Foreign direct investment (FDI) in China has risen rapidly over the past twenty years, with China being the current lead recipient of FDI among all developing nations and second only to the United States among APEC countries. A small, yet growing type of FDI in China is focused on the production of "clean" technologies or products (e.g., for pollution control, energy efficiency, or renewable energy). Two speakers at a 2 October 2006 China Environment Forum meeting examined whether international companies in the wind power and auto sectors are transferring the most cutting edge green technologies into China.

Joanna Lewis of the Pew Center on Global Climate Change focused her presentation on the growing technology transfer to local manufacturers in the wind power industry, while Kelly Sims Gallagher of Harvard University's Belfer Center highlighted the relatively low level of international technology transfer in China's auto industry (See PowerPoint presentations in the See Also box). Greater transfers of such clean energy technologies could greatly influence not only China's energy development, but also mitigate growing pollution and respiratory problems linked to deteriorating air quality domestically (some 400,000 people die prematurely in China due to respiratory illnesses). In China, up-scaling and expanding the adoption of renewable and clean energy technologies would help decrease respiratory problems domestically, as well as having a significant impact on mitigating current trends in global warming and pollution. The International Energy Agency's World Energy Outlook 2006 recently predicted that China would surpass the United States in CO2 emissions by 2009.

Learning how to Ride the Wind—China's Budding Windpower Sector
Although China only contributes a small share of wind energy development globally, in 2005, the largest annual capacity addition was in China; spurred by the government's wind power target to produce 30 gigawatts (GW) by 2020 and other policies and initiatives to encourage the market for wind power development:

(1) The wind concession program. This Chinese government-run bidding program encourages domestic and international companies to develop wind projects and was first utilized to promote large-scale wind farms. The program grants companies the right to develop the selected project site and includes a 25-year power purchase agreement, guaranteed grid connection, financial support for grid extension and access roads, and preferential tax and loan conditions. However, one aspect of the program that frustrates some international investors is a 70 percent local content requirement.

(2) 2005 Renewable Energy Law. This law creates incentives and requirements for 10 percent of China's energy to be renewably sourced by 2020. The law includes measures to promote the use of bidding to set prices for renewable energy developments, although feed in tariffs have been used in some wind power cases. This law extends the 70 percent local content requirement to all renewable energy projects throughout China; although many companies have found some ways around this requirement.

(3) Upcoming renewable portfolio standards (RPSs). Policymakers in China are discussing RPSs that would place percentage requirements for utilization of renewable energy sources on the generating companies. Such discussions have helped keep prices low, as it is predominantly the generation companies that are dominating market development. Although the government has not yet released official RPSs, these standards will be set soon; many generation companies are already operating as if they were already in place.

With large local-content requirements these policies are encouraging local manufacturing, but are not yet addressing technology transfer or intellectual property rights.

Various Models of FDI in the Wind Sector
In her study of wind power in China, Lewis examined foreign and domestic companies involved in the Chinese wind turbine industry, comparing the extent of technology transfer in four case studies (See Table 1). Among these four cases there were three types of ownership models, which greatly impacted the extent of technology transfer:

(1) Limited joint venture: All materials and technology are developed and owned by the foreign company—but manufactured with Chinese labor and materials (e.g., NEG Micon/Vestas and GE Wind);
(2) Joint venture: A foreign company develops the technology, which is then owned by a Chinese company. Components are made with Chinese labor and materials (e.g., Xian-Nordex); and
(3) Chinese owned: A Chinese company develops and owns the technology and oversees the production of the materials (Goldwind-China).

Table 1. Ownership, Innovation, Manufacturing and Intellectual Property

Regardless of the joint venture model, very few foreign companies have transferred wind power technology, in great part due to the high level of local content requirements and concerns about intellectual property rights.

Foreign-owned companies have not challenged local content requirements because they have been able to do well in the market and retain control of their intellectual property. Notably, the Chinese government is considering the implementation of local intellectual property requirements for wind power in an attempt to push international companies to transfer more technology. Such stipulations on intellectual property requirements might be viewed as, "changing the rules in the middle of the game," and could be contested by international companies under WTO or simply limit new FDI in this sector. The risk of WTO challenges is deterring Chinese policy development in this direction.

The Chinese government has been trying to promote the strong independent Chinese wind power companies with some success. Among Chinese wind power producers, several manufacturers produce equipment that is up to 30 percent cheaper than their foreign counterparts, but they generally are not as advanced in design. For example, Chinese firms rely on 600-750kW capacity turbines, while GE offers 1.5MW and Vestas 2MW turbines.

Policy Recommendations
Lewis suggested that instead of mandating intellectual property requirements, there should be a focus on finding policies to support demonstration, testing, and certification of locally manufactured technologies. Goldwind, a Chinese company, is one of the only local manufacturers with commercially available turbines, but new Chinese manufacturers are popping up every day. Many of the Chinese turbines are new models that have not been tested. Thus, there is a need for a standardized testing program, not only to help reduce the risks of these new turbines, but also to promote their distribution. Chinese companies must also develop channels for informal knowledge transfer, such as by creating research and development centers, possibly following the model of a new wind power company in India called Suzlon. Suzlon was a latecomer to the renewable energy market, yet recently became the world's number four manufacturer of wind turbines, surpassing Denmark. Suzlon founders created a unique model in which they established research and development centers throughout Europe to improve their production of turbines in India.

Technology Transfer in the Auto Industry
Gallagher began her talk by noting that although car ownership is still relatively low in China, it is growing rapidly, and in large cities cars are already the leading source of urban air pollution. Beyond pollution problems, the explosion in personal cars also raises concerns about energy supply. In 2004, China was the second largest consumer of oil and currently is importing 3.5 million barrels a day.

In her recent book China Shifts Gears: Automakers, Oil, Pollution and Development, Gallagher examined whether U.S. FDI in the auto industry has motivated technology transfer and thereby aided industry growth in China. Specifically, she examined: (1) the extent to which U.S. firms have been transferring of environmental or energy efficient technologies, and (2) the key incentives or barriers for that technology transfer.

Gallagher investigated FDI as a vehicle for technology transfer in China through studies of three major joint venture (JV) companies in China: (1) Beijing-Jeep Corporation; (2) Shanghai-GM; and (3) Chang'An Ford. The study was conducted through dozens of interviews with managers on both sides of the JVs, government officials, and even from visiting many of the factories and talking with workers on the shop floor.

China's Automobile History
The auto industry has been enormously helpful to the Chinese economy—as of 2003, 16 million people were employed directly in China's burgeoning car industry; this number does not include spillover industries such as the steel and rubber manufacturers. According to China Automotive Technology and Research Center (CATARC), the auto industry makes up 3 percent of the country's total manufacturing employment and 6 percent of manufacturing output—this is a tripling of percentage since 1990.

Prior to World War II, there was very little manufacturing of automobiles, some trucks were manufactured for government officials but most automobiles were imported. Immediately following WWII, there was a great deal of technology transfer from the Soviets, yet after the Sino-Soviet split around 1960, passenger car production virtually ceased. After the Cultural Revolution, the Chinese leadership debated whether China should copy the South Korean and Japanese auto industry model or simply focus on importing cars. The government initiated an experiment of JV auto manufacturing, beginning with Xia Li vehicles licensed from Japan, which sparked many other JVs.

Auto Industry JVs—Imbalanced Partnerships
Beijing-Jeep was China's first ever JV company and the lack of experience with such a partnership led to a steep and painful learning curve for both the Chinese and U.S. firms. Some of the difficulties stemmed from the lack of a clear auto industry policy until 1994. Even the 1994 guidance policy was very broad and simply stated that China would form a national auto industry and attempt to gain its own technological capabilities. In the mid-1990s, there was also much talk within the Chinese government of consolidating the auto industry, which today is still quite high at 160 manufacturers. The government issued another major auto policy in 2004, which stated that China wanted technology transfer to turn auto manufacturing into a pillar industry, although the government had lost most of the tools to do so with China's WTO entry.

Except for Chery and Geely, all the major Chinese auto companies have been created via JVs, with some partnering with two or three international automakers. This extensive web of partnerships (See Figure 1) has led foreign companies to worry about their intellectual property "slipping" to other international automakers. Gallagher's study found—with the exception of Shanghai-GM—that technologies transferred by U.S. firms were rarely, if ever, updated once a model was in production. For example, Shanghai-Volkswagen produced a 1980s version of the Santana when it first began manufacturing in China. Years later the company put a different shell on this same model and called it the Santana 2000.

Figure 1. Investment in China's Auto Industry

Another obstacle to greater transfer of clean vehicle technologies stems from the conditions China agreed to under WTO. During WTO accession talks, the U.S. and Europe were greatly concerned about the auto industry, which led Chinese negotiators to concede all of China's policies requiring technology transfer and local content requirements. Yet China has been creative about backhanding local content requirements through tariff policies—which the U.S. and Europe are currently disputing in the WTO. The results from this case will have great implications on China's ability to marshal more technology transfer in the future.

Lack of technology transfer has been a major irritant to JV relations. Galleghar cited an illustrative quote from a Chinese engineer at Beijing Jeep Corporation (BJC), "top executives in big [foreign] companies only see China as a market to sell vehicles. They don't see China as a place to develop vehicles." Gallagher noted that during her research trips to BJC before Daimler reinvested, the JV was going through a very troubled period where production was nonexistent.

At Shanghai-GM, the Chinese developed a software program to track and ensure that they were getting all the information and technology they had been promised. Although GM is viewed as one of the most generous in terms of technology transfer, the Chinese were still dissatisfied—although both sides have profited from the venture. One Chinese manager stated bluntly, "the foreign companies are not good teachers, and the Chinese companies are not so clever."

Ford Motor waited until WTO negotiations were over to close their JV agreement with Chang'An so it would not have to deal with technology transfer requirements. The Chang'An Ford relationship has been very troubled due to dissatisfaction with the kind of autos Ford is bringing to China, beginning with the first car—the Fiesta—which became an icon in India, but flopped in China. More recently, the Ford Focus was introduced, which while doing much better has not stemmed demands by Chang'An that Ford be more open with technology transfer to make up for the Fiesta fiasco.

Realizing the challenges associated with foreign technology transfer, China's 11th Five-Year Plan for the auto industry emphasizes the need for more autonomous development, better Chinese branding, and less dependence on JVs.

Lack of Clean Car Technology Transfer
Overall, Gallagher's research found that U.S. automakers did not substantially contribute to improving the technological capacity of Chinese firms, because very little knowledge was transferred in the construction of the cars. The Chinese government has also failed to design and implement an aggressive and consistent strategy for the acquisition of technological capabilities from foreigners in the auto industry.

Even though technology transfer has been slow, FDI has contributed to the growth of the Chinese auto industry. For example, the Chinese firms have acquired good manufacturing skills and some product adaptation capabilities. While Chinese parts and components manufacturers have benefited from local content requirements, Chinese automakers remain weak on engine design and innovation because foreign automakers hesitate to share this technology. This hesitancy has resulted in foreign automakers not introducing cutting-edge low emissions engine technology to China—not even information on basic catalytic converters is shared. Clearly, this information gap represents a major missed opportunity to cut vehicle pollution in China.

It seems, that the U.S. and other foreign automakers will not transfer pollution-control technologies until they are required to do so by the Chinese government. China passed strict fuel efficiency standards in 2005, which if fully implemented will require much cleaner technologies from all automobiles manufactured and sold throughout China. Many foreign automakers point out that under these rules, transferring cleaner technologies may not help pollution problems due to the low fuel quality available in China. Thus, while the new fuel efficiency regulations are admirable, they need to be done in conjunction with changes in the pricing of gasoline and in the refining sector in China. Specifically, Chinese oil companies buy crude oil at world prices but are required to sell it cheaply to Chinese consumers due to government price caps. Oil companies thus cannot afford to upgrade refining capabilities.

Acknowledging the pun, China stands at a crossroads regarding auto production. The quality of the next 50-100 million cars produced and sold in China in the next decade will be decisive in whether China can stem its current air pollution and human health crises. The decisions made in China today regarding vehicle emissions and efficiency also will have major impacts on global energy prices and CO2 emissions. There is a significant opportunity to develop cleaner cars and create alternative transportation models in China, but it is not clear whether the Chinese government's policies and JV industries will move fast enough to prevent exacerbating the current energy and environmental problems (See 30 November 2006 Urban Transport Summary). Gallagher noted that from her personal experiences, the Chinese do seem truly committed to a green path in the auto sector, but require a great deal of assistance.

By Juli S. Kim and Jennifer L. Turner