Clearing the China Air: Technology and Protectionism

January 29, 2013

My posts have been few and far between these days for a variety of reasons (other commitments, paucity of real news, smog-induced crushing depression), but today’s weather requires some words in response, and thinking about smog has led me back to familiar themes about technology transfer, local protection and industrial policy.

If you’re picking up my RSS directly or reading this at the China Hearsay home page, you’ll see the pic I included, which is the view from my living room window.

The air quality this month has lurched past “Blade Runner” and gone straight to . . . well, I don’t even have a good popular culture allusion to what we’re experiencing now. Historically, I wonder if we’re getting on towards a London Great Smog situation, which happened back in ’52.

But I actually didn’t want to simply bitch and moan about the weather, which by the way my forecast describes as “Fog.”

More interesting, or at least optimistic, is the story of what will happen when all of this gets cleaned up. As a native of Los Angeles who grew up in the smoggy ’70s, I know that these things can get better through government action. I sincerely believe that the Chinese government will fix all this, although I’m not sure exactly how or when. Officially, China has been working on environmental solutions for many years, but we’re not yet seeing the fruits of those labors.

I do know, however, that the best way to do so in the near term will involve some measure of foreign technology, and this presents a problem for China’s industrial policy. (Yes, we’re back to that.)

Consider an article, attributed to Bloomberg, that I grabbed off the Shanghai Daily RSS feed. They helpfully entitled it “Foreign automakers may profit from smog.” Here’s the thesis:

[F]oreign carmakers in the world’s biggest auto market are poised to profit from this month’s record-breaking pollution. With toxic smog engulfing Beijing and much of the rest of the country for weeks now, China is considering tighter vehicle curbs and emissions standards that match Europe’s.

That could benefit General Motors Co, Volkswagen AG, and Hyundai Motor Co in a market where sales are forecast to top 20 million units this year, according to industry researcher Intelligence Automotive Asia. The new rules are likely to spur many drivers to buy new cars, and unlike most domestic automakers, overseas companies can produce vehicles that comply with stricter global standards for emissions.

Now let’s expand that out to a wide variety of clean technologies, and the point still holds true: foreign manufacturers and owners of intellectual property are dominant. If China wishes to clean things up here, the first few years at least will involve foreign technology.

Yes, there are other options. China could, for example, utilize its much-publicized compulsory licensing rules to force some foreign IP owners to share cleantech with local manufacturers. However, I’m not losing too much sleep over this possibility. The law probably allows for this draconian measure, given an environmental emergency, but I don’t see China making a move that would serve to give up much of the ground it has taken in recent years in the IP PR war.

No, China will continue with the policy it has been implementing for a long time now when it comes to cleantech: inward technology transfer. And that brings us back to the Shanghai Daily/Bloomberg article. This policy just isn’t all that favorable to domestic firms.

So will we see increased local protectionism as more money is doled out to environmental projects?

I think that’s a real possibility, and it shouldn’t surprise anyone. We’re talking about significant public expenditures, and folks never like to see such funds being spent on foreign firms. I recall back in the days following the 2008 Great Recession, when Washington actually appropriated a small amount of money for infrastructure and other public projects, that there was significant criticism over government expenditures going to foreign contractors. Keep in mind that the U.S. doesn’t even really have an industrial policy.

If local protectionism rears its ugly head, what will it look like? There are a lot of ways this can happen. For example, while we might not see compulsory licensing, I wouldn’t be shocked to see certain valuable foreign cleantech IP experience trouble when it comes to specific instances of enforcement against infringers, particularly in secondary or tertiary cities. We might also see provincial/local governments get more aggressive when it comes to approval of foreign investment projects in related industries, perhaps informally pushing for additional tech transfer.

At the State level, Beijing might revisit incentive programs somewhere down the line. The complaints over the indigenous innovation program have finally died down, after Beijing walked back the more troublesome IP transfer requirements, but there are still a variety of programs out there in the cleantech sphere (e.g., tax incentives). New programs or protectionist enforcement patterns are both possibilities.

All of my technology transfer clients get the usual speech from me about protection of IP. The ones in the cleantech sector, however, get a souped-up, aggressive and slightly paranoid version of those cautionary comments. Themes stressed include IP registrations, partner due diligence, strong contract language, ongoing market investigations, and (as always) a reliance on non-legal, practical ways of protecting IP/technology.

Now more than ever. Just look up at the sky, and you’ll see why.