By Stanley Lubman, The Wall Street Journal, China Real Time Report
The Ministry of Science and Technology (MOST) last week formally relaxed proposed requirements that technologies owned by foreign companies must meet in order to sell them to Chinese government agencies. The new Notice is a brief draft that was posted for public comment on April 10 (in Chinese here) and a translation (available here) is being circulated. But the modifications don’t address continuing and significant concerns for foreign owners, including the very real possibility that China’s administrative decentralization will result in inconsistent administration of the procurement rules.
The Notice modified an earlier one issued in November that established guidelines for an accreditation process for companies seeking to offer “indigenous innovation” products. It required such companies to be legal entities registered in China and to be owners of the relevant intellectual property (IP). The previous guidelines further stated that the applications submitted for accreditation to offer products and technologies required them to “have Chinese intellectual property and proprietary brands” and to be “totally independent of overseas organization or individuals.” Some foreign companies and trade organizations were concerned that this approach excluded foreign IP and proprietary brands and they protested, as reported in the press and, among other places, my last blog post.
The new Notice omits the language quoted above and provides that to be eligible for accreditation, applicants must be manufacturing enterprises that are legal persons in China (which includes registered foreign-invested enterprises) and their products must comply with national laws and regulations and “national industry “ and ”technology” policies. Applicants must own the IP rights and have the exclusive right to use the trademark of the product in China. The product must be “advanced” according to briefly enumerated, very general criteria (discussed below) and must be “reliable” in quality.
Even though companies seeking accreditation will no longer have to prove that relevant patents were developed in China or relevant trademarks were first registered in China, questions remain. One executive in an American technology company was quoted as saying “…this is a document and we have to see how it is implemented,” and that the implications of the new rules had to be “fully studied.” His caution is understandable in view of obvious concerns raised by the Notice.
As noted above, the criteria for deciding that a product is “advanced” are not spelled out in detail, other than by adding that the product “has obvious effect in energy saving, energy efficiency, pollution reduction, or have substantially (my own translation; the English translation that is being circulated reads “substantively”) improved original products in terms of structure, material and techniques, and obviously improved product performance.” How this general language will be applied in practice is impossible to predict, but some problems seem likely to arise.
The US-China Business Council (USCBC) has observed that “in particular, the notice does not address the use of the product list or its link to government procurement preferences” “China Proposes Partial Solution to Indigenous Innovation Issues; USCBC Seeks Member Comments.” It further points out what may be a potentially troublesome issue, namely, the relationship between the national product list and lists of accredited products compiled at local and provincial levels. The Notice provides that lower-level Science and Technology Departments will organize “preliminary accreditations” that are to be reported by October to MOST, which will then review them to form a “primary” list of National Indigenous Innovation Products. A problem that has pervaded the governance of the PRC throughout its history, however, is that decisions by local officials, exercising their broad discretion, often depart from national standards, policies and laws.
The extent to which the decisions of lower-level governments often vary from central government policies and laws is well-known and can vex foreigners and Chinese alike. Because of the vagueness with which the new Notice states the criteria that will apply, businesses must await a response to their application locally as well as in Beijing. The USCBC memo refers to “discriminatory accreditation criteria” used to prepare the lower-level lists, suggesting that local officials will act arbitrarily. Although some officials might favor Chinese companies, others might also bestow the benefit of accreditation to foreign investors favored because of the revenue they contribute to local budgets.
The USCBC further notes that although the accreditation criteria no longer include import substitution as a policy goal, the new Notice apparently does not change the application form issued in connection with the November Notice, which requires the applicant to state whether its product can substitute for imports. There has been a “Buy China” emphasis in government procurement policies that has been manifested in a number of directives, most recently in 2009, according to the 2010 National Trade Estimate Report on Foreign Trade Barriers of the United States Trade Representative (available here as a PDF).
Moving beyond the sparse text of the latest Chinese government document discussed here, it is useful to consider Chinese attitudes toward lawful imports of foreign technology that may help to explain the current emphasis on home-grown technology: Since China’s “opening” to foreign investment, Chinese policy has recognized the need for foreign technology and knowhow to advance economic development, but has also exhibited concern that foreign owners of IP may either not transfer their latest technology or may seek to make exorbitant profits, or both. In one negotiation in which I advised a US company on the transfer of technology to manufacture scientific instruments, after thorough discussion of what would be transferred the Chinese buyers requested the notebooks of the engineers who had designed the product in question, so that they could learn from design alternatives that were not chosen. It was difficult for the Americans to convince the Chinese that the notebooks would normally be thrown into a drawer and forgotten.
Similar concerns might well be influencing current policy, as well as the logical view that China is now advanced enough to generate more Chinese technology. At any rate, the economic strength that China has achieved understandably impels it to press its advantage in order to advance indigenous capabilities to develop technology. At the moment, foreigners can only speculate on the developments and nuances that will be developed in practice.