International Technology Transfer in China

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International Technology Transfer in Chinas Auto
Industry Implications for Future Energy
Development

• Kelly Sims Gallagher, Ph.D.
• Energy Technology Innovation Project
• Belfer Center for Science and International
  Affairs
• John F. Kennedy School of Government
• Harvard University

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Foreign Investment in Chinas Auto Industry A
Complicated Network
VW
Shenyang Brilliance
Honda
First Auto Works
Shanghai Auto Industry Corp.
Ford
General Motors
BMW
Guangzhou Auto Works
ChangAn
Chery
Nissan
Toyota
Suzuki
Beijing Auto Industry Holding Co.
Kia
Tianjin Auto Works
Dongfeng Auto Works (former SAW)
?
Hyundai
DaimlerChrysler
Geely
Citroen
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The Sino-U.S. Joint Ventures
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Beijing Jeep Corporation (BJC)

• We are here to make money that means with the
  proper business model in making the JV profitable
  and in the meantime perform respective
  training.
• Wei-Ming Soh, DaimlerChrysler
• Top executives in big companies only see China
  as a market to sell vehicles. They dont see
  China as a place to develop vehicles.
• Chinese engineer at BJC

Above The Entrance Gate to Beijing Jeep. Below
Old BJ2020 and newer Jeep Cherokee
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Shanghai GM
We did everything we promised to do.
Phillip Murtaugh, Chairman and CEO of GM
China The foreign companies are not good
teachers, but the Chinese companies are not so
clever. -Chinese citizen working for GM China
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ChangAn Ford
Ford knew that WTO rules prohibited the Chinese
government from requiring technology transfer.
Keith Davey, Director of Business Strategy for
the Asia Pacific and Africa, Ford Motor Company
ChangAn Ford plant under construction in
Chongqing
Ford should be more open technologically because
there would be mutual benefit. Chinese
engineer at ChangAn
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Comparative Analysis
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Seven Main Findings

• U.S. FDI did not substantially contribute to
  improving Chinese vehicle technological
  capabilities because little knowledge was
  transferred along with the product.
• Chinese government failed to design and implement
  an aggressive, consistent strategy for the
  acquisition of technological capabilities from
  foreigners in the automobile industry.
• U.S. companies in JVs are purely
  profit-motivated Chinese also seek profits in
  short term, but most want skills for long term.

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Findings (cont.)

• Chinese firms have acquired good manufacturing
  skills and also acquired some product adaptation
  capabilities. Parts suppliers appear to have more
  advanced capabilities due to local content
  requirements.
• Technologies that were transferred by U.S. firms
  in the period studied were rarely, if ever,
  updated once a model was in production, with the
  emerging exception of SGM. This is now changing
  due to competitiveness.
• Even though technology transfer was purely
  product, the FDI has contributed to the growth of
  the industry, which has benefited the Chinese
  economy in terms of jobs and spillovers.
• U.S. firms did not transfer pollution-control
  technology until required to do so by the Chinese
  government.

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Remaining Challenges

• Fuel quality
• Rate of deployment of advanced technologies (and
  rate of growth of sales of passenger cars)
• Economic growth pressures, and role of auto
  industry
• Lack of incentives for foreign companies to
  transfer cleaner technologies other than Chinese
  policy, which is weak
• Lack of Chinese technological capabilities to
  design and manufacture clean technologies
  themselves
• Still relatively weak fuel efficiency standards

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Remaining Opportunities

• The next 50-100 million cars in China
• Alternative transportation and modes of mobility

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Limits to Leapfrogging?

• Huge opportunity to leapfrog due to existing
  small base and rapid growth. . . but, opportunity
  is being missed. Why?
• The combined short-term motivation of producing
  and selling cars is the main common incentive for
  technology transfer today
• There are fairly different incentives for
  technology transfer on either side of the joint
  ventures

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Thank You

• We gratefully acknowledge general support from
• Energy Foundation, William Flora Hewlett
  Foundation, David Lucile Packard Foundation,
  Shell Exploration Production, Winslow
  Foundation
• For in-use vehicle emissions testing project
• U.S. EPA, Energy Foundation China Sustainable
  Energy Program, Ford China, Ford Asia Pacific,
  and GM China

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Research Questions

• What role has U.S foreign direct investment
  played in the development of the Chinese auto
  industry?
• Have the U.S. auto firms helped to deploy cleaner
  or more advanced technology in China?
• What have been the most important barriers to
  technology transfer from the U.S. to China in the
  auto sector and why? What have been the best
  incentives for technology transfer?
• What special barriers or incentives will exist
  for cleaner technology transfer for automobiles,
  if any?

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Methodology

• Case study approach 1984-2002
• Interviews with dozens of officials in the joint
  venture companies and their parent companies in
  both the U.S. and China
• Visits to offices, factories, and research
  facilities in Shanghai, Chongqing, Beijing and
  Tianjin
• Interviews with numerous government officials in
  U.S. and China company public materials and some
  internal documents
• Academic literature and secondary sources (news
  media, wire services, magazines)
• Quantitative analysis using data from CATARC

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Auto Industry in Chinese Economy

• 1.6 million Chinese were directly employed by
  this industry as of 2003 (not counting the
  employees of industries that supply the auto
  industry (i.e. steel, rubber), which are
  estimated at approximately 36.4 million workers).
  Auto industry is 3 percent of total manufacturing
  employment.
• The value added by the Chinese auto industry
  represented 6.3 of the total value added of
  manufacturing in China in 2003, a tripling of
  this percentage from its level in 1990 (CATARC
  2004).

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History of Chinese Auto Industry

• Little to no manufacturing experience prior to
  WWII
• Tech transfer from Soviets before Sino-Soviet
  split in 1960
• After Cultural Revolution, no technological
  capabilities in this sector
• Decision to make or buy forced to buy because
  of weak technological capabilities
• Formation of many joint ventures with foreign
  firms and licensing of technology from them as
  well, but without formal industrial policy
• 1994 Auto Industry Policy intention to create
  national industry
• Consolidation of industry, but currently 118
  manufacturers all the major ones have formed
  joint ventures with foreign auto companies
• Joining WTO in 2001 effectively reversed many
  previous policies, but increased competition
• 2004 Auto Industry Policy auto industry as
  pillar industry create better technological
  capabilities and consolidate industry

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Chinese Automakers

• Currently 116 automakers in China
• Vast majority of output comes from the firms that
  have formed joint ventures with foreign companies
  (quasi-exceptions are Chery and Geely)
• High profitability
• Skills in manufacturing, parts and components,
  and business development
• Weak design and innovation capabilities,
  especially for advanced engines and system
  integration

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Terms of WTO for Chinese Auto Industry

• Import tariffs for complete vehicles are to be
  reduced from the current 80 to 100 percent to 25
  percent by July 1, 2006
• Import tariffs for parts and components are to be
  reduced from 35 percent to 10 percent by the same
  date
• Import quotas on vehicles will be decreased 15
  percent per year until they are cancelled in 2005
  
• Import licenses will also be phased out by 2005.
• Majority ownership limits on foreign
  manufacturers for engines will also be eliminated
  
• Also, provincial governments will be given the
  authority to approve foreign direct investment
  projects up to 150 million by 2005 (used to be
  30 million)
• All of the Chinese governments requirements
  regarding technology transfer, maintaining a
  foreign exchange balance, maintaining a trade
  balance, and meeting localization standards were
  eliminated upon Chinas entry to the WTO in 2001.

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2004 Auto Industry Policy

• 10-year update to 1994 policy
• Emphasizes need for consolidation of industry
  (i.e. FAW-Tianjin-Toyota)
• Urges more capacity-building and innovation
• First articulation of concern about environment
  and oil imports
• More emphasis on (and incentives for) exports

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11th 5-Year Plan for Auto Industry

• ???????????????
• Speed up autonomous development based on the
  current conditions (Chinese branding)
• ????????????????
• Promote sustainable development by using advanced
  technologies
• ?????????????????
• Optimize and upgrade the industrial structure
  using market mechanisms

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Background Data
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Comparisons
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Production Mix is Changing
Source CATARC, 2006
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Vehicles Per Capita
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BP Statistical Review of World Energy, 2004
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Oil Imports

• China became the second-largest consumer of oil
  in the world in 2004
• China now imports about 3.5 million bbl/day
• China is now the third-largest oil importer after
  the United States and Japan.
• Crude oil import growth has been about 0.5
  million bbls/day in recent years.
• More than half of Chinas oil comes from Middle
  East
• According to the Economist Intelligence Unit,
  imported petroleum (and related products) cost
  China US44.5 billion in 2004, making
  petroleum-related imports the second-largest
  category of import behind electrical machinery
  (EIU DataServices March, 2005)
• 15 billion spent over the past five years to
  acquire more than 100 foreign oil fields and
  companies (McKinsey Quarterly 2006)

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Domestic Oil Prices

• Chinese domestic prices of gasoline and diesel
  among the lowest in world.
• Government tightly controls prices of gasoline
  and diesel in domestic market.
• Concern about effect on poorer areas and
  manufacturing.
• Refining industry squeezed. Buying crude at
  world prices, selling refined products at low
  prices.

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New
Continued
China Light-Duty Vehicle Fuel Consumption
Standards
models
models
Phase I
7/1/2005
1/1/2006
Phase II
7/1/2008
1/1/2009
Red Line -- Phase II Maximum (2008-2009)
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Green Line -- Phase I Maximum (2005-2006)
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L/100 km
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For both Phases, the upper solid line is for
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Automatic transmissions and the lower
dash line is for Manual transmissions .
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750
1000
1250
1500
1750
2000
2250
2500
Vehicle Test Weight (lbs)
Feng An1, Wei Wu2, Yuefu Jin2 and Dongquan He3
1Transportation Consultant 2China Automobile
Technology and Research Center 3The Energy
Foundation
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Air Pollution

• Motor vehicles are now a leading source of urban
  air pollution in Chinas big cities

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Chinese Government Policies

• First emission standards in 2000
• Catalytic converters required in 2000
• Leaded fuel banned in 2000
• Clean Vehicle Action (alternative fuel vehicle
  program) started in 1999
• Ministry of Science Technology (MOST) high-tech
  (863) RD started program on clean vehicles in
  2001 (US120 million over 5 years)
• New fuel efficiency standards in 2005
• Euro III standards to take effect in 2008

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Vehicle-Emission Standards
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Chinese vehicle emission standards
Source He, Kebin, Oct. 2004
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Carbon Emissions from Chinese Passenger Cars
Under Various Scenarios

• China is already the second-largest emitter of
  GHGs in the world
• Transportation is currently only responsible for
  a very small fraction of those emissions, but
  this sector is likely to be the one with the most
  rapid growth in emissions during the next two
  decades

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In-Use Vehicle Emissions Tianjin

• Fuel Quality Testing
• Vehicle Activity Study
• In-Use Emissions Testing (Remote Sensing and PEMS)

• Project Partners
• ETIP, Harvard
• CATARC
• ISSRC, UC Riverside
• Tsinghua University

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Preliminary Results
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Technology Distribution (Preliminary)