Managing Technology Transfer to China

 

Jerry Feng Xia

 

 

 

The Sino-European Technology Transfer Center (SETTC)

Rotterdam & Delft, the Netherlands

2001.8

 

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INTRODUCTION

 

There are many vehicles for the transfer of technology from West to China, such as licensing, co-production, subcontracting and the equity joint venture, etc. Among them that of joint venture is especially popular since it allows the foreign partner to realize its major objective, i.e., to participate in the Chinese market while maintaining some control over business activities. Following are some key aspects as well as a few major problems concerning transferring technology to China, in which the joint venture vehicle will be taken as the usual case.

 

 

ESTABLISHING GOOD PARTNERSHIP

 

If a foreign technology owner/holder has interest in transferring his technology to China, his first step is to find a good Chinese partner. To convince him you are a qualified and valuable partner candidate, being an entity enjoying the status of a legal person is apparently far from enough. In particular, foreign parties would take the following into consideration when choosing a suitable Chinese partner:

 

• A good connection (Guanxi) network: to establish a good connection network in China is probably the most indispensable thing necessary to the success of a business in China.

 

• Knowledgeable ideas about the specific conditions of the potential Chinese partner, such as following fundamental information:  

                                                                                                       

1)      The financial situation of the potential Chinese partner;

2)      The ownership of the Chinese partner: public, collective, or private?

3)      Are leading members of the Chinese partner professionally competent and devoted?

4)      Whether the Chinese partner receives strong backing from the relevant governmental institution;

5)      How much power the partner has in obtaining essential supplies and raw materials?

6)      What kind of access the Chinese side has to China’s domestic market?

7)      Are competing ventures planned elsewhere or does the Chinese side have the political and economic clout to keep a dominant position in its field?

8)      Whether the Chinese side can successfully assimilate the transferred foreign technology?

 

·        Desirable Location: the right location is also crucial. Normally, coastal cities are home to China’s most profitable foreign joint ventures with the higher returns on investment (ROIs) than inland cities. A recent survey reveals that Shanghai and Shenzhen have the highest ROIs among across China.

 

·        Two pitfalls a foreign partner would try to avoid in choosing Chinese partners:

 

1)      The so-called “fishing” strategy: The potential Chinese partners are in serious financial trouble and hope that joining forces (foreign technology or investment) could serve to rejuvenate a dying organization. They try to hook unsuspecting foreign partners by hiding the dismal financial and management problems of the enterprise.

2)      Another pitfall lies in differences amongst priorities, as described: “sleeping in the same bed and having the different dreams”. Generally speaking, foreign partners are interested in market access, cheap labor and lax rules on pollution control while the Chinese side is interested in capital and technology as well as promoting its exports. When these various priorities are at odds, coordination between the partners is thus becoming very poor.

 

 

PREPARING FOR NEGOTIATION

 

A potential foreign partner would first need to familiarize itself with the legal framework for technology transfer in China.

 

• The new Contract Law apparently did not change the existing regime with respect to technology contracts (import or export) between foreign parties and PRC companies (including FIEs). Currently, the relevant Chinese laws and regulations that still de facto apply on the import side include:

 

1)      The Regulations on the Administration of Technology Import Contracts (RATIC), promulgated by the State Council on May 24, 1985;

2)      Implementing Rules for RATIC, promulgated by Ministry of Foreign Trade and Economic Cooperation (MOFTEC), on January. 1988; (Implementing Rules)

3)      Administration of Trade in Importation of Technology and Equipment Provisional Measures (MOFTEC, March 1996);

 

            The two most important laws for those who want to transfer their technology via 

            joint ventures are:

 

4)      The Law of the PRC on Joint Ventures Using Chinese and Foreign Investments (the Law), Second Session of the Fifth National People’s Congress, July 1, 1979;

5)      The Regulations Governing the Implementation of the Law of PRC on Joint Ventures Using Chinese and Foreign Investments (the Regulations), promulgated by the State Council on September 20, 1983.

 

• Relevant tax laws should also draw special attention from potential foreign partners.

 

In the case of transferring technology via the channel of joint venture, there should be:

 

• A feasibility study, normally including:

 

1)      Economic significance of the transfer or investment;

2)      Market demand and the scale of the proposed product;

3)      Necessary resources, fuel and public utilities;

4)      Proposed project location and project design scheme;

5)      Environmental protection;

6)      Organization of production;

7)      Employment and training of workers and staff;

8)      Implementation plan;

9)      Investment estimate and manner of raising funds;

10)  Estimated product cost and economic results.

 

One common complaint from foreign partners is that in order to impress them some Chinese partners tend to verge on over-optimism, changing the study of feasibility into a study of the “imagination” .

 

• Contact with the relevant governmental institution for approval on the proposal of technology transfer or joint venture concerned, depending on the nature and amount of the transaction or the scale of investment;

 

In the case of international technology licensing, although the precise provisions of a  licensing agreement may depend on the objectives of the parties and their relative bargaining power, the nature of the intellectual property and the relevant national laws (Chinese laws) governing the relationship, there usually should be:

 

·        A preliminary study on key contractual provisions including:

 

1)      Scope of the license;

2)      Restrictions on use;

3)      Performance requirements;

4)      Compensation; (Royalties payment)

5)      Intellectual property protection and confidentiality;

6)      Dispute settlement;

7)      Force Majeure (an unforeseeable and irresistible event that renders an obligation impossible to perform;

8)      Duration.

 

 

SOME SPECIFIC PROBLEMS IN NEGOTIATION AS REGARDS TECHNOGOGY TRANSFER TO CHINA

 

Common problems:

 

·        A dilemma whereby Chinese negotiators routinely request the “most advanced” technology  from foreign suppliers while they may lack sufficient foreign exchange and have an inadequate infrastructure to utilize complex technology.

 

·        The difficulty of balancing between “the most advanced” technology and “the most price competitive” technology in price negotiations.

 

 

·        Another persistent problem is how to decide on the contribution made to the venture by each partner. There would be complications and even complaints about the evaluation of their respective investments.

 

·        When investing their technology in a joint venture, the foreign suppliers may have some additional complications on capitalization of their technology which is said to be often discouraged by Chinese authorities due to their fear of under-financed joint ventures in which foreign partners mainly contribute intangible assets.

 

·        There are from time to time complaints from foreign partners about negotiation tactics usually taken by the Chinese side, such as controlling location and schedule, utilizing weakness, using shame tactics, pitting competitors against each other, feigning anger, rehashing old issues and manipulating expectations

 

Problems relating to restrictive practices in technology transfer to China:

 

·        The RATIC and its Implementing Rules impose strict restrictions on tie-in arrangements while at times such tie-in arrangements are necessary to protect the legitimate interests of the foreign suppliers.

 

·        The so-called “parallel import” problem: the RATIC and other related Chinese laws also prohibit foreign suppliers from placing restrictions on quality, price or region of sale and exports. However the suppliers shall have legitimate cause for protecting their existing markets if the recipients export the transferred technology product to these markets.

 

·        The issue of intellectual property: RATIC allows a Chinese recipient to simultaneously use other foreign suppliers’ technology. This may challenge the validity of clauses restricting the recipient’s use of competing technology. When the Chinese recipient cooperates with a direct competitor of the foreign supplier it is more difficult to maintain trade secrets.

 

 

FOREIGN EXCHANGE BALANCE

 

As a rule, pro forma financial statements that project early foreign exchange payment tend to facilitate negotiations and operations.

 

• The State General Administration of Exchange Control (SGAEC), 1980

 

 

HUMAN RESOURCES (HR) MANAGEMENT ISSUES

 

Personnel management is also vital to the success of the joint ventures involving technology transfer. Many of these companies need intensive training to ensure a smooth process of transfer and the production of good quality products. One major incentive for foreign companies to invest in China is its relatively low labor cost.

 

• The problem of maintaining confidentiality. Although Chinese law provides that the licensee (the joint venture) must adhere to the confidentiality provisions of the contract, confidentiality remains a worrisome, as employees may attempt to appropriate proprietary technology after they leave the company. Therefore, the contract should provide that disclosure of confidential information to employees shall only be on a need-to-know basis. Each employee to whom such information is disclosed should sign an individual confidentiality agreement with the venture.
• The foreign partners expect Chinese managers’ active involvement in decision-making process especially in selecting the technology package and the proper channels of technology transfer and in managing relationships with their parent companies, other companies and governments that are involved with the technology transfer concerned.

 

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Appendix 1:

 

An Envisaged Disclosure Checklist for Specifying A Technology Demand from China

 

Drafted for Sino-Europe Technology Transfer Center, Rotterdam, September 2001

 

 

1. Name of the technology demand
2. Information about the demander

o       Name/company name of the demander

o       Full contact information (contact person, postal/visiting address, postal code, telephone, fax, telex, email, website, etc.)

o       Company profile (location, history, business, legal form, products, annual income/ financial status, organization, industrial standard/ISO, commercial reputation, honors, partners, etc.)

3. General description of the technology demand
4. Specified technical requirements or standards (if any)
5. Valid duration of the demand (from, until);
6. Preferred or required model of transfer (if any) (e.g., transfer, license, sub-license, joint venture, R&D cooperation, etc.)
7. Preferred or required sources of the technology supply (if any)(e.g., R&D, hi-tech companies, governmental labs, individual inventors, or geographically from certain country or area, etc.)
8. Preferred or required technical level of the technology supply (if any)(e.g., “internationally leading”, “internationally advanced”, “nationally leading/advanced”, etc.”)
9. Preferred or required intellectual property protection of the technology supply;
10. Any requested consulting services concerning the technology demand;
11. Financial conditions of the technology demand (e.g. self-funded; banking; investment insert; or any governmental funds or grants, etc.)
12. Description of the project from which the technology demand was initiated (e.g. Torch, Sparkle, 863..S&T programs, etc.);

o       Project name

o       Background information

o       Letter of Intent

o       Development status and developers

o       Investment status and Investors

o       Current achievements

o       Future exploitation

13. Business plan for the development of the technology/project in question;
14. Technology/project assessment files (with certified English translation) (if any);
15. Relevant governmental/official approvals on technology importation (with certified English translation) (e.g. from local S&T authorities or from MOST, MOFTEC on national level)
16. Description of the national industrial sector that the technology/project belongs to (if applicable)
17. Envisaged post-transfer activities (if any) (e.g., training, material supply, production, marketing, etc.)
18. Other relevant documents or information disclosures.

 

 

Appendix 2:

 

A Sample Technology Request Registration Form in Europe

 

Date_________, with reference to event / contact with_________________.

-         Please fill in the relevant grey spaces below as completely as possible.

-         Your details will be handled confidentially.

-         You can make your Technology Request free of charge.

-         You will be informed of any response to this offer we receive.

-         As soon as we receive this completed form, one of our advisers will contact you to discuss what happens next.

 

Your Details
Organisation	Full Name
	Department
	Street & No.
	Postcode & City/Town
	Website		http://
Contact	Last Name			Mr	Ms
	Initials
	Title/Titles
	Position
	Telephone No.
	Fax No.
	E-mail
Your Organisation / Business
Type of organisation / business	Research Institute		Manufacturer
	University		Marketer
	Technical Centre		Supplier
	Consultancy Office		Other (please specify):
Established in:                      (year)		No. of staff members:
Which field/fields of technology do you operate in?
Core activities / knowledge & skills

 

Your Technology Request
Name of technology / title of request (maximum of 12 words)
Description of requisite technology
Field/Fields of technology in which the requested item is to be applied
Special characteristics or benefits of your application which are required
Desired stage of development	development stage	available for demonstration		already on the market
Wishes regarding collaborative partner
Type of organisation / business	Research Institute		Manufacturer
	University		Marketer
	Technical Centre		Supplier
	Consultancy Office		Other (please specify):
Preferred form of collaboration	Financial resources		Information exchange
	Marketing agreement		Further research and/or development support
	Manufacturing agreement
	Licence agreement		Other (please specify):
	Joint venture agreement
Geographical preferences	Send to:
	Or do not send to:
Know-how / expertise / facilities of preferred partner
General Comments of Importance to this Request

Abbreviated Instructions for Completing the

Technology Request Registration Form

 

By filling in the form as completely as possible and using only key words where explicitly requested, you will provide the readers of this request with greater clarity and improve your chances of getting more and qualitatively better responses. Your name and address are only for internal use and, consequently, will not be published in your request.

 

Your Organisation / Business
Which field/fields of technology do you operate in?	State the sector in which your business operates and any relevant sub-sectors, e.g. mechanical engineering (= sector) & packaging machines (= field of technology).
Core activities / knowledge & skills	In what areas does your business excel? How do you want to be recognised by others?
Your Technology Request
Name of technology / title of request (maximum of 12 words)	This should be a concise and inviting sentence reflecting exactly what you desire.
Description of requisite technology	Describe as clearly as possible what you are looking for. The more specific your request is, the more precise the response from interested parties.
Field/Fields of technology in which the requested item is to be applied	What is the technology/knowledge going to be used for?
Special characteristics or benefits of your application which are required	What are your demands for the requested technology?
Know-how / expertise / facilities of preferred partner	Do you have particular demands or conditions for your collaborative partner (the size of the organisation, type of business and preferred experience)?
General Comments of Importance to this Request
You can use this space to provide any remaining information which might be important to interested parties, but for which the form provided no fields.

 

 

* This checklist is basically composed at a researching level and does not necessarily represent the practical situation that has been applying. Major references have been made to South International Technology Trading Market (HX863), Shanghai Pudong Productivity Center (SPPC), The Innovation Relay Centre Netherlands (IRC-NL), and Technology Innovation Information

 

** The form is retrieved and translated from a Dutch version provided by IRC-NL.

 

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