Beijing ups R&D competition with U.S.

Third of four parts

BEIJING — Stepping up its long-running struggle with the United States over access to technology, China this year embarked on a campaign to target advanced industries such as aerospace, medicine and information technology for its next stage of development.

Those industries are long-standing strengths in the U.S. and important sources of wealth and high-paying jobs. Many in Washington remain reluctant to see a rising competitor in the economic and geopolitical spheres gain access to valuable trade secrets and technical know-how.

China’s goal is to establish high-tech industries by attracting Western businesses to build plants and partnerships in China. Chinese leaders say they also would like to import more high-tech products directly from the U.S. and acquire technical expertise by helping Chinese firms invest in U.S. companies with leading technologies.

But government officials say export restrictions on high-tech products, justified as protecting national security, and congressional opposition to proposed mergers have quashed many deals to the detriment of both China and the United States.

“Investing in the U.S. could be mutually beneficial, create more jobs and boost revenues,” said Lu Kang, deputy director-general at the Ministry of Foreign Affairs. “But when Chinese companies go to the U.S., they face a lot of difficulties.”

U.S. political leaders want to preserve restrictions enacted during the Cold War that have become “obsolete” in light of China’s evolution into a capitalistic economy, he told visiting U.S. journalists. Chinese officials, when asked, shunned the word “communist” and used the phrase “market socialism” to describe the nation, though they did not repudiate outright the government’s Marxist roots.

“Economic cooperation between our countries could be on a much bigger scale,” but a “Cold War mentality” is preventing that, said Qu Xing, president of the Chinese Institute of International Studies. He said the U.S. prefers to press conflicts over Taiwan, the South China Sea and other issues rather than deepen trade ties.

“In the next 10 years, China will import $800 billion from abroad,” but U.S. export restrictions will prevent American firms from reaping much of the benefit, he said.

U.S. restrictions drive the Chinese to purchase technology from South Korea, Europe and Japan instead, officials said.

The Chinese Commerce Ministry estimates that if the U.S. had maintained the 18 percent share of Chinese technology imports it had in 2001, it would have sold $300 billion more in goods to China in the past decade. That would have put at least a small dent in a U.S.-Chinese trade deficit that has climbed to the highest ever between any two nations at nearly $300 billion a year.

Just a 1 percent increase in exports to China would help create 100,000 jobs in the U.S., according to U.S. estimates.

“The U.S. needs to rethink its policy and behavior,” Mr. Qu said. “You have some serious problems in the economy,” including unsustainable levels of federal debt, oversized trade deficits and a need for jobs and growth.

“These kinds of difficulties deserve a lot of attention,” and a more open economic relationship with China would help solve the problems by enabling the U.S. to “put more resources” into reducing deficits and debt, and expanding the economy, he said.

Several officials pointed out that Chinese firms are flush with cash and keen to invest in the United States, a trend that would help the U.S. economy grow and create jobs just as U.S. investment in China has helped the Chinese economy.

But they say Chinese enterprises have encountered opposition during several high-profile incidents in recent years, including an attempted acquisition of Unocal Corp. by the Chinese state oil company and a blocked 2008 merger of U.S. company 3Com with Huawei Technologies Co. Ltd., China’s leading telecommunications firm.

Even so, investment in the U.S. by Chinese enterprises has soared 130 percent in the past two years, with activity in most of the 50 states, according to the Vale Columbia Center on Sustainable International Investment.

“We encourage a global strategy for our corporations,” Mr. Lu said.

Daniel H. Rosen, a researcher at the Vale center, said Chinese companies will invest an additional $1 trillion to $2 trillion overseas in the next decade, but the U.S. could miss out on a share of that investment unless it becomes more welcoming to China.

“U.S. leaders must guard against protectionism,” he said, in particular avoiding further “politicization” of the national security review process. “The U.S. might lose out in competition with other developed countries if it fails to adapt.”

High-tech incubator

Even as it pushes Washington, China is vigorously pursuing its own plans to build a domestic high-tech sector. The government is seeking to get its foot in the door in numerous areas where American firms have led the world, including oil-extraction technology and social media.

China has an uncanny “ability to learn quickly and translate that learning into business success,” as seen in the rise of Huawei within only a few years into one of the top three telecommunications companies worldwide, said George F. Brown Jr., co-founder of Blue Canyon Partners consulting firm. Few U.S. companies are safe once China sets its sights on learning their business, he said.

“China’s brilliant ’Fast Follower’ innovation policy is generating the biggest transfer of technology in history,” said Bruce Nussbaum, writing in the Harvard Business Review.

China is acquiring Western technologies through a combination of methods, he said, including requiring Western companies to partner with Chinese firms to do business in China, demanding transfer of the latest technologies in exchange for access to markets, favoring “indigenous innovation” in government purchasing, fencing off “green” and other industries from foreign competition and offering low-interest loans from state-controlled banks to local champions.

U.S. officials and executives add that spying and theft also are among the tools China is using to get its hands on coveted technologies. They say Google’s experience with hacking in China was only the tip of the iceberg. The U.S. government leaves it largely up to businesses to protect themselves against such corporate espionage.

But many Chinese inventors and engineers earned their knowledge through legal channels - by studying and working at American universities and businesses.

Generous government funding played a critical role in enticing American-trained engineer Chaoming Zhang, for example, to establish a budding oil-services enterprise in Ningbo rather than in Houston or Silicon Valley.

“U.S. higher education is the best, but there’s more opportunity in China now,” Mr. Zhang said. He added that his son is attending college in the U.S., but he hopes he will follow his father’s example and return to China to make a living.

Mr. Zhang’s firm, Veritas Tech Co. Ltd., developed a machine to cheaply and efficiently siphon and dispose of water pumped out of aging oil wells. That technology is increasingly important in a world where rapidly depleting oil fields often are filled more with water than oil.

He said the technology solves a major problem encountered by oil producers around the world and has drawn interest from Saudi Arabia, the world’s leading oil producer, as well as China’s big national oil companies and such Western companies as Chevron Corp., BP PLC and Royal Dutch Shell plc.

Mr. Zhang hopes that one day Veritas will be big enough to compete with major oil services firms like Halliburton, Baker-Hughes Inc. and Schlumberger Ltd.

As with Veritas, China’s government nurtures “national champions” in other areas it targets for development and protects those firms from U.S. competitors that could easily squash the budding enterprises.

“Protectionism is a huge problem,” said Alan Turley, a vice president of FedEx Express in Hong Kong. He said the government is seeking to establish a Chinese competitor to replicate the delivery firm’s unique air-courier service and is putting obstacles in FedEx’s way, contending that the U.S. company doesn’t have enough competition.

Sometimes the government’s help for domestic industries comes in an unusual form.

The government pressured Google to exit the mainland and prohibits Facebook from operating there because both companies refused to accept Chinese censorship rules. While Westerners viewed the social media firms as persecuted and heroic, Chinese officials contend they deserved what they got because they refused to play by the rules.

Now, China is nurturing its own enterprises, Sina.com and Weibo, a Twitter-like service, to take their place.

Tong Chen, the chief editor at Sina, an Internet portal and news outlet with an enviable 500 million users, said the government’s occasional censorship of debate on sensitive issues proved to be a blessing in disguise for his company.

“If not for censorship, maybe Sina would have to compete with the big media, and the U.S. would invade the market just like it did in Taiwan and Japan,” he said. Sina Corp. is the only Chinese media company whose stock trades on the U.S. Nasdaq stock market.

Fatal attraction?

Still, the lure of China’s vast consumer market and low labor costs can be irresistible for American technology firms considering establishing a presence in China, even if it means having to share trade secrets or accept rules they don’t like.

Francisco Sanchez, undersecretary of commerce for international trade, made the rounds in China last month with a delegation of 19 biotechnology firms, including Amgen Inc. and Applied Science Associates Inc.

The delegation announced a $2 million deal to market American cervical cancer tests in China through a joint venture between California firms DiaCarta LLC and Kodia Biotechnology Co. Ltd. and Henan Kelong Medical Apparatus & Instruments Co. Ltd., a Chinese firm.

“China’s biotech sector is growing at roughly 25 percent a year, so it makes sense to bring the products and services of U.S. companies to China to help meet the demand,” Mr. Sanchez said. “This sale will not only help an American company prosper and hire more people, but it will also help China benefit from world-class, cutting-edge American technology.”

While publicly trumpeting such deals, many American executives privately complain that they are being coerced into transferring technologies and divulging trade secrets, and remain vulnerable to spying by Chinese firms and agencies seeking to replicate what they do.

Tom Burns, global director at Intel Semiconductor Ltd. in Hong Kong, said his company has worked to avoid getting into partnerships with Chinese firms where it would be required to “turn over the recipe” on trade secrets.

Also because of restrictions on technology exports imposed by the U.S. government, he said, the technology used at Intel operations in China already is “three generations behind” that used elsewhere.

That could be a growing problem in a country that Mr. Burns predicted will soon become the world’s largest market for personal computers.

U.S. companies such as Intel, Apple Inc. and FedEx that invented cutting-edge technologies and services are benefiting today from selling to China’s rising middle class of 250 million consumers who have the money to pay for their premium products, said Blue Canyon Partners’ Mr. Brown.

But they are in danger of losing out in the mass market of 1 billion lower-income Chinese consumers once Chinese firms learn their business and are able to produce comparable products at much lower prices for the domestic market, he said.

Mr. Brown said he cautions his American clients that “the early bird gets the worm, but the second mouse gets the cheese” in China. He noted that China overtook Japan in the last decade as the second-highest spender on research and development after the U.S., with most of its work focused on altering Western inventions for use in the fast-growing Chinese market.

U.S. companies, to avoid falling into a “first-mouse trap,” will have to follow the example of Chinese firms and re-engineer their products to take out unnecessary costs if they want to sell in China’s mass market, he said.

“The secret of success of many of the Chinese firms,” he said, is they’ve “figured out how to serve a less-prosperous market, often their own, and in doing so have become forces in world markets outside China.”