In the past half decade or so, China has made huge strides in the high speed train manufacturing sector and has been developing a vast high speed rail network across the large country. China has currently become one of the largest manufacturers of high speed trains in the world and boasts of world's largest high speed rail network.
Chinese manufacturers are giving the Japanese and German high speed train manufacturers a run for their money in the global arena and have been often beating them in securing orders from abroad. Even until a few years ago, the Japanese bullet trains or Shinkansen as they are known in Japan, were synonymous with the word 'high speed train'. This has changed now, with China manufacturing high speed trains for domestic use at a rapid pace, exporting it to countries like Turkey and planning vast projects across Southeast Asia.
The high speed train manufacturing industry is only one of the many high-end manufacturing industries in which China has excelled. The same can be said of other industries like non-renewable energy, especially solar & wind energy, electronics hardware, including computers, laptops, & mobile phones, and sophisticated heavy machinery & equipments manufacturing, to name a few. China's mobile phone manufacturer Xiaomi is cutting into Apple and Samsung's share in the Smartphone market in China and is also expanding abroad at a fast pace. Lenovo and Huawei are among the industry leaders in their respective segments. Sany, China's heavy machinery manufacturer is rivalling the global giants in the industry.
What has made all this impressive progress in technology intensive and high-end manufacturing in China possible is the ability of the Chinese manufacturers to obtain access to modern technology. This has been achieved through the process of 'Technology Transfer'. To put it very simply, 'Technology Transfer' is a process by which technology, knowledge, skills and manufacturing methodologies are transferred from one country or company to another. This transfer occurs from a technologically advanced economy to an emerging economy striving to move up the manufacturing value-chain.
In the nascent stages of high speed train manufacturing in China about a decade ago, Kawasaki, a Japanese company, transferred high-speed train technology to China South Locomotive & Rolling Stock Corporation Limited (CSR), China's largest train manufacturer by market value and a state-owned company. The two signed a deal worth US$740 million in 2004. The deal stipulated that Kawasaki, in addition to exporting, would also help manufacture trains in China. Further, training of Chinese engineers by Kawasaki was also agreed upon. A decade later, CSR is exporting its own bullet trains. In 2005, Siemens, a German high-speed train manufacturer, also entered into an agreement with China CNR Corporation Limited, another state-owned company. The deal was for the first high-speed rail link in China, between Beijing and Tianjin, and was similar to the one between Kawasaki and CSR. However, almost a decade later, the tables have turned and due to production shortages, Siemens is purchasing high-speed rail components from CNR. In addition, CNR is currently competing with Siemens for international contracts.
The phenomenon of technology transfer is not a new one. The economic development of the Asian Tigers, starting from the 1970s, was also rooted in the process of technology transfer. In the initial stage of their economic development, Taiwan and South Korea imitated foreign technology from Japan. Besides, Japan in turn had become one of the most technologically advanced economies in the world after in part benefiting from technology transfer from the US. At present, both South Korea and Taiwan are leading innovators and have moved on to high-end manufacturing.
The government in China has taken a more active role than its East Asian predecessors in obtaining technology transfers. It has been promoting specific industries, supporting companies which use globally-competitive technologies and facilitating joint ventures between foreign & Chinese companies where technology transfer is involved. The support often comes in the form of subsidies, easy access to capital, tax exemptions, loans on favourable terms, preferential access to market, implicit government backing in case of loan defaults, preferential treatment in bidding for government contracts and alike. The current Five-Year Plan (2011-15) in China makes it clear that advancing high-technology industry is a national priority. The plan identifies seven strategic industries – new-generation information technology, energy-saving & environment protection, new energy, biotechnology, high-end equipment manufacturing, new materials and new-energy vehicles. The government has pledged that these industries will be "nurtured" with fiscal and tax policies to "improve industry core competitiveness" and promote "domestic indigenous innovation."
China has a very unwavering approach towards technology transfer, which is actively enabled by the government. The government uses tactics like preferential treatment if the foreign companies are willing to play by the government rules on technology transfer, and threat of inaccessibility as well as exclusion if foreign companies are unwilling. These aspects set China apart from the previous Asian economic development stories. The 2006 'Medium and Long-Term Plan for Science and Technology Development (MLP)' issued by China's State Council, was one of the examples for the use of state coercion in obtaining technology transfer. According to the MLP, if foreign companies wanted to compete for government contracts and subsidies promoted under indigenous innovation policies, they had to transfer their proprietary technology and intellectual property to their Chinese partners. These policies led to a backlash from foreign governments and companies because they gave Chinese companies an undue advantage. In 2011, under mounting pressure from foreign companies, governments, and trade lobbies, the policy of "forcing" foreign companies to transfer their intellectual property to Chinese companies in order to bid for government contracts was officially abolished.
For most large foreign companies, the risk of not getting into the Chinese market is bigger than the risk of sharing technology. With a total population of more than 1.3 billion, world's largest middle class at about half a billion consumers and their rising disposable incomes, China is a business opportunity that the foreign companies cannot afford to miss. Hence, in the past, foreign companies willingly or otherwise agreed to comply with the technology transfer regulations set by the government in China like the MLP. Though foreign companies have benefitted in terms of sales and revenue by operating in China, but at the same time, past grievances from their side continue to emerge. Kawasaki has publicly complained that CSR's high-speed rail technology is based on their design, and has threatened to sue CSR if it begins to export trains based on that design. Similarly, during German Chancellor's official visit to China in 2010, executives from Siemens complained directly to the then Chinese Premier Wen Jiabao about the "forced" technology transfer.
Another common criticism of China's technology transfer policies is that many of the transfers occur through corporate espionage. Despite international laws like the World Trade Organization's 'Agreement on Trade-Related Aspects of Intellectual Property Rights' (TRIPS), which requires all members to meet a threshold level of intellectual property protection and enforcement, technology is illegally transferred through practices like corporate espionage. Even though most of the technology transferred to China by international companies is carried out through legal channels like joint ventures, patent licenses, and mergers and acquisitions, the strong arming & coercive tactics used by the government in China still remain a concern for the foreign companies.
China has been able to reap huge rewards in a short time through the government's strong-willed and pro-active efforts at obtaining technology transfer from foreign companies. The government has also played a major role by providing incentives to local manufacturers to forge joint ventures with technologically advanced foreign companies and use the technological know-how to move up the manufacturing value-chain. Despite the allegations of corporate espionage, institutionalized coercion through government policies such as MLP and alleged implicit coercion that foreign companies often accuses China of, it has to be accepted that the country has truly arrived on the world stage as far as high-end manufacturing is concerned.
India on the other hand has been a relative non-starter in the field of high-end manufacturing. Almost all of the requirements for sophisticated infrastructure projects in India are dependent on imports. Similarly, foreign brands continue to dominate the Indian market in the high-end consumer electronics segment. Even the majority of automobile industry in India remains limited to assembling rather than being based on component manufacturing. In the coming years and decades, high-end manufacturing is the game changer that Indian economy needs in order to generate vast employment and sustain economic growth. Whether India wishes to or is capable of emulating the technology transfer model that China adopted in the past remains a different question, but India can surely learn a few useful lessons from China when it comes to the phenomenon of technology transfer in high-end manufacturing.
Disclaimer: The views expressed in this article are personal.
Mukul Raheja, Research Associate at the Delhi Policy Group, New Delhi.
