China’s technology tactics irk its trading partners
Beijing – For four decades, Beijing has cajoled or pressured foreign companies to hand over technology. And its trading partners say if that didn’t work, China stole what it wanted.
Communist leaders deflected demands for change until foreign frustration erupted into a showdown with President Donald Trump. He sent shockwaves through their export industries by slapping punitive tariffs of up to 25% on Chinese goods.
Europe, Japan and other trading partners object to Trump’s tactics but echo American complaints. They say Beijing’s tactics violate its market-opening commitments under the World Trade Organization.
American prosecutors go further. They say the Communist Party is the ringleader of a global industrial spying operation.
Chinese leaders have promised stronger patent protections and other legal changes. Foreign experts say that will make little difference if the party won’t enforce them.
“Chinese government efforts to encourage and direct firms to acquire technology from the United States are likely to continue as Beijing seeks to further develop its domestic high-tech industries,” an American government panel, the U.S.-China Economic and Security Review Commission, said in a report this month.
Here are some tactics Beijing’s trading partners complain it uses to improperly obtain foreign technology.
JOINT VENTURES: The strongest tool in Beijing’s arsenal is the longstanding requirement for companies in most industries to work through state-owned local partners.
The goal is for the Chinese partner to learn and eventually displace its foreign competitor.
Some balked but thousands of companies cooperated as the price of admission to the most populous global market.
Many companies say Chinese partners abide by promises not to abuse their access to technology. But some say partners have copied chemical formulas, industrial processes and other secrets for their own operations, sometimes with local government support.
Beijing denies it forces foreign companies to hand over technology, but joint ventures won’t work without foreign technology and manufacturing expertise.
In the auto industry, China has promised to lift requirements for joint ventures and allow full foreign ownership by 2023. Experts say that suggests they believe Chinese automakers no longer need foreign tutors.
Pressure to hand over technology pervades Chinese law and action by regulators.
Beijing promised when it joined the rules-making World Trade Organization in 2001 to treat Chinese and foreign companies equally. Eighteen years later, business groups and governments say foreign companies still face special burdens, including sharing technology.
The European Union filed a WTO challenge last June to Chinese laws on technology licensing it says discriminate against foreign companies. It said China’s own companies are free to negotiate licensing terms, but Chinese law dictates terms for foreign companies in advance.
A law approved in March bans using “administrative measures” to compel foreign companies to hand over technology. Business groups welcomed that but said Chinese officials can still use other pressure tactics.
Business groups say Chinese regulators misuse a 2008 Anti-Monopoly Law to pressure foreign companies in negotiations on technology licensing.
The law includes an unusual provision prohibiting “abuse of intellectual property right.” Lawyers say that runs counter to the spirit of patents and copyrights, which are meant to encourage technology creation by giving the owner a temporary monopoly and the right to charge others for using it.
Lawyers said Chinese regulators sometimes intervene in contract negotiations and push foreign companies to accept lower fees by threatening to launch an anti-monopoly investigation.
Authorities also use “window guidance,” or verbal orders given to companies in secret, to compel companies to support Chinese technology development in ways the government doesn’t publicly acknowledge.
A decade ago, for example, global automakers agreed to help Chinese partners create new local brands.
That injected foreign expertise into fledgling brands the Communist Party hoped eventually will compete in global markets in a way joint venture vehicles made under foreign brand names cannot.
It made life harder for automakers by spreading their resources more thinly and adding to competition in a glutted market. Despite that, global automakers said they had commercial motivations and regulators denied they applied any pressure.
The real reason? Industry researchers say regulators told automakers in private they had to cooperate if they wanted permission to expand production of their own brands.
More regulatory pressure
Regulators also pressure foreign companies to help potential Chinese rivals develop technology.
Global companies in engineering, software, pharmaceuticals and other fields have set up research centers with Chinese partners. Many say they are to take advantage of China’s scientific talent pool, but such arrangements benefit potential Chinese competitors and are unusual abroad.
This month, Microsoft Corp. opened an artificial intelligence research lab in Shanghai with the state-owned Zhangjiang Group.
Other prominent examples include General Motors Co.’s Pan-Asia Technical Automotive Center with state-owned SAIC Motor. SAIC is the main Chinese manufacturing partner for GM and Volkswagen AG but also sells its own auto brands.
And more regulatory pressure
Companies complain regulators use patent, safety and other official examinations to learn about technology, often including employees of Chinese rivals in review panels.
Companies are required to provide what they say is an unusually large amount of information about products and industrial processes, including competitive secrets, to obtain patents or approval for operations.
The Wall Street Journal in September cited an employee of a foreign automaker as saying there was “clear evidence of collusion” between regulators and Chinese automakers.
The employee said regulators asked for blueprints of components the company was trying to prevent its Chinese partner from seeing but ignored other parts of the vehicle.
For decades, the ruling party has rewarded businesspeople, academics and others who “localize technology” – a euphemism for unauthorized copying of foreign know-how – with promotions, research grants, money and public praise.
Security researchers say the government operates a network of research institutes and business parks to turn stolen technology into commercial products.
In 2013, three Chinese scientists at New York University were charged with sending U.S. taxpayer-financed research on magnetic resonance imaging to a Chinese government-run institute.
Other Chinese-born researchers in the United States have been charged with stealing chemical, seed, turbine and other technologies. Prosecutors say some had partners waiting in China to turn them into products.
American prosecutors say when all else fails, top-level state companies steal foreign secrets.
Pangang Group, a steelmaker owned by China’s Cabinet, was indicted in 2014 on U.S. charges it paid industrial spies to steal a process from DuPont for making titanium dioxide, a white pigment widely used in toothpaste, Oreo cookies and other products.
Defendants including an industry consultant and a retired DuPont employee admitted working for Pangang. But the case stalled because prosecutors had no access to Pangang Group and Chinese authorities took no action.
U.S. prosecutors say the Communist Party uses its military’s cyber warfare skills to steal commercial secrets.
The People’s Liberation Army is regarded as, along with the U.S. and Russian militaries, a leader in research on breaking into or disabling an enemy’s computer networks.
Security experts say hackers believed to be Chinese soldiers or military contractors have stolen secrets including product designs, chemical processes and details of commercial negotiations.
In 2014, five members of China’s military cyber warfare unit were indicted on U.S. industrial spying charges.
The following year, President Xi Jinping agreed with President Barack Obama to avoid using military resources to steal commercial secrets. But the U.S. National Security Agency said in November that Beijing appeared to be violating its pledge.
In October, an employee of China’s main spy agency was charged with trying to steal trade secrets from U.S. aviation and aerospace companies.