The Evolution of Technology Transfer in China

Multinational companies in China face dilemmas balancing technology sharing with local demands for research and production.

### The Evolution of Technology Transfer and Localization in China
* 🌏 Since the 1950s, China has strategically acquired foreign technologies through a national translation project, including critical advancements like **hydrogen bomb technology** from the U.S.
* 💼 American companies, eager to tap into the Chinese market, faced dilemmas about establishing **research centers in China**, which were often demanded by **Chinese consumers in exchange for product sales**.
* 🔍 The need for localized research became evident as companies realized that products like basketballs needed to be **tailored to meet local preferences**, leading to the establishment of research institutes focused on **adaptation**.
* 🏭 Multinational companies set up research facilities in China not only for localization but also to take advantage of **lower labor costs**, resulting in **significant contributions to product development and innovation**.
* 📈 By 2010, companies like Nokia demonstrated the effectiveness of Chinese researchers, who, despite being a **small percentage of the workforce**, contributed **significantly to design and development**.
* 🔒 As China progressed, technology transfer became more pronounced, with companies sharing **sensitive information** through joint ventures, leading to **increased concerns about intellectual property theft**.
* 📊 The shift in U.S. attitudes towards China, particularly after 2010, reflected a **growing frustration among American companies** about **technology theft** and the **competitive landscape**.
* 🚗 Looking ahead, the ongoing U.S.-China conflict and the potential for **Chinese investment in key manufacturing sectors** in Korea raise concerns about the **future of technology and economic stability** in the region.

Hello, subscribers of Yeoui Domision. Last time, we talked about how, since the 1950s, China, which had been walking alongside the Soviet Union and the Eastern bloc, chose to acquire advanced foreign technologies and innovations through a national translation project. We even discussed how they obtained hydrogen bomb technology from the United States. After that, many American companies entered China, and it seems that China did not miss that opportunity. You are correct in your observation. In a way, they were eager to quickly mimic and internalize their technological advancements. It is very likely that they expressed a desire to come directly to our country, and there could have been many instances of that happening.

So, what has happened now? From here, we need to think about the dilemmas faced by American companies or Western powers. Imagine you are the CEO of Microsoft, trying to enter China, or perhaps the CEO of Motorola or Philips; it could be anyone. You might think, I'm better off than I am now, or Would it be good for just me? Now, you are trying to enter China, but the Chinese people are saying, We buy a lot of your products, but you also need to bring your research center here. They are demanding it. So, what will you do? To sell your products, they are asking you to establish a research center, but if you set one up, they will take everything from it, right? However, in the U.S., there are many companies that are not led by professional managers. In their minds, the only measure of management success is revenue.

During my term, it was like this. Even if you try to copy GD technology, you can never create something similar to our Motorola phones. It won't come out; everything is too short-term. You can never create something like our MS server. Why not? I can make it happen, and both you and I should establish a research lab in China. This is where the real economy and textbook economics often diverge. How can the world be like a textbook? If there were only efficiency and rationality in professional management systems, then the entire world would be managed by professionals. These people are actually holding what could be the country's greatest secrets. There is a gray zone; if this were to leak, it would cause a huge uproar, and it wouldn't even be legal. However, if you quickly learn this technology, you can get there fast.

There are technologies that fall under the gray zone until the national deadline, right? There might be many thoughts like, I won't enter the Chinese market for the sake of national interest, or Let's slowly let them take it. In the meantime, our country will develop something better and seize the opportunity. There could be a mindset of it's just one country, how significant can it be? Therefore, we are really competing to enter the Chinese market. 

There's also a real need for this. When multinational companies build or operate research facilities overseas, they typically conduct research that is relevant to the local market. For example, a basketball that sells well in the U.S. may not do so in China because it might be too large for the hands of Chinese people.

However, Chinese people prefer basketballs that are colorful and have a good grip and feel. This was determined through demand and market research conducted by local research institutes, which identified suitable materials, sizes, and designs. As a result, looking at the large market in China, American, European, and Japanese companies are all eager to compete for a share. To achieve success, they realized that local research is essential. Some of these research institutes were established specifically to focus on product localization and technology adaptation based on the local market. Therefore, it’s not entirely true that there are only bad intentions; the establishment of these diverse research institutes is a reality. In China, the question is how to sell basketballs effectively. For instance, a red basketball with a yellow logo would likely sell the best. How do I know this? Just a hunch.

Oh Seong-gi, that's why I like red and yellow. Well, that's true. And, you know, putting a mark on the ball and having it roll upside down, well, that should work. Also, since the Chinese people like Kobe Bryant, they might do something like that too. I think that would work for me as well. So, for those reasons, we decided to establish a research center in China. But it wasn't just the research center; we also set up manufacturing plants there. The main reason for that is because it's cheap; the labor costs were really advantageous at that time. Because of that, the Chinese would translate everything one by one in their labs, saying, It says here in the book, but does this work or not? I mean, sometimes our writing is not very precise, and there are times when the meaning between the lines needs to be figured out. So, it works out that way, but the implementation...

Skipping all the trial and error, I was able to observe directly from the production site and conduct research right next to it. This allowed me to catch on more quickly. However, another variable emerged here. What happened is that multinational companies established research facilities in China, primarily for localization research. These studies are routine and at a somewhat low level. Alternatively, the Chinese government has requested some basic research, which, although not immediately applicable for generating significant economic results, has some characteristics of a public good. If someone discovers something there, it may be widely utilized. So, I thought there would be more basic research conducted there, but gradually, the situation is changing.

Does it change? This is a representative case mentioned by Nokia. Nokia has about 5% of its entire workforce in its corporation consisting of Chinese employees. So, even though there were research centers in China, the number of researchers with Chinese nationality working at the headquarters in Finland was not insignificant. The percentage of Chinese researchers they had was there, but those 5% of employees were responsible for 40% of the entire design of Nokia phones. So, why did China play such a crucial role? It's because they are very inexpensive. The researchers are highly skilled but very cheap. They are PhD-level or higher, for instance, someone who studied abroad in the United States or went abroad for research studies.

That same doctor is in Finland, so the salary needs to be adjusted according to the cost of living in Finland. You would need to pay several tens of thousands of dollars, right? However, in the early to mid-2000s, the cost of living in China was certainly not at the same level as in Finland; there was a significant difference. So, even if someone studied at Ivy League schools or Oxbridge and returned to China, they would be offered salaries that correspond to the local cost of living, which is very low. As a result, there were critical technology fields where local research institutes were just left to handle things. Consequently, the management performance was outstanding. At that time, Chinese people were also incredibly hardworking and diligent, working all night and producing excellent research, yet their salaries were quite low.

Let's talk about this; the rumor has spread. Based on 2010, I looked into multinational corporations and their research institutes established in China. I examined a few, but there are no statistics available, so I checked a couple of sites. At that time, there was Microsoft, and then IBM, Motorola—those are three names already, which is quite significant. It's not just American companies; there's Siemens from Germany, and there are more American companies as well, like Volkswagen, GE, GM, and Honda from Japan. This is almost like a ranking of global market capitalizations at that time, right? No, it's close to that level. I spent exactly 35 minutes using Google Translate to confirm this information, so you can imagine how much there is. As a result, researchers who are inexpensive, high-quality, and diligent have all flocked to the Chinese market. So, Professor, in the Chinese market, is it really...

When we talked about the enormous number of researchers, it wasn't actually that many when you look at the numbers alone. If we based it on the number of PhD researchers per one million people, at that time, China had about a thousand, while countries like Japan, Germany, and the UK had around four thousand. Moreover, those researchers couldn't start off with hardcore research right away. So, we thought, let's try conducting routine localization research first. They did a really good job; hey, this friend is smart! Then we would say, Okay, now you try this, which is how we raised their level. Consequently, the personnel conducting localized research were naturally Chinese, due to various reasons including convenience. This led to most research institutes being concentrated in China. As a result, those many research institutes began to produce the most critical patents and research outcomes, right next to their own factories in China.

Manufacturing in products often falls into the realm of know-how that cannot be protected by patents. This started in China, and initially, it was the same for everyone; only a few leading companies were doing it. However, as time went on, the moral considerations began to arise. They thought, They are doing it, so we should do it too. If they can do it, why can't we? This led to a situation where everyone started to follow suit. As I mentioned earlier, within just 30 minutes, I found several international research institutes already established in China. That's how quickly it happened. But then, what started to happen? All these companies began to point out the same issues. For instance, today we visited the used car market, and regarding Honda, we noticed that the parts have been strangely inconsistent lately.

Sales have decreased, so I wondered why this isn’t selling. I went to a used car dealership, and there were some strange products made by the Hong group, for example. What is that? But there’s a guy working there from City, you know, Assistant Manager Choi. He’s there with Sim City. He said he was going abroad to study and that he would take over a cold noodle restaurant, but what happened? It turns out he’s there. So that’s how it ended up like this. And if those technologies are well combined, China could create its own independent car company. As a result, the rapid development of science and technology in China has been largely driven by the research labs and factories of multinational corporations that have entered the Chinese market. There’s no one to blame for that. And there’s one more thing; these multinational...

When companies entered the Chinese market, China strongly encouraged them to do so. However, in a joint venture, you and I are business partners, which means I can access important confidential documents in the safe, right? Of course, I can see them. I am also one of the major shareholders, so naturally, I have access. This means that technology was openly shared. I was aware that technology was being transferred gradually, but until 2010, we were still doing quite well in business. However, slowly but surely, the focus shifted within China towards the Chinese Dream, promoting the localization of products instead of foreign companies. Brands like Baic and Hi, along with domestic Xiaomi smartphones, were part of this movement. As a result, most intermediate goods, such as displays, began to be produced locally by Chinese companies. Consequently, while we couldn't make money, any attempts to continue operating there only increased the likelihood of technology leakage.

It has become more pronounced. Now that we have reached this point, the voices of American companies demanding from the U.S. Congress or the U.S. President have changed. They say that China is stealing our technology. They were making the same knockoff products in the past, but back then, they didn't say anything. Even then, they made all kinds of Disney merchandise, like Mickey Mouse. I bought a few items myself. A T-shirt costs 5,000 won, and it has the Disney logo on it. On the day the movie premieres in the U.S., the DVD comes out, and they sell it in Witan. So, when the DVD is released, they used to watch it, but now they're talking about technology theft. Back then, they made money. They said, Go ahead and make a few knockoffs; we are selling them too. But now that it doesn’t work anymore, they keep raising their voices about protecting intellectual property rights.

In this context, this is how it goes. Let's summarize. Since 2010, the trend of escalating US-China conflict has changed. Why is that? Those who used to advocate for China and lobby for it in the United States were originally American businessmen. That's right. These American businessmen were supposed to lobby, but some made money while lobbying, and some thought they would make money but ended up losing everything after starting to lobby. These companies are now struggling, and slowly, as they begin to make money, they say, Hey, don't criticize China too much. We need to get along. However, some companies that were at least making some money from defense contracts are now earning less than before. But even those who have been stripped of technology are starting to speak more negatively about China in Congress and the US administration.

The main context of the current shift in the United States towards a hardline stance against China is that American politicians inevitably make decisions and judgments based on political funding. To win elections, I need money, and those who provide that money don't do it for free. This is the underlying context in which everything is currently unfolding. Now, who is the biggest donor to Trump? It's Elon Musk. Why did he donate? Because the last person doing business properly in China is Tesla. So, Musk is essentially saying, Please, just stop. I want to continue doing business. This sentiment is also directed at Trump. Additionally, Trump is not particularly favorable towards electric vehicles.

Traditional energy companies, so Tesla, that company has to generate a significant portion of its revenue from China, and in the future, from the United States. However, both of these avenues are currently blocked by negative hurdles. It's right here, isn't it? Now, looking to the future, American companies have come in to teach technology, but the pathways for easily extracting that technology have all been disrupted due to the China exodus. There are only a few left now, so that route has been cut off. But that doesn't mean that Chinese engineers lack creativity. No, they have really caught up a lot. Among the Chinese products, there is one company that I am 300% satisfied with: DJI. Ah, the drones, right? Not only the DJI drones, but also other devices we use for taking selfies, right? For example, those we use for YouTube or when we carry them around for filming.

The interface, performance, and satisfaction level of this device are astonishing. This audio-visual device is used all over the world, like Sony from Japan, and all the booths are from Japan. Companies like Nikon are also included. However, Japan has been stuck in its traditional market for a long time and hasn't been able to adapt quickly to changes. With the rise of YouTube, everyone wants to shoot videos, but they have remained focused on the market for professionals who create broadcast videos. It's quite remarkable. On the other hand, you can carry around affordable equipment that has great stabilization features, so you don't need to hold it perfectly like a professional. China has produced some really good options in this regard. The equipment I purchased is worth several million won.

So, I really have come a long way in terms of understanding, but there's still that 2% missing. There must be a desire to catch up more quickly, right? To fulfill that desire, what’s left to do? It’s reader research, right? No, what’s left is to bring in people. Ah, bringing in people. The company has come in and created opportunities for us to nurture our kids, but the chance to build factories here and have them nearby is disappearing. So, what’s left is to bring in people and start doing reader research, right? Ah, yes, who is it that works as a chief researcher at Samsung Electronics' semiconductor research center? Ah, please listen until the end. Ah, don’t hang up. I’m from a Chinese semiconductor equipment company, who am I? Um, no, I’m Korean, but I’m calling on behalf of them because that’s the only way the call can go through.

It won't be easy, right? When a Chinese person calls, I worry about that too. So, let's just meet and have a chat about various things. This is my real story. It's not about my KAIST classmates, but about someone who is one or two years ahead of me. He’s not from my department; he’s related to semiconductors and is pursuing a PhD at KAIST. One day, he told me that he went to China after being in Korea, and then he returned to Korea. Now he is in academia. I’ll just mention that much. When I asked him about going to China, he said, I had to earn some money. He was the sole breadwinner and needed the funds. He was really contemplating whether to switch jobs to a Chinese company. That was quite a struggle for him.

I felt a bit of pressure and it was tough, but I thought, Let's meet and talk. So, I met them and asked, What do you want? I stated my conclusion clearly, saying, You need to offer this much. I laid it all out, and I expressed that if this is the amount, then I wouldn't go if it didn't meet my expectations. When I said that, the representative from the headhunting company in China looked at me and mentioned the salary, saying that he had referred to it as an annual salary. He seemed a bit taken aback and said, Wow, that's quite high. I thought to myself, This is a bit much, and I realized that if he had labeled it as an annual salary, it could have been a huge mistake. For a moment, I felt a bit shaken because the salary was indeed very high. So, I suggested that we lower it a bit, and we settled on a considerable level of payment for the work I did at that time. However, that person had some issues and various problems, so I had to think about how to respond.

It's a bit unreasonable to appeal to simple patriotism, isn't it? Anyway, we are doing a lot of that now, and from our perspective, we are also defending against it. The National Intelligence Service in Korea is currently very busy with its main task, which is to prevent technology theft. They are working on catching industrial spies, and that is the most important job because it involves protecting the national wealth. However, it's not easy, especially considering the current economic situation. Our economy isn't doing well, and China has taken a significant amount of technology from our country. A representative example of this is the acquisition of Ssangyong Motor. At that time, when the Chinese company from Shanghai acquired Ssangyong Motor, it didn't cost them much, just a few hundred billion won. However, the cost of developing a new car model is typically around several hundred billion won.

I found that the cost of developing two new car models is equivalent to acquiring the management rights of Ssangyong Motor. By that time, how many SUV models had Ssangyong developed? They had all that technical know-how. Then, what happened to Ssangyong after that? Ssangyong was acquired by a company in India, and then that Indian company also put it back on the market. So, during economic downturns, countries like the United States, the United Kingdom, France, and Germany are always the first to be considered. However, if they can't easily find good assets there, they look at countries like South Korea, Taiwan, or even Spain and Italy. Those countries used to have significant technological capabilities, but their companies are currently facing global instability.

Or, companies that are currently struggling with management and don't know what to do can be picked up. And for one minute, let's leave out the technology; that's enough. Then, put the assets back on the market, and for one minute, just take the brand. For example, companies like Volvo, it's a bit of a waste to abandon a brand like that, right? So, given the current economic situation, I am one of the scholars who is very worried about next year's economy and the economy the year after that. If this trend continues, China might slowly start investing in key manufacturing companies in Korea. To put it nicely, it’s investment; to put it harshly, it’s a takeover. We need to keep this in mind. I roughly got the gist of it. Yes, I found it quite interesting. Now, there is the final act of the conflict between the US and China, which could potentially hold an even bigger portion. Initially, what are we holding onto?

Before we talk about technology, what did we discuss? We talked about the lobby, starting with AT&T, and then how they lowered the network. There was also what happened on Wall Street. In that process, we discussed themes of technology theft. The third point, which is very important, will be covered next time.

[미중 패권 최후의 승자는? ⑱] 중국 진출은 미국 기업에게 득이었을까? 실이었을까? #박정호교수 #여의도멘션 #미중패권

광고 · 협찬문의 junghopark0430@gmail.com


박정호 교수의 여의도멘션

The Dilemma of Western Companies in China

American companies, eager to enter the Chinese market, face the dilemma of establishing research centers in China while fearing the potential loss of their technology.

The competition for market share in China is fierce, with companies realizing the importance of local research for product localization and technology adaptation.

The establishment of diverse research institutes in China is driven by the need to understand and meet the local market's demands.

The Impact of China's Research and Manufacturing Centers

The decision to establish research and manufacturing centers in China was driven by low labor costs and the country's skilled workforce.

Chinese researchers, often with international education, provided high-quality work at a fraction of the cost, playing a crucial role in the success of multinational companies like Nokia.

The influx of these researchers and the routine establishment of research facilities in China significantly impacted the localization and development of critical technologies.

The Impact of Multinational Corporations on China's Research and Development

China had a lower number of PhD researchers per million people compared to countries like Japan and Germany, but the concentration of research institutes in China led to the production of critical patents and research outcomes.

The moral pressure to follow successful companies' practices resulted in a rapid establishment of international research institutes in China.

The collaboration between multinational corporations and China led to a gradual transfer of technology and a shift towards local production, promoting the Chinese Dream and increasing the likelihood of technology leakage for foreign companies.

The Shift in American Companies' Stance on China

American companies' voices have changed, now accusing China of technology theft after years of benefiting from knockoff products.

The escalating US-China conflict since 2010 is linked to American businessmen's lobbying efforts, with some struggling and others losing money.

The current hardline stance against China is driven by political funding, with Elon Musk as a major donor to Trump, seeking to continue business in China.

The Impact of Audio-Visual Equipment and Career Decisions

The device's interface and performance are impressive, with a strong presence of Japanese companies like Sony and Nikon.

Japan's traditional market focus has hindered its adaptation to the rise of affordable, well-stabilized equipment from China.

The narrator shares their journey of understanding the industry and the struggles of a PhD student from KAIST, who faced pressure to switch jobs to a Chinese company for financial reasons.

The Challenges of Technology Theft in Korea

The National Intelligence Service in Korea is focused on preventing technology theft and catching industrial spies, especially given the country's economic struggles and China's significant acquisition of Korean technology.

The example of Ssangyong Motor's acquisition by a Chinese company highlights the impact of such takeovers on Korea's technological capabilities.

The current global economic instability is driving countries to seek out struggling companies in Korea and other nations, raising concerns about potential Chinese investment and takeover of key manufacturing companies.