Western governments, multinationals, and trade groups will soon have a single form letter that they can send to the communist central government in China.
“Dear Chairman Mao:
We find that your trade and/or currency pricing practices are not in accordance with those of any other developed free market economy. We understand that we must do business in China because of the size of your consumer and enterprise economies, and that you have an unusual amount of leverage in any negotiations with us because fairness is not part of the national doctrine in the People’s Republic. We would, however, appreciate it if you would give some notion of fair play consideration in your dealings with us.”
Best for the holidays,
Sign here._________________”
The Chinese have set a new policy for selling IT equipment to the government. A program based on what the People’s Republic labeled the “Indigenous Innovation Product Accreditation Program” has created a national catalogue of products that will receive preferential treatment for procurement by the Chinese government. The items in the catalogue include software, computer and application devices, telecommunication products, new energy and equipment, highly energy-efficient products, and modern office equipment. Any product in these IT categories must contain Chinese proprietary intellectual property to qualify for sale to any agency or department of the central government. The last day that companies can submit products for the catalogue is December 10. The total IT spending by the Chinese government is estimated to be $80 billion a year.
Put simply, it will be almost impossible for most technology companies from outside China to make bids on projects for the government of the world’s most populous country. The Business Software Alliance said that it was joining with more than 30 other associations to object to the new policy. The organizations sent a letter to the Chinese Minister of Science and Technology and Minister of Finance in which they objected to the new catalogue program by writing “Implementation of this system will restrict China’s capacity for innovation, 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 Chinese knew that already. That letter from the association was a waste of paper.
China begins most of its “negotiations” on economic and business matters which involve trade partners by taking an extreme position. The West eventually thinks if it makes any progress in softening aggressive Chinese protectionism that it has won a victory. Usually all that actually happens is that the Chinese get three-quarters of what they want. Western governments, industries, or companies in exchange get an uphill battle to make money in China markets rather than being shut out altogether.
It is absurd that the communists want the world’s IT industry to believe that the Chinese government can run advanced software and hardware which must use the nation’s intellectual property. Most advanced technology invented around the world is not based on Chinese IP at all. Chinese hardware and software is far too primitive to be of any use in the West. The head of The Business Software Alliance made it clear that no one was fooled when he said, “We join with other organizations in the US and abroad in urging the Chinese government to reconsider this policy so the government can purchase the best and most innovative products and technologies, whether they are made in China, the US, or elsewhere, on non-discriminatory terms.” The BSA knows that the Chinese are simply flaunting that they can force concessions out of the largest technology companies in the world.
The matter is likely to be settled fairly soon and the settlement is likely to be in the form of a “bribe” for Chinese nascent technology industry. Western companies may be forced to sign license agreements with Chinese companies for the use of intellectual property that is almost useless. That would bring a flow of capital into these firms which they can use to begin to create a portfolio of patents that may actually have value over time. Alternatively, the Chinese may say that Western IT goods and services must be sold through Chinese wholesalers, a system that the central government has used to distribute Western entertainment content for years. Two companies in China distribute all the music and video content created in the US, a practice that was challenged at The World Trade Organization. The system allows wholesalers to become wealthy by acting as unnecessary middle men. The Chinese government may even hold a stake in these wholesale operations.
China is erecting a huge barrier to Western technology sales because it can. Large IT firms cannot afford to turn their backs on an economy which will soon be the second largest in the world. The fact that it is not a level playing field only matters to ethicists. The Chinese have the premier marketplace that the world’s major companies want to take part in and that allows this government to write the rules for participation both now and in the future.
Douglas A. McIntyre
Top Gaining Stocks
Top Losing Stocks