which have a military potential
but it's the fear of losing control of the technology behind existing US
products sold in China that worries US companies.
report by the US Chamber of Commerce says
China's innovation campaign is focused on
employing China’s fast-growing
domestic market and powerful
regulatory regime to decrease
reliance on foreign technology
indigenous technologies that
will enable China to solve its
infrastructure and social
problems, and as a result
enhance both its economy and
and broad plans for indigenous
innovation were officially
unveiled in 2006. But the
policy’s importance and
complexity are just now coming
to global attention as
supporting regulations pour out
of bureaucracies in Beijing and
across the country. In Party
liturgy, 'Indigenous Innovation'
is China's follow-on blueprint
to Deng Xiaoping's 1978 'Reform
and Opening.' The Chamber says
the evidence for
the historical importance of
indigenous innovation includes:
the turbulent preparation
process, unprecedented senior
level management mobilization,
elaborate web of policies and
implementation tools and surging
government science and
technology spending -- topping
$130bn in 2010,
according to the National Bureau
of Statistics -- as China races
to develop its own integrated
circuits, passenger airliners,
global technology standards and
all manner of intellectual
The US Chamber says China's MLP report is steeped in suspicion
of outsiders. The MLP explicitly states that a key tool for China to create its
own intellectual property and proprietary product lines will be through tweaking
foreign technology. "Indeed, the MLP defines indigenous innovation as
'enhancing original innovation through co-innovation and re-innovation
based on the assimilation of imported technologies.' It also warns against
blindly importing foreign technology without plans to transform it into Chinese
technology. The report states: 'One should be clearly aware that the importation
of technologies without emphasizing the assimilation, absorption and
re-innovation is bound to weaken the nation’s indigenous research and
As a result, the plan is considered by many international
technology companies to be a blueprint for technology theft on a scale the world
has never seen before."
General Electric, which was formed in 1892 from a
merger of the inventor Charles Edison's electric light company with a rival
company, has a long history in innovation but copying and intellectual property
theft is not a modern innovation.
reported in 2007 on the global innovation process of Apple's iPod, showing
that it can involve many countries.
recently published Brookings Institution policy brief (pdf) cites a 2009
survey by Greg Linden, Kenneth Kraemer and Jason Dedrick of the University of
California, which suggests that Apple, sells iPhones or iPods for several
hundred dollars, most of them 'made in China,' but the Chinese producer and
Chinese workers receive just under four dollars a piece. The retail price
of the 2005 video iPod was $299, the wholesale price $224 and the factory price
$144.56. The largest part of the factory price ($101.40) came from Japanese
components, with US companies other than Apple supplying $14.14 in components
and many different suppliers providing other small components. The final
assembly and checking is done in China for $3.86, while Apple’s estimated gross
margin is $80 per unit sold at wholesale, plus a portion of the retail margin
through its Apple online and retail stores.
These same researchers deconstructed the value of a 2005 Hewlett-Packard
Notebook PC, which sold at retail for $1,399 and had a factory cost of $856.33.
Intel and Microsoft received a total of $305.43 for each computer sold, while
the assembly and checking done in China netted $23.76— only 1.7% of the retail
price. China’s massive export boom in computers and electronics derives from
the fact that it is a very good place to assemble electronic products that
clearly benefit US companies’ profits. However, Brookings' economist, Martin
Neil Baily, says China’s policymakers want change; they
are determined to attempt to obtain more of the value added of the goods their
Bailey says Germany provides a fascinating
case study of the benefits and perils of a strong relationship with China.
Spiegel Online notes that the most important driving force behind the current
German economic upswing is its exports of sophisticated capital goods to China.
German companies find, however, that the Chinese demand access to their
industrial know-how. German businesses are reluctant to offend their Chinese
customers, but they are deeply concerned about the loss of intellectual
property. Beijing does not want merely to catch up to German companies - - its
goal is to surpass them. It has already done so in the manufacture of solar
panels, by subsidizing research into solar technology. China exports perhaps 70%
of its output of solar panels, about half of which goes to Germany, where demand
is heavily subsidized by the German government. In electricity generation,
Beijing invited Western companies to build power plants jointly with domestic
Chinese partners. Now the Chinese are upgrading the
plants with their own technology, based on what they learned through the German
company Siemens and the French company Alstom.
Martin Neil Baily also cites the $730bn
investment by China on its rail network by 2020, which Western companies cannot
ignore; during President Hu's recent state visit to the US, GE's Jeffrey Immelt
signed a joint venture deal with a Chinese firm in the avionics
sector and the joint venture’s first contract is to provide an integrated
avionics suite for the 160- to 190-seat Comac C919, China’s single-aisle
transport that will compete with the Airbus A320 and Boeing 737 families.
Baily says US policymakers must recognize that:
- Today’s trade deficit is not a technology
problem. The U.S. economy simply must become a more attractive place to
develop and manufacture new products.
- Technology may become a problem in the
future. The United States should work with the European Union, Japan and
multinational companies to develop a uniform code of conduct to protect
technology and patents when emerging market companies work with
- Policymakers must work with the private
sector to identify and reduce barriers to US exports.
- The policy debate must focus on the right
issue, and not be drawn down blind alleys.
- Companies should focus on innovation and
cost reduction and avoid dragging policymakers and themselves along