China's Curbs on Tech Purchases Draw Ire and Chinese "Protectism"
December 11, 2009 Leave a comment
U.S. Government, Dozens of Global Industry Groups Speak Against Push for State Agencies to Buy ‘Indigenous Innovation’
By LORETTA CHAO
BEIJING — China has rolled out regulations that could curb billions of dollars worth of sales of high-tech gear to government agencies, raising cries from companies across the globe and from the U.S. government.
More than 30 industry groups from North America, Europe and Asia — representing most of the world’s major technology companies — sent a letter Thursday to Chinese ministries saying they were “deeply troubled” by a new Chinese rule they say discriminates against their products. (Read the letter.)
A man transports products by China’s Lenovo. The PC maker could benefit from a rule encouraging Chinese agencies to buy ‘indigenous’ technology.
* China Blog: U.S. Businesses Suspend Euphoria
The companies were responding to a notice the Chinese government posted on a Web site in late October, but didn’t immediately publicize, requiring vendors to gain accreditation for their products before they can be included in a government procurement catalog of products containing “indigenous innovation.”
Companies that aren’t listed in the catalog will theoretically be allowed to sell products to government agencies. But preference will apparently go to those listed.
The office of the United States Trade Representative said several U.S. agencies had already raised “serious concerns” about the policy with the Chinese government. “It is in the interests of both the U.S. and Chinese governments to promote innovation, but innovation is no excuse for discrimination,” said spokeswoman Carol Guthrie.
“Implementation of this system will restrict China’s capacity for innovation,” the industry letter read. It will “impose onerous and discriminatory requirements on companies seeking to sell into the Chinese government procurement market, and contravene multiple commitments of China’s leadership to resist trade and investment protectionism and promote open government procurement policies.”
The letter bore the names of the heads of the American Chamber of Commerce, the U.S.-China Business Council, the National Association of Manufacturers, the Information Technology Industry Council and 30 others representing U.S., European, Korean, Japanese and Indian businesses.
It was addressed to officials from the three Chinese agencies that jointly issued the notice, the Ministry of Science and Technology, Ministry of Finance and the National Development and Reform Commission. The Chinese agencies didn’t respond to requests for comment Thursday.
At stake are billions of dollars of Chinese government spending on personal computers and application devices, communication products, office equipment, software and energy-efficient products. Though the overall value of government contracts that would be covered isn’t clear, China’s purchases through public procurement—which also includes nontech goods—totaled about $88 billion in 2008, more than triple the amount in 2003, according to China’s Ministry of Finance.
Public procurement will account for 14% of the 40 million PCs sold annually in China this year, estimates market research firm IDC. The Chinese government is also a major purchaser of licensed software in a country where piracy is rampant.
Foreign executives and procurement experts say they believe the rules don’t apply to the massive purchases by companies owned by the Chinese government. The government didn’t respond to requests to clarify that point.
Some of the groups that signed the letter say the rules could be aimed at compelling foreign companies to share technology they’ve spent heavily to develop with Chinese competitors or government agencies.
The rules “would be designed to force technology transfer—that is the real concern that is going on here,” said Sage Chandler, senior director of trade for the Consumer Electronics Association, which signed the letter.
Industry groups say they didn’t learn of the plan until November, after it was reposted on a government Web site. The deadline for applying was Thursday.
The procurement rules come at a time of rising global concern about protectionism amid continued economic uncertainty. Chinese officials have been among the most vocal in complaining about alleged protectionist measures against their country by other nations, including the U.S.
One possible inspiration for China’s move could be “Buy America” provisions in this year’s federal stimulus package, said Anne Craib, director of market research and international affairs for the Semiconductor Industry Association, another signatory. But she says the U.S. stimulus provisions are much less onerous to Chinese companies than China’s procurement rules are to foreign manufacturers.
Others pointed out that China’s “indigenous innovation” push was in the works well before the stimulus provisions. The recent measures expand on 2006 rules that require government agencies to favor domestic technology in their purchases>, as part of Beijing’s broader effort to foster domestic innovation and wean China off costly foreign technology. Foreign business groups have long complained about the guidelines.
But the older, vague requirements appeared to gain teeth with the move to create a national catalog of products that would receive preferential treatment for procurement. The list covers six product categories—software, computer and application devices, telecommunication products, new energy and equipment, highly energy-efficient products, and modern office equipment—but is expected to be expanded, according to the Business Software Alliance.
The BSA represents companies including Microsoft Corp., Adobe Systems Inc. and Cisco Systems Inc. These companies, as well as other software and hardware manufacturers contacted for this article, declined to comment.
Companies rarely complain openly about government policy in China precisely because the state wields so much economic power. But a group of international technology companies banded together earlier this year to push back against Chinese government plans to require PC manufacturers include Internet filtering software called Green Dam-Youth Escort with all new PCs shipped in China. After protests from industry groups, the U.S. government and Chinese consumers, authorities delayed the mandatory installation plan indefinitely.
China’s new procurement rules spark fears among businesses that they could restrict vendors from selling high-tech gear to China’s government agencies. WSJ’s Jeff Grocott explains what’s at stake, in the News Hub.
China is a World Trade Organization member, but it hasn’t signed on to the WTO’s voluntary Agreement on Government Procurement, which bars discrimination against foreign companies bidding on government projects.
Other nations, including the U.S., have procurement policies that give preference to products that are produced locally. But industry officials say that basing procurement preferences on the origin of a product’s intellectual property is unusual and difficult to enforce. They point out that it could also affect Chinese companies, many of whose products include foreign innovations.
The notice leaves many issues unclear, but “it does look like the intellectual property must be developed and owned in China, and it does look like trademarks must be originally registered in China,” says Jeff Hardee, vice president and regional director for the BSA in Asia.
The government’s application instructions specify that all products in the catalog must “have Chinese intellectual property and proprietary brands,” and intellectual property by applicants must be “totally independent of overseas organizations or individuals.”
“With these provisions, it would be very difficult for any products that are copyrighted by foreign companies to qualify. Even for wholly owned companies or joint-venture companies in China, it would appear to be very difficult,” Mr. Hardee says. “The uncertainties, coupled with a very short deadline, we think [creates] a very challenging situation. And so we would encourage the government to reconsider going forward with this policy.”
—Kersten Zhang in Beijing, Don Clark in San Francisco and Louise Radnofsky in Washington, D.C. contributed to this article.
Write to Loretta Chao at firstname.lastname@example.org