Chinese High Speed Rail Leapfrog Development

Since serious Chinese planning of high-speed rail (HSR) networks began in the 1990s under the guidance of the Ministry of Railways (MoR), rail planners have sought to create independently trademarkable Chinese brands capable of competing in global markets in addition to confronting domestic transport inefficiencies and improving air pollution. This success of this effort to absorb foreign technology has implications for world railway markets, but also serves a case study of China’s approach to technology acquisition.

Previous Chinese participation in the world HSR market was limited due to the inferiority of its technology relative to established Western and Japanese manufacturers despite lower labor and resource costs and favorable government financing. However, China appears to have pursued a “technology for market access” strategy to enhance the global competitiveness of domestic HSR companies. These policies and the modus operandi of the Chinese government are explicitly stated in official documents and state media which detail the use of technology transfer agreements as a key component in realizing technology development goals. 

Poorly formulated technology transfer agreements may constitute more of a threat to the competitiveness of Western enterprises (particularly ones reliant on high-technology which consume significant amounts of capital and resources in research and development) than that from Chinese cyber economic espionage. The latter is primarily associated with obtaining knowledge such as patents and technical schematics, whereas the former often involves training the receiving party in how to skillfully exploit the knowledge. This not only potentially accelerates rival product development but also reduces financial and time costs of process optimization.

Chinese train-makers and civil engineering companies are now building, participating in or contemplating bidding for HSR construction projects in South America, the US, Saudi Arabia and Russia. In October 2013, State council premier Li Keqiang signed a railway cooperation memorandum of understanding with Thailand, followed by an exhibition of Chinese railway manufactures in Romania in November 2013 attended by 16 leaders from Eastern Europe (Xinhua, May 8). China is also involved in HSR construction in a Turkish project worth $1.27 billion (People’s Daily, January 18) and has signed $3.1 billion worth of deals with Nigeria (Xinhua, May 8). The greatest market potential, however, is in Asia. The Asia Development Bank estimates that $8 trillion dollars will be spent on infrastructure in the region up to 2020. To facilitate Chinese domination of this market, China published an initiative to found an Asian infrastructure investment bank which will provide funds and support for ASEAN countries (China Daily, October 28, 2013).

Clear Plans for Technology Export

From the beginning, Chinese media and government sources were explicit that China planned to compete with established train manufactures in their home markets and around the world. In 2006, Xinhua, writing about the locomotive technology introduction, digestion, absorption and re-innovation project protocol described a 3-stage process: complete analysis of foreign technologies and materials, simulation and testing to assimilate crux technologies, followed by re-innovation to achieve independently manufactured Chinese high-speed rail systems (Xinhua, August 3, 2006).

The development trajectory of Chinese HSR has been guided by the “Mid-to-Long-Term Railway Development Plan,” which states that the ultimate rail development goal (in addition to improvements in national infrastructure) is the creation of independently competitive international Chinese HSR brands. Chinese companies would master advanced technologies obtained through technology transfers and re-innovate using national research institutes to enhance the country’s domestic manufacturing capacity (Xinhua, April 29, 2007).

The “China High Speed Train United Action Plan Cooperation Agreement” signed between the Ministry of Science (MoS) and the MoR on February 26, 2008 (PRC Science and Technology Ministry, February 27, 2008) specified that both would cooperate to:

1. Develop key technologies to create a network capable of supporting train speeds of 350 kph and higher.
2. Establish independent intellectual property rights and improve international competitiveness.
3. Export technology.

The MoS invested nearly 10 billion RMB ($1.6 billion) in the plan, bringing together 25 universities, 11 research institutes, 51 national laboratories and engineering research centers with participation from the 863 and 973 national high technology research and development programs (Science and Technology Daily, September 6, 2010). The MoR also mobilized universities and colleges, science research centers and manufacturers to work on the “locomotive introduction, digestion, absorption and re-innovation program” (People’s Daily, September 5, 2008).

Chinese HSR Contracts

Despite its plans for global expansion, China has been able to leverage the size of its market to achieve sinification of important foreign technologies through technology transfer agreements. In 2003, when the State Council resolved to build the Beijing-Shanghai line, it found that Chinese companies lacked the capacity to fulfill HSR development objectives. According to MoR spokesman Zhang Shuguang, China might have needed more than a decade to catch up with developed nations due to the cost and difficulty of improving domestic technology (Xinhua, April 29, 2007). Instead, China used the size of its market to demand foreign technology transfer and realize development objectives through digestion, absorption and re-innovation (yinjin xiaohua xishou zai chuangxin) of foreign technology. China would use flexible negotiation tactics, such as inviting simultaneous bids for important equipment from foreign companies allowing China to shop around for the best deal (huo bi san jia).

On June 17, 2004, the MoR launched the first round of bidding for 200 km/h rail technology. The State Council stipulated that the economic benefits of foreign participation must primarily accrue to China and not foreign economies (Xinhua, March 4, 2010) with technology transfer a priority aim to assist China in the development of indigenous designs.

Criteria imposed by the MoR included competitive pricing and that companies awarded contracts be legally registered in the PRC, comprehensively transfer key technology to Chinese enterprises and use a Chinese trademark on the finished product. While foreign partners might provide technical services and training, Chinese companies must ultimately be able to function without the partnership (National Technology and Equipment Network, March 18, 2010). Chinese entities were free to choose foreign partners, but foreign firms were required to pre-bid and sign technology transfer agreements with domestic manufacturers (Xinhua September 4, 2004). The State Council also stipulated that foreign companies must transfer not only existing technology to China, but also subsequent improvements (Xinhua, March 4, 2010).

Alstom (France), Siemens (Germany), Bombardier (Canada) and a Japanese consortium led by Kawasaki Heavy Industries all submitted bids. All had to adapt their HSR train-sets to China’s own common standard and assemble units through local joint ventures, or cooperate with Chinese manufacturers under the direction of the MoR (People’s Daily, September 5, 2008).

Bombardier, through its joint venture with CSR Sifang won an order for 40 train sets based on its Regina design. These were re-named CRH1A and delivered in 2006 (Bombardier). Alstom, with CNR’s Changchun Railway Vehicles, won an order for 60 train-sets designated CRH5, based on the New Pendolino developed by Alstom-Ferroviaria in Italy. Siemens offered the Velaro E to Changchun Railway Vehicles Co., Ltd for a “sky-high” price of 350 million RMB ($56 million) per train-set and demanded €390 million ($530 million) for technology transfers. Additionally, Siemens did not respond to as many as 50 items on the tender (Xinhua, March 4, 2010). According to the People’s Daily, the elimination of Siemens from the first bidding round (allegedly) led to the collapse of the company’s share price and the firing of its negotiating team in China (People’s Daily, September 2, 2008). In 2005, Siemens returned to tender for 350 km/h+ train contracts subject to more severe conditions, agreeing to lower its prices and comprehensively transfer technology (Xinhua, March 4, 2010). In November 2005, Siemens reached an agreement with the MoR, entering into joint ventures with Changchun Railway Vehicles and Tangshan Railway Vehicle Co, (both CNR subsidiaries) and was awarded sixty 300 km/h train orders. It supplied the technology for the CRH3C, based on the ICE3 design, to CNR’s Tangshan.

Initially Japanese participation in bidding was led by a Nippon-Sharyo consortium, but Hitachi and Nippon-Sharyo refused to sell railway technology. China then opened negotiations with Kawasaki, over the objections of other Japanese companies. At the same time, a Chinese web campaign demanded a boycott of Japanese train manufacturers as a protest over wartime atrocities. Nonetheless, the MoR decided that excluding Japanese companies would weaken competition between bidders (Xinhua, March 4, 2010).

In October 2004, Kawasaki and the MoR signed an export and technology transfer agreement with China ordering 60 high-speed train sets from Kawasaki based on its E2 Series Shinkansen for a total of 9.3 billion RMB ($1.5 billion) (Xinhua, March 4, 2010). The contract provisions also stipulated that a certain number of key technologies would be transferred to China. Kawasaki evidently believed that this technology would be used only in the domestic market. Three of the train sets would be completed in Japan and delivered completed, another six would be handed over and assembled by the Chinese party. A further 51 would be manufactured by Qingdao Sifang with transferred technology. The modified Kawasaki E2 series Shinkansen was renamed the CRH2A. In 2008 (two years into the partnership), CSR ended its cooperation with Kawasaki and began independently building CRH2B, CRH2C and CRH2E models at its Sifang plant and designated the technology for export (Financial Times, July 8, 2010).

Kawasaki accused China’s high-speed rail project of patent theft, believing that its agreement with China restricted the export of transferred technology (Japan Daily, April 15, 2013). This claim was denied by the MoR, which countered that re-innovation had made the product distinctively Chinese (China Daily, July 8, 2011). According to CSR president Zhang Chongqing, CSR “made the bold move of forming a systemic development platform for high-speed locomotives and further upgrading its design and manufacturing technology. Later, CSR began to independently develop high-speed CRH trains with a maximum velocity of 350 km/h, which began production in December 2007” (China Pictorial, July 1,2010).

Kawasaki’s complaints have been supported by similar statements from Alstrom that Chinese companies are now competing for export contracts using foreign technology. Alstrom’s Asia-Pacific managing director claims that: “Around 90 percent of the [HSR] technology the Chinese currently are using is derived from their partnerships or equipment developed by foreign companies” (Financial Times, April 6, 2010).

In a 2011 interview with the Financial Times, Alstrom chief executive Patrick Kron accused Siemens of inadvertently allowing key technical know-how to leak out to Chinese companies through a HSR partnership (Financial Times, October 31, 2011). Kron asserted that Alstom, unlike Siemens or Kawasaki, had been careful not to engage in Chinese joint ventures or collaborations that involved giving up key technology. “You should ask Mr. [Peter] Löscher [Siemens chief executive] whether he is satisfied…I have no problem with the general issue of business partnerships in China, but you have to do this in a pragmatic way. In collaborative ventures it is not mandatory to give away technology.”

Not all perceptions of operating in the Chinese market are negative however. Zhang Jianwei, President of Bombardier China, stated that when Bombardier entered the Chinese market (in 1998) it was active in promoting comprehensive, systematic technology transfer: “whatever technology Bombardier has, whatever the China market needs, there is no need to ask. Bombardier transfers advanced and mature technology to China, which we do not treat as an experimental market” (People’s Daily, March 16th 2007).

Conclusion

China appears to be practicing a “technology for market access” policy in order to achieve development goals defined by the country’s leadership. This tactic is remarkably similar to the “technology for resources” strategy seemingly pursued by China in relation to rare earth resources which was challenged by the EU, US and Japan at the World Trade Organization (WTO) in 2012. The complainants charged that China’s restrictive practices were in violation of its protocol of accession to the WTO and other international agreements, an accusation upheld by the judgment of the dispute settlement panel in March 2014 (WTO, March 26).

Chinese government technology strategy (as exemplified for high speed rail) and favorable financing, combined with domestic labor arbitrage advantages, have led the former deputy governor of the People’s Bank of China to predict that China’s market share of manufacturing of advanced machinery could climb from 8 percent in 2010 to 30 percent of global exports by 2020 (Wall Street Journal, November 17, 2010). China’s method of high-technology development therefore may have serious repercussions for the future competitiveness of innovation-driven economies such as the United States, Japan and the European Union.