Import substitution industrialization (also called ISI) is a trade and economic policy based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. (Wiki)

During the past six months or so, one of the big themes in foreign investment circles has been the extent to which China has rolled up the red carpet for foreign companies. Some of this talk is in reaction to recent government enforcement policies that have made it more difficult for foreign companies to do business here. Additionally, China’s industrial policy has led to significant concentrations in certain market sectors, dominate by “chosen” State-owned Enterprises (SOEs).

In my own law practice, I have seen a disturbing trend with respect to technology transfer. In the past year, I have seen one tech license deal go bad because of a very questionable patent invalidation decision — the result allowed the local company to use the tech royalty-free. The other matter was a transfer of Chinese tech offshore, a purchase by a foreign entity; a couple of years ago, this deal would have gone through within days but now is bogged down in red tape.

For a long time, two of the chief motivating factors behind China domestic innovation programs are: self sufficiency and avoidance of paying royalties to foreign enterprises. As a developing country, China’s econ policy here makes some sense if it leads to domestic innovation and a continuous rise up the value chain of tech products.

However, if this attitude leads to specific policies designed to dislodge foreign suppliers in favor of domestic firms after tech know how has been shared, that’s not so cool. So what should we make of this sort of report:

China spends billions of dollars importing high-end scientific instruments every year, and its global competitiveness in manufacturing this technology is dwindling, a survey has found.

Conducted by Peking University and the National Center for Nanoscience and Technology and the National Science Library, the survey found that in some sectors scientists rely 100 percent on imported high-end instruments.

Importing these high-end instruments, including DNA sequencers and particle colliders, cost several billion US dollars in 2009, an increase of 30 percent on the previous year, the report found, without specifying an exact figure. (China Daily)

On its face, this is a simple report about how China is spending a lot of money, perhaps inefficiently. Maybe I’m reading between the lines too much here, but in addition to being more efficient, the obvious solution to this problem is import substitution.

I wrote about this topic a while back on china/divide, explaining that although China was seriously looking into compensation limits for bank executives, there were serious problem in moving ahead with comprehensive rules:

[B]anks are not independent institutions in China and, at least in the past, were specifically referred to as “policy banks,” since they were instrumental in implementing economic development policies.

When the government wants to stimulate the economy, like it did last year, the policy banks get the job done, lending to a variety of capital projects around the country. In return for doing so, they are backstopped to some extent by the government with respect to risks like Non-performing Loans.

So when it comes to assessing bank executive performance, one cannot simply take a look at the balance sheet or stock price — there’s a lot more going on at any given time. Moreover, it’s not even easy to define exactly what “compensation” is at a State-owned institution[.]

Seems like quite a complicated issue, and certainly not something that lends itself to a quick fix. The U.S. approach was to go for simplicity, a USD 500,000 cap, which is quite a ham-handed way of dealing with this.

Given what was announced yesterday, the China solution is starting to look a lot like the U.S. rule:

Senior bank executives’ performance-related bonuses should be within three times that of their basic salary, the China Banking Regulatory Commission said in its new guidelines.

At least 40 percent or more of an executive’s bonus must be delayed for a minimum of three years and could be withheld if their bank suffers losses due to poor control of risk.

Well, the three-year holding period is kind of interesting. If someone racks up huge numbers in one year and receives a fat bonus for his work, but then those investments go sour within 36 months, the bonus could be adjusted. On paper, that sounds like a good way to reduce risk-taking.

That sort of holding period would never fly on Wall Street. Those guys already despise the (usually) much shorter mandatory holding periods following IPOs, M&As, etc. (depending on either legal or contractual provisions). Asking them to wait three years before they can spend/invest that bonus cash? Heaven forbid!

On the other hand, are those bonus reductions mandatory/automatic or discretionary? If the latter, then all of this may be bullshit at the end of the day.

Banks must consider a range of indicators, such as capital adequacy ratio, non-performing loan ratio and provisions for bad loans, when assessing executives’ performance, the banking regulator said.

OK, but again, what does this mean? Will there be quantitative guidelines? How much is mandatory and how much discretionary? I think we’re going to need some lengthy implementing regulations on this one.

Potentially some tough times ahead for HP in China, at least in the short term. The problem: bad Nvidia graphics cards in some laptops. Sorry, gamers.

I assume that HP has a good relationship with a PR firm used to handling crisis management in China. The photo is from a 2009 Greenpeace protest against HP last year. I wonder if HP has already met with their consultants on this issue?

A couple of isolated tort cases would be unfortunate, but certainly no cause for alarm. However, there seems to be much more going on. The Financial Times has details today:

Chinese lawyers have filed a complaint on behalf of more than 170 consumers against Hewlett-Packard, requesting that the Chinese government order a recall of allegedly faulty notebook computers.

Uh oh. Some good news/bad news for HP here. The good news is that the complaint was not a lawsuit. The bad news is that it was a formal request sent to the General Administration for Quality Supervision, Inspection and Quarantine (AQSIQ), asking the government to open an investigation, institute a recall of the laptops, and order HP to provide compensation.

This is probably a smart move on the part of the lawyers involved. Class action lawsuits are not really a formal process here, although the functional equivalent is possible. However, big lawsuits are frowned upon and not in keeping with a Harmonious Society. On the other hand, mediation led by a government agency can be quite acceptable, as long as you go through the right channels and have enough political support.

What makes this worse than your run-of-the-mill product liability/consumer law type of case is the backdrop of the Toyota dispute (my previous post on Toyota) hanging out there and the sensitivity towards non-reciprocal customer remedies. Ouch, the complaint alleges the same thing with this dispute:

“We have also noticed that HP in the US offered consumers extended warranty periods for even more models and compensated them for transport costs, but in China, it has not made a statement or offered services, and openly discriminated against Chinese consumers,” the complaint said.

Not good at all. How bad it will be for HP depends on a number of factors, including the total number of people involved (so far, rather small), whether there is political support for this action, the reaction of HP, and media interest.

As to the latter, I already noticed one article in Xinhua today (Chinese) about an enterprising young law student from Zhejiang who had laptop problems and went up against HP to get compensation. Poor kid buys a laptop made in Taiwan and, within the two-year warranty period he gets the black screen (黑屏) (of death) after the graphics card overheated. Bummer, no more World of Warcraft.

If the Chinese media is already starting to pen feature articles describing poor unfortunates who have suffered after their HP laptops have given up the ghost, then bad times might be ahead. The next bump in the road is March 15, International Consumer’s Day. Expect AQSIQ to announce some new campaigns at that time to show the higher-ups in the government that they are diligently protecting the interests of the people.

Update: China Daily is on the story too.