Will China Succeed with an Electric Car Technology Grab?
If Chinese companies are so strong in electric vehicle technology, why does a draft policy currently in circulation appear to be yet another attempt by the Chinese government to coerce foreign companies to transfer vital technology to Chinese partners? Because Chinese companies still lack vital electric vehicle technologies, of course. But the impact of the policy is unlikely to be as draconian as some reports suggest.
First, it's a bit unclear if the policy actually mandates that a foreign firm wanting to be part of China's electric vehicle sector must transfer technology. The draft policy, jointly issued by the National Development and Reform Commission and the Ministry of Commerce, is a revision to the Guiding Catalog for Foreign Invested Industries. The section that is giving foreign automakers and suppliers indigestion refers to joint ventures that are no more than 50 percent foreign-owned, and producing key electric vehicle components such as battery management systems, engine management systems, and electric vehicle control units.
Here's where the tricky part comes in. The policy says the guidelines aim to “encourage” foreign investment in these areas. How to read that? Does it mean that only the 50 percent locally-owned joint ventures will be encouraged with preferential tax treatment, as some have suggested to me? Or should the word encourage be interpreted to mean the government is mandating that any foreign company that wants to produce these components in China has to form a 50-50 joint venture and hand technology to a local partner?
Produce or Perish, In China
China is already discriminating against foreign firms where subsidies for electric vehicle purchases are concerned. GM told me several months ago that the Volt doesn't qualify for government subsidies because it is not produced in China. But GM already shares technology with its partner SAIC. Kevin Wale, president of GM China, said recently the two would cooperate on developing an electric vehicle architecture that is appropriate—that is, cheaper—for China. So GM wasn't planning to localize Volt production anyway. It is just using the car to prime the market for a future, cheaper model.
What about the Nissan LEAF, which will go on sale in China later this year? Last year, I asked Tsunehiko Nakagawa, vice president of Nissan (China) Investment Co. Ltd., if Nissan would produce the LEAF in China, and if so, was it worried about having to give away its intellectual property?
Nakagawa told me that since Nissan has a 50/50 joint venture with Dongfeng Motor Co, technology transfer would occur if the LEAF was produced locally. That was a given. The real deciding factor for local production of the LEAF was the size of the market in China for electric vehicles, he said. And that was, and still is, unknown.
Nissan was concerned about the cost to build a battery plant in China, which would be necessary if the LEAF were to be produced locally. For a small market, such a large investment would be unwarranted. “Therefore the decision (to produce the LEAF locally) is quite difficult,” said Nakagawa.
Worrying for Nothing?
Foreign suppliers are also worried about the impact of the draft policy. Many suppliers have wholly-owned foreign enterprises in China. Some-such as Ener 1 Inc. of New York, which just formed a joint venture with Wanxiang EV-will willingly form joint ventures. Others, such as Delphi, already have wholly-owned companies in China producing components that go into EVs. The government is unlikely to force them into JVs. Companies looking to supply China's EV sector from new wholly-owned companies may face problems, however.
If China does intend to use the policy to get technology, will it be effective?
Let's use history as a guide. I was in China back in 2004 when the government released a draft of the revised auto industry policy. The section on fostering independent intellectual property rights development caused much consternation among foreign firms, as did the reference to development of independent brands. Did this mean foreign automakers would have to give their intellectual property rights to Chinese partners?
Eight years later, the policy has resulted in a flurry of local brand development by the joint ventures. But the local brands in most cases are using older platforms rather than transferring new technology to the Chinese partner. Foreign automakers haven't been forced to give away intellectual property.
Now let's look back to the beginning of foreign investment in China's auto industry. Aiming to extract technology from foreign brands that would allow Chinese automakers to be more competitive, China mandated that no Sino-foreign joint venture that sold cars in China could be more than 50 percent owned by the foreign partner. Did that result in the massive transfer of technology to Chinese companies? No.
So, even if the new policy does mandate tech transfer, history suggests it is unlikely to succeed.
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