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OPINION
China's looming clash with the U.S. over intellectual property
Michael Dunne | 2017/9/12

We are about to discover the true measure of America's bargaining power with the People's Republic of China. 

Brace for a possible head-on collision. 

Running in one direction, Chinese officials soon will unveil new regulations designed to give China a decisive upper hand in the market for electric vehicles.  

Those rules distilled: Global automakers -- General Motors, Daimler AG, Nissan, Volkswagen, Ford and Fiat Chrysler and others -- may continue selling cars in China as long as they hand over their advanced electric vehicle technology. 

On a collision course with China is a man on a mission: U.S. Trade Representative Robert Lighthizer. 

Last month, President Trump gave Lighthizer the green light to investigate China¡¯s treatment of American intellectual property.  

China¡¯s treatment of U.S. automakers could become a flashpoint for Lighthizer and his team of trade specialists. What right, Lighthizer might ask, does China have to require these companies to hand over costly American ingenuity? 

Lighthizer enters the picture just as China looks poised to clinch a decisive win in its campaign to be No. 1 in EV technology. 

First, a little background: China declared its ambition to lead the world in this segment in 2010.  At the time, foreign automakers were instructed to form new joint ventures to produce state-of-the-art EVs. 

Global players grudgingly complied by registering a spate of new joint ventures with decidely un-household brand names like Carely, Ranz, and Springo. 

Then the foreign automakers shifted into slow-walk mode. Very few new models were developed, even fewer sold. In 2017, Sino-foreign JVs will account for less than 1 percent of all EVs sold in China. 

It is fair to say that global automakers ignored Beijing¡¯s call for an infusion of EV technology. Instead, they and their Chinese partners continued to sell tens of millions of gasoline-powered cars and earned billions of dollars.  

Chinese brands like BYD, Chery and Zhidou did produce a record number of EVs without foreign help last year. But those models come up short in terms of range, comfort and efficiency. Durability is also a question mark.

State-owned Chery Automobile Co. sells its eQ1 small car for $7,500 to $14,700 after subsidies. Great price, eh? But the car¡¯s top speed is only 100 km per hour, and its maximum range is 180 km.

By international standards, the eQ1 is not a competitive car. And that¡¯s why China is so determined to capture foreign technology. 

This year, Chinese policymakers have developed a tougher approach, and there is no apparent workaround: 

? All automakers in China must meet aggressive electrification quotas that could jump to 12 percent of sales by 2020. 

? Meeting the quotas will require automakers to manufacture EVs in China because the 25 percent import tariffs remain prohibitively high. 

? Foreign automakers must have a Chinese partner, and that partner must own no less than 50 percent of the venture. 

There is one more factor -- a dramatic departure from past practice. All intellectual property introduced under EV joint ventures is to be owned by both partners immediately. 

(Under current rules, the Chinese JV partner acknowledges intellectual property and pays royalties for it). 

General Motors, Ford and FCA executives wonder and worry where the mandatory sharing will end.  If it is EVs today, will it be self-driving vehicles and artificial intelligence tomorrow? 

¡°Forced transfers of U.S. technologies have ¡­ accelerated as China seeks to become self-sufficient in key technologies and dominate world markets,¡± said Michael Wessel of the U.S.-China Economic and Security Review Commission. 

What are Lighthizer¡¯s options? 

Look for him to press China to discard the EV quotas. He might go a step further and demand that China drop the joint venture requirement. American companies should enjoy the same level of unfettered access to the China market that Chinese firms enjoy in America, he could argue.  

But Lighthizer will not have an easy go of it. Self-assured Chinese regulators preside over an auto market where annual sales are approaching 30 million units. 

¡°If the Americans don't like the new rules, they are free to leave,¡± the powerful Mandarins could say. ¡°We¡¯ll welcome the Germans, Koreans and Japanese.¡± 

Ever since Beijing Jeep, the original Sino-American car joint venture, was formed in 1984, Chinese and American partners have been ¡°sleeping in the same bed, dreaming different dreams¡±. 

China is hungry for technology. American automakers want to sell more cars. 

The two countries are drifting towards a confrontation. America the irresistable force meets China the immovable object. 

Let¡¯s hope the airbags work. 


Michael Dunne is president of Dunne Automotive, a Hong Kong-based company that facilitates investments between the U.S. and China. He is also author of American Wheels, Chinese Roads.


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