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American Green Vehicle IP Goes to China

Words by Phil Covington
Leadership & Transparency

Though we have all become accustomed to China as a major net exporter of goods to global markets in recent years, in the automotive world, China's burgeoning domestic car market inspires all the major global auto companies to compete vigorously for a piece of the action.

The size of the Chinese market is set to grow hugely in the near term, which explains why veteran companies like GM and Ford, along with leading European car makers, are keen to establish a significant footprint in China, especially since their own domestic markets are likely to remain flat. In doing so, they will be forced to go up against China's own manufacturers; who themselves are keen to lead in green automotive technologies. And here is the dilemma - if foreign auto makers want to enjoy generous green-tech incentives to sell into China, they may be required to hand over their intellectual property. Will they be prepared to do this?

The simple answer, of course, is they absolutely don't want to comply, but they cannot ignore the numbers. The Financial Times reported earlier this year that by 2020, China's auto market will roughly triple in sales volume to 40 million vehicles, while the country could account for up to half of the world's total vehicle production by then. The USA was the world's largest auto market until two years ago. The Chinese market has since surpassed the size of America's, notching up 13.8 million passenger vehicle sales last year. In short, the market potential is huge.

As detailed in Green Car Reports, under China's "New Energy Vehicle Development Plan," the country will make $15 billion dollars available in R&D incentives for electric and plug-in hybrid technologies. Auto makers recognize that to compete in China, they'll need to build in China. The trouble is, to qualify for these incentives, the Wall Street Journal reports that foreign auto makers must enter joint ventures with Chinese companies in which they will be limited to a minority stake. Furthermore, the rules state that the Chinese firm must have the intellectual property rights and "mastery" of one of the qualifying vehicle's key components: the electric motor, battery pack, or power electronics.

So, if Chevrolet wants to build the Volt in China and enjoy the incentives, it would potentially have to hand over the intellectual property on at least some of its drive-train technology - or forfeit the incentives and be placed at a competitive disadvantage in competing with other companies who are enjoying them,  likely an untenable proposition. Hence the dilemma. As the same Wall Street Journal article reported, the U.S. Chamber of commerce stated that China's policies are "forcing foreign technology companies to anguish over balancing today's profits with tomorrow's survival."

In the world of sustainability thought leadership, there is much discussion that IP should be somewhat "open source" - that is, shared for the public good - to spur further innovation. But in this context, it looks like China's policy is a cheaper and easier scheme to transfer know-how to Chinese firms, when considerable effort and investment has been borne elsewhere. It's hard to argue that this precedent would be good for either the American, or other western economies. But is it a reasonable price to pay if foreign businesses get to play in China's huge market?

Consider this. China's cheap labor and currency exchange controls have led many US manufacturers to move overseas. America's economy has, as a result, tipped away from manufacturing and towards services, while US manufacturers have remained viable by emphasizing domestic R&D and vigorously protecting their intellectual property. Note, Apple products say "designed in California" on the box. If Apple gave up its IP, what competitive advantage would it retain?

While you mull over that, remember that a tenet of sustainability is the recognition that everyone on the planet is, "in it together," so cleaner cars in China benefits us all. However, we live in a paradigm of sovereign economies operating within a global marketplace, and in this context, China's policy of demanding a transfer of such green-tech intellectual property appears - at least at this high level - inequitable. If the policy sticks, companies will have to think very hard about what they could be getting into. For car makers, they will have to figure out how to balance the massive market potential of the Chinese car market and their own long-term interests. On the other hand, from a sustainability perspective - an additional 40 million cars on China's streets in 2020? That's a different discussion altogether.

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Phil Covington

Phil Covington holds an MBA in Sustainable Management from Presidio Graduate School. In the past, he spent 16 years in the freight transportation and logistics industry. Today, Phil's writing focuses on transportation, forestry, technology and matters of sustainability in business.

Read more stories by Phil Covington