The Hindu Business Line : Chinese walls within China’s economy

“Domestic manufacturers have been known to produce a model for testing, only to bring the unit to the market without including all the safety or pollution-control equipment featured on the demonstrated model.”

M. Ramesh

Chennai, Sept 24 A recent study by the Georgia Institute of Technology, US, placed China at the top of the countries for its ‘Technological Standing’, giving the country a score of 82.8 compared with 76 for the US, 66.8 for Germany and 66 for Japan. Just eleven years ago, China’s score was 22.5.

What did China do to achieve this? The report of the Prime Minister’s Group on Manufacturing, which was submitted to the Prime Minister recently, delves deep into the Chinese policy to seek the origins of the country’s competitiveness.

(The Group is a high-level committee, headed by Dr V Krishnamurthy, Chairman, National Manufacturing Competitiveness Council and with the Secretaries of the Ministries of Finance, Revenue, Commerce, Textiles and Industrial Policy and Promotion as its members.)

Though the report says that the policies followed by China “are worth noting”, the discussion in the chapter is less than flattering.

With policies ranging from providing covert support to Chinese companies to violation of explicit commitments to the WTO, China has been able to protect its domestic industries.

At the outset, the report says it would not elaborate on “China’s unconventional use of banking system and exchange rate policies, though relevant,” but would focus only on the industrial policy strategy.

Referring to a 2007 initiative called “indigenous innovation”, the report notes: “While China claims that this is only to invigorate domestic innovation, the real purpose appears to be to Chinese companies an additional advantage through preferences and tax incentives.”

Favouritism

This ‘indigenous innovation’ has manifested itself in the form of national standards and favouritism in government procurement. The report cites as an example the Chinese government’s efforts to promote its home-grown 3G cellular network technology, called Time Division-Synchronous Code Division Multiple Access.

“The government appears to be waiting for this indigenous technology to be fully developed before opening the Chinese market to foreign 3G companies,” the report says.

“Separately, China appears to be moving towards mandating the use of unique and non-transparent standards for national and information security purposes,” the report says.

Further, the Chinese government also encourages state-owned enterprises to purchase domestic Chinese software as part of its software development effort.

“This is being done in spite of an explicit commitment to the WTO not to discriminate” foreign and domestic companies when it comes to government procurement.

Procurement measures announced in December 2007 and January 2008 require the government to procure products from an “indigenous innovation catalogue” wherever possible.

Government agencies wishing to purchase imported products must justify and seek approval from the Ministry of Finance.

“Certification and testing of imported products is conducted in an uneven manner compared with similar domestically produced products,” the report notes.

Certification

For example, domestic manufacturers can evade or escape scrutiny in the certification and testing of special purpose products such as agricultural machinery.

Chinese manufacturers also encourage the government to mandate the use of outdated technologies, via standards or test methods, in order to restrict or limit competition by foreign manufacturers trying to enter the Chinese market.

“This lag in adoption of new technologies by mandated use of outdated standards or test methods is particularly noticeable in the building materials industry. For example, the new insulation materials and application technologies are prohibited in China because of lack of standards with which to evaluate them,” the Group’s report notes.

Communications

In the area of communications technology, China is developing security and encryption-related standards that could have an adverse impact on the ability of foreign IT companies to produce and sell their products in China.

Clearly, the tone of the report is not one of finger-pointing — all the discussion about China is to show the country as an example for India’s policy makers.

“China has followed a policy of privatisation and FDI that is conducive to domestic manufacturing and transfer of technologies to China. Domestic value addition has been the bedrock of its industrial and FDI policies,” the report says.

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