Posted on 08/22/2002 5:57:00 PM PDT by maui_hawaii
American companies are crying 'Foul.' As they rush to sell more hi-tech goods to China, some have hit a wall thrown up by a U.S. government worried about national security and suspicious of Chinese intentions. And critics say the strategy isn't even working
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IT WAS EARLY 2001 and Semiconductor Manufacturing International Corp. was scrambling to get its $1.5 billion chip-making plant in Shanghai up and running. Suddenly, the China-based corporation hit an unexpected obstacle: The newly arrived Bush administration froze an export licence that had been granted in the final days of the Clinton administration for two electron-beam systems that SMIC had ordered from Applied Materials in California.
In the next six months, while a committee made up of representatives of the departments of Defence, Commerce and State reviewed the licence, the Applied Materials deal became another American casualty of Washington's effort to control technology going to China.
The justification for vigilance is simple: national security. By controlling exports of items considered to have both civilian and military applications--powerful computers, hi-tech telecommunications gear, equipment used in semiconductor manufacturing, and sophisticated machine tools--the U.S. believes it can prevent other countries from upgrading their weapons capability.
What's more, the new administration believes it can do it better than the last, which was perceived by Republican hawks as lax on export controls. U.S. companies say that since Bush took office, and particularly since the terrorist attacks on the U.S. nearly one year ago made national security a driving force in decision-making in Washington, they have faced longer delays, more scrutiny, and more rigorous conditions placed on licences that are approved.
U.S. businesses, struggling to boost global sales in the midst of an economic downturn, complain privately that for every unexpected day spent waiting for an export licence, money is lost. Furthermore, say corporate representatives and former U.S. officials, restrictions don't keep technology out of Chinese hands: They just allow rivals to snare sales from American firms.
"It's difficult to quantify how much our companies are losing to foreign competition," says Jennifer Greeson of the Computer Coalition for Responsible Exports, which lobbies on behalf of the computer hardware industry for such heavyweights as IBM, Hewlett-Packard and Sun Microsystems. "You're not just selling a box, but a system, a service, building client relations and gaining a reputation. If a Chinese company has to wait six months to get a U.S. licence, the company may decide to deal with a German company or a Japanese company instead."
U.S. companies fear they will lose market share to competitors in what is already the world's largest mobile phone market, the third-biggest personal computer market and what will become the second-largest semiconductor market by 2010.
For SMIC, by the time the U.S. interagency committee that reviews export licences unanimously approved its request, the company had cancelled one of two orders from Applied Materials and replaced it with a similar machine from a Swedish firm. SMIC senior adviser Chris Chang says that in the rush to get the Shanghai semiconductor fab up and running, "we just couldn't take those kind of delays. We had a schedule." Other American orders are lost even before they're made, as Chinese companies, anticipating delays, turn elsewhere.
This is certainly not music to the ears of the Bush administration, which is perceived as pro-business. Says a senior Commerce Department official, "We at Commerce are sensitive to the need for U.S. companies to have a level playing field internationally."
No one in the Bush administration has declared that the U.S. government has tightened its licensing procedures for exports to China over the past 19 months. "We have no standing policy that we should pay more attention to China," says the Commerce official. Licences to China have for years taken longer than for exports to other places, simply because "China often has more complex issues," he says.
Another U.S. official suggests that the conflict is cyclical; that when the security environment ramps up scrutiny of exports to China, corporate lobbying will eventually force a climb-down. A similar row escalated in 1999 after a congressional committee issued a hard-hitting report that China was stealing military technology from the U.S. "It's all about the atmosphere right now in Washington," says the official.
In this climate, "we're seeing longer unpredictable delays and more conditions put on licences" that are approved, says James Lewis, a technology policy analyst who served as an arms control official in the previous Bush and Clinton administrations. "The problem is the uncertainty. If you can't tell a customer when you can deliver, he will go somewhere else. Everyone is feeling the chill."
Some companies exporting to China say the Bush administration is rejecting more of their export licences, while others believe their approval rate is about the same as under Clinton. All agree that license approvals now take longer and
that officials ask more questions and often attach more rigorous conditions to licences that are approved.
"Some licences say certain things have to be reported after the fact or that certain people can't have access to the technology," says a computer executive. In some cases, Washington has insisted that the company post an American representative to the project site or conduct quarterly inspections along with written reports on how the technology is being used.
"Licences have gotten tighter with the new administration," says an executive of a U.S. telecoms giant who, like most of the representatives of the 18 U.S. companies and industry associations interviewed for this story, asked not to be identified. "The operating committee is raising questions about commercial products that have long been sold and transferred into China. The nature of these questions indicates that they are throwing up every obstacle they can at us." Spokespersons at the departments of State and Defence have not responded to questions for this article.
U.S. company representatives and government officials say of the three agencies involved in approving licences, Defence raises the most questions. The Pentagon's Lisa Bronson, deputy undersecretary of defence for technology security policy, spoke earlier this year about tension in policy-making between concern about China as "a problematic proliferator" of weapons, and interest in the country as "the largest potential future market."
"The challenge for China is striking the balance between the desire to successfully compete in a vast untapped market and the need to protect national security," Bronson told a January hearing of the congressionally appointed U.S.-China Security Review Commission. "Striking the right balance with respect to China is especially difficult, and questions of China's intentions, capabilities and conduct weigh heavily."
As recently as July, the U.S. sanctioned eight Chinese companies and a Chinese citizen for the transfer of goods and technology that the U.S. says contributed to the efforts of Iran and Iraq to acquire chemical weapons and advanced conventional weapons. The sanctions did not apply to the Chinese government.
Many corporate executives interviewed for this article believe that licences are being blocked by officials broadly opposed to engagement with China.
U.S. businessmen also complain that government regulations don't keep up with the rapid pace of technological innovation, effectively tightening licensing requirements. "This administration is very sensitive to this," says the Commerce Department official, noting that early this year the U.S. began to allow much faster computers than before to be exported without a licence.
What's more, according to an April report by the General Accounting Office, the investigative arm of the U.S. Congress, the U.S. is alone among its allies in considering China's acquisition of semiconductor-manufacturing equipment "a potential threat to regional or international stability."
The U.S. expects at least 32 other countries to agree because they are members of the Wassenaar Arrangement, a grouping established in 1996 to control the dissemination of sensitive technology. Members have indeed agreed to control exports of a long list of sensitive technology and to inform the other members about any sales. But the grouping and its regulations aren't formally binding, and each country decides on its own what it will sell to whom.
KEEP THEM WAITING
Last year, the Department of Commerce received 1,294 applications for hi-tech exports to China, of which 72% were approved, 3% were denied and 25% were returned to the applicant without action. Compared to 2000, the number of approvals fell 2%, while the number of denials dropped 1% and those returned without action rose 3%. But the average licence took 77 days to process in 2001, or 14 days longer than during 2000.
Corporate officials say the actual number of licence denials is quite low because they sound out licensing offices about a licence's chances of approval before actually submitting an application. They also say the average time for an approval is actually three months to one year, with many hi-tech licences taking closer to one year. The Commerce Department shows a quicker turnaround time because it stops the clock when it returns an application to a company for additional information, company officials say.
In contrast, the Japanese government approves a hi-tech export licence to China in two to three weeks, with a maximum of one month. Germany's maximum is 30 days. Both countries have agreed to control exports of dual-use technologies to China under the Wassenaar Arrangement.
U.S. corporations insist that the tight American licensing regulations aren't effective in keeping the latest technology out of Chinese hands, because they can still buy the equipment from other countries. "Thirty or forty years ago when most technology was developed in the U.S., unilateral controls may have been effective," says a senior official of a telecoms firm that exports to China, "But that's no longer the case." The General Accounting Office says that despite U.S. export controls, Chinese semiconductor-manufacturing technology is now only two years or less behind that of the United States.
In fact, many analysts question whether the export controls actually work. Lewis, the former official in the State Department's military affairs department, told the U.S.-China Security Review Commission in January that export controls are "irrelevant to Chinese military modernization," adding that "efforts to restrict hi-tech trade are more likely to damage than improve U.S. national security." Because China can get the technology from other countries, Lewis said, the U.S. loses more than corporate sales: It also gives up access and the intelligence-gathering opportunity that comes with it.
And once the technology gets to China, according to the General Accounting Office, the U.S. does little to monitor its use. "We found that the U.S. officials in China tasked with this job have not conducted any checks on semiconductor manufacturing equipment in the last five years," the GAO report says.
Experienced companies, meanwhile, learn to adapt. Today, Chang of SMIC says he hasn't had to cancel any other orders from U.S. companies because his firm is now better able to gauge how long it will take to process an application. "We do our planning right," Chang says.
Despite their frustrations, U.S. companies have been reluctant to take their complaints public. Their reasons are twofold: first, they don't want to worsen their working relations with government officials. "We may not like the process, but we have to be careful how vociferously we complain because we have to keep working with these people," says an official with a hi-tech trade association.
The second reason that business isn't protesting loudly is anxiety about being condemned for putting profit above national security. "When the Defence Department comes to the table with security concerns, it's hard for others to fight back," another trade association representative says. "No one wants to be the person who sells something to China and then becomes responsible for [military] proliferation."
Step Two: Raise taxes on all technology imports from China to say 5 times their current level. Also raise income taxes for all corporations importing from China. Call it 'the China penalty'. It won't hurt the corporations, it will just have them comply with moving to somewhere better and more productive, and as to not have such a trade imbalance.
Step three: realize that the internal China market is not peechy and rosy. If you manufacture 90% of your products in China, and sell to the Chinese, with no tarriffs, your sales and profits will be far from stellar. The trade off is not worth it.
Do a study. Find out about their massively 'huge' market. Learn about it tip to tail. Sort through facts vs propaganda, or the whole dot.com 'we hope China is a big market' vs what really goes on. Publicize all the numbers including all the profits, all the losses of all corporations doing business in China. That way we aren't running an ideological battle.
You will find that every China apologist businessman will FEAR such a study.
After that, work on steps one and two.
It will take one act of congress to settle this debate. That act will be to have open and transparent and PUBLIC disclosure of corporate operations in China using all of these new found accounting standards.
It will take minor retooling, such as requiring the numbers to seperate out what is exported revenues vs what is actual in country sales. Also seperate out what is sold to other US corporations, as well as what is sold to the government.
Instead of looking at this big mass and fighting over "China", why not look at the nuts and bolts, just like they do everywhere else, except in China of course.
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Let investment decisions be based on real risk evaluations and real rates of return.
Stray well - Stay safe - Stay armed - yorktown
You sound more communist than the Communist Chinese.
Let investment decisions be based on real risk evaluations and real rates of return.
Most capitalists would argue against, not for, tariffs. Investment decisions are best made without tariffs and other anti-capitalist measures.
China is a dot.com scheme in process and we are all buying shares.
For long term sustained economic growth we have to be extremely careful about China.
We will be a whole lot better off somewhere else.
You are spot on IMO. Good post.
Another thing too...China's size is not a plus, its a negative. Especially combined with an authoritarian government.
In a place without as much labor pool available, incomes rise at a much faster pace. As incomes rise, so does consumer consumption. The right to form a union to get higher wages (albeit often abused in the US sometimes), in these developing countries is fundamental to their healthy growth. Higher incomes, limited government taxation, and increased consumption mean good business.
The Chinese government is too busy trying to stay on top of everyone.
With China though 'private' means 49.9% govt owned. The govt hoards the money, then spend it on govt projects. The government IS China...They ARE the market.
Its not a place focused on the individual consumer which is not the kind of economics anyone is used to, or works.
There are so many things fundamentally wrong with business in China.
Our corporations need to learn that cost cutting is not growth. Growth means an outward growth, meaning adding the number of consumers, which means fundamental individual rights and individualism. Thats directly opposed to the CCP way of doing things. Yet for the quick buck, corporations are not challenging their system.
I am all for trade as long as its on those terms.
Thats how Korea got rich, Japan, Singapore, Taiwan, etc.
Those have been some good investments.
Also check out #13 and #14
Our corporations are becoming tools of the communist party.
Their short term interests are in serving Beijing. Beijing makes certain of it.
Unfortunately, the market is limited to the small fraction of the population in coastal cities in the SE part of the country, and to a certain extent, Beijing, who have any sort of disposible income. It's ususally break even at best and mostly for market presence and the access to the labor market in the chase of the vanishing point known as contuniuous cost reduction via external overhead reduction.
I suspect there is also another motive from the standpoint of the KMT industrialists. Many of them (and mind you, I know some of them) believe that they will be able to carve out a niche on the mainland at some point for themselves and their families. They have lost their martial spirit and have been duped by the move from Marxism to Stalinist Fascism that they will be happy as wealthy subjects of the Forbidden City. In other words, they now believe in convergence of a sort. That's why they are at odds with the DPP, who are Western facing and want to restore the de facto pre Victorian era independence of Formosa, with a fall back position of rejoining Japan, who had annexed Formosa in the late 1800s and kept it until 1945.
Reading from PLA writings regarding unrestricted warfare, one of the dimensions of successful war under high tech conditions is to use the opponent's economic position against them. I am afraid to say that the war between the PRC and Taiwan (and the US for that matter) began some time ago.
Capitalism is gonna do whatever it's gonna do, regardless or what you or anyone else thinks "should" happen.
Perhaps you think business conditions in Third World republics like India, Brazil, and Argentina are better? Come on, in India, despite 50 years of democracy, they have yet to enact basic labor and land reforms that allow private businesses to hire and fire people as they wish to or buy property when they want to.
I am all for trade as long as its on those terms.
Thats how Korea got rich, Japan, Singapore, Taiwan, etc.
Those have been some good investments.
For your information, US firms outsourced manufacturing to Japan, Singapore, Taiwan, etc. over the past few decades for "cost-cutting" reasons as well. It's only because these places have become rich themselves and their labor rates so high that manufacturing is now being transferred to mainland China, where labor wages are still low. Japan, Singapore, Taiwan, etc. all developed middle-classes through decades of exports, and China today is merely following the same path (including politically, as all these places had one-party rule).
You're talking about approximately 100 mil. people here (a "small fraction" in China is still a large number of people), who enjoy a standard of living on par with Taiwanese or S. Koreans. 100 mil. people is almost as big as Japan's entire population or the entire US workforce. Those 100 mil. new bourgeois didn't even exist 20 years ago. As time goes on, you can expect about another 100-200 mil. Chinese to join China's middle class each decade. China is already the world's largest market for cell phones, refridgerators, air conditioners, light bulbs, etc. Pretty soon, it will replace Japan as #2 in PC's. In the meantime, today's Third World republics are so chaotic and dysfunctional they need one IMF bailout after another. Representative democracy in Third World countries is largely dysfunctional around the entire world.
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