Stop Dragon My Heart Around: Auto Makers Distraught Over Electric Vehicle Rules

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BYD's E6 electric vehicle (Bloomberg)

Foreign automobile manufacturers are worried, and other multinationals are looking on with a great deal of interest as well as China mulls over incentive and spending plans for the electric vehicle sector. The newest potential heartbreak for an industry that is already highly regulated: mandatory technology transfer for foreign investors.

The Wall Street Journal has the details:

China’s government is considering plans that could force foreign auto makers to hand over cutting-edge electric-vehicle technology to Chinese companies in exchange for access to the nation’s huge market, international auto executives say.

The draft suggests that the government could compel foreign auto makers that want to produce electric vehicles in China to share critical technologies by requiring the companies to enter joint ventures in which they are limited to a minority stake, the executives say.

The plan is “tantamount to China strong-arming foreign auto makers to give up battery, electric-motor, and control technology in exchange for market access,” says a senior executive at one foreign car maker. “We don’t like it.”

If this sounds familiar to you, it should. This is the exact same criticism that has been out there for years, albeit in recent days the subdued grumbling has changed into outright shouting.

As I’ve said before, mandatory tech transfer is not a legal issue in China. That is, the law doesn’t say that the government may force anyone to turn over IP as a condition to investment.

Where this comes up most often is in a particular industry (like autos) that has been tagged as one of special concern for Beijing. In certain cases, before and during the approval process for a new subsidiary or joint venture, the government will quietly explain to the applicant that unless the IP owner transfers or exclusively licenses tech to the new company, the approval will be withheld.

This does not happen very often. In the majority of sectors it never happens at all. But for autos, environmental technology and other areas that are part of China’s economic development plan, it can happen.

I haven’t seen this draft plan to which the article refers, but I can guess that there is nothing in there about technology transfer per se, although I suppose it’s possible that there are some sort of incentive programs that have IP preconditions. More likely is that the plan includes a list of areas in which foreign companies are not allowed to set up wholly foreign-owned enterprises (WFOEs), forcing them to enter into joint ventures.

Auto execs, familiar with these games, understand that if they must sign on for a minority interest in a JV in a sector like electric vehicles, there is a good chance that some special requirements might be introduced (quietly) when they negotiate with their future partner and the local approval authorities.

It’s probably a good idea for them to scream as loud as possible right now, while the draft plan is still being circulated for comments. As with China’s indigenous innovation rules regarding government procurement, vociferous complaints actually resulted in positive changes to the IP conditions.

That being said, I’m not overly optimistic for the auto guys. They’ve sold a lot of cars in China over the years, but China has built an entire industry on that tech and experience and will soon be exporting domestic cars into foreign markets to compete against their old partners. The same thing will happen with this EV tech, it’s just a matter of how long it will take.