CHINA: REASSESSING THE ROLE OF FOREIGN TECHNOLOGY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000200390001-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: March 15, 2012
• Sequence Number: 1
• Publication Date: May 8, 1987
• Content Type: MEMO

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rILE
DATE 5-2-6-7
Central Intelligence Agency
Washnon,D.0 20505
DIRECTORATE OF INTELLIGENCE
08 May 1987
DOC NO Z-
OIR
PPD
China: Reassessing the Role of Foreign Technology
SUMMARY
After several years of rapidly?and haphazardly?importing
Western technology, Beijing is reassessing the role of such technology in
China's industrial modernization. Growing concerns about costs,
ineffective use, and disruptions in some fledgling industries have led to
closer scrutiny and tighter controls over the acquisition of both equipment
and know-how. These changes will probably, over time, strengthen
Chinese industrial capabilities and export competitiveness. Although
Beijing will be more selective in importing technology, market
opportunities remain bright in some sectors.
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This memorandum was prepared by Office of East Asian Analysis. 25X1
Information available as of 8 May 1987 was used in its preparation. Comments and
queries are welcome and may be directed to the Chief, Trade and Technology Branch,
China Division, DEA 25X1
EA M 87-20092
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Emerging Problems
Three concerns prompted Beijing to reassess the role of foreign technology in
China's modernization:
? The decline of China's foreign exchange holdings. Duplicate and unnecessary
technology imports contributed to the dramatic drop in China's foreign exchange
holdings from $17 billion in December 1984 to $10.5 billion in December 1986.
According to Chinese press reports, Chinese traders, for example, imported more
than a hundred color television production lines and dozens of washing machine
and refrigerator assembly lines. Many of these deals committed China to
massive expenditures of foreign exchange well into the future in order to import
the components needed for assembly.
? Disappointing results from imported equipment. Widely publicized Chinese
reports last year indicated that only a fraction of the imported equipment was
being used effectively?even in priority areas such as computers,
microelectronics, and scientific instrumentation.
? The harm to infant Chinese industries. Many factories are strapped because
their products cannot compete with lower priced, higher quality imported goods,
while--at the same time--purchases of duplicate production lines have created
additional surplus production capacity. The Chinese press has also criticized the
fact that many of the foreign-equipped production lines have kept China
dependent on imported components.
New Initiatives
To correct these problems, Beijing aims not to curb total expenditures on foreign
technology, but rather to reduce unnecessary purchases and find ways to increase the
benefits from the technology it must import (see figure 1). Beijing still believes that
foreign technology, if put to good use, provides a cost-effective shortcut to industrial
and technological advancement. China also views foreign technology as vital to its
competitiveness in export markets, as well as to its goal of eventually substituting
domestic products for imports.
Beijing seeks policy solutions that are less restrictive than the legislation adopted
by Brazil and India to protect their infant electronics industries--yet more stringent than
the policies of Taiwan and South Korea, which have nearly eliminated government
controls over technology acquisition to speed industrial development and export growth.
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4.5
4
3.5
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Figure I
China: Technology Imports by Central Authorities,
1979-16*
15
I
0.5
0
1979 1980 1981 1982 1983 1984
1985
1986
* Data from China's Ministry of Foreign Economic Relations
and Trade reflect contracts stoned. not actual shipments,
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China has implemented a combination of direct administrative controls, economic levers,
and worker and manager incentives to control the purchase and improve the use of
foreign technology, and to encourage greater use of domestic technologies. Beijing has,
for example:
? Centralized import decisionmaking, and charged industrial ministries with
checking domestic availability to ensure imports are not redundant.
? Issued regulations linking equipment purchases to transfers of know-how, and
offered preferential treatment to foreign partners that help China produce for
export.
? Encouraged trade corporations and factories to seek the advice of technical
consultants and to use feasibility studies.
? Raised tariffs and cut domestic prices to shore up sales of domestically produced
goods and to protect infant industries.
? Sponsored technology exhibits and fairs to make Chinese buyers aware of
indigenous technologies that could substitute for foreign ones.
Beijing Debates Technology Import Policies
In the aftermath of Hu Yaobang's dismissal, Chinese reformers and
conservatives have deepened their debate over issues related to economic
policy. China's "open door" to Western technology could become one of the
focal points for challenges to recent reform policies.
Throughout 1986, even when reformers generally had the upper hand, Chinese
officials expressed differing opinions on the merits and drawbacks of foreign
technology, as well as on the policies most likely to yield maximum economic
benefits from technology introduction. The debate has centered on several
issues:
o To make or buy technologies.
o To centralize import decisionmaking or to increase the factory voice in the
decisionmaking process.
o To regulate imports by administrative means, or through greater use of
market mechanisms.
o To direct purchases toward mature sectors such as textiles and machine
building or to high-tech industries such as electronics.
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o To purchase state-of-the-art or less advanced but more easily assimilated
items.
We believe that more conservative Chinese leaders favor greater use of
indigenously developed technologies and equipment, closer central supervision
and greater use of administrative mechanisms to regulate technology imports,
and stronger emphasis on less sophisticated but possibly more easily
assimilated technologies for backbone industries. Soviet technology would
probably meet the requirements of many Chinese conservatives. Reformers,
however, have also promoted their policies, which include greater use of market
mechanisms to regulate technology import choices and to encourage effective
technology use, greater involvement by factory-level decisionmakers, and
emphasis on imports of sophisticated Western technology for high-tech
industries.
More Bang for the Import Buck
We expect China's progress in rationalizing technology import decisionmaking
and in improving technology use to be gradual. Bureaucratic boundaries--both
provincial and ministerial--will continue to result in duplicate or unnecessary purchases.
Moreover, shortages of technical personnel, energy supplies, raw materials, spare parts,
and funds will continue to hinder technology absorption.
Nonetheless, we believe that China will, over time, substantially reduce the
incidence of duplicate imports and the purchase of equipment China can supply
domestically. Some successes are already evident. Last year, for example, China's
Ministry of Machine-Building Industry canceled 88 import projects that did not meet the
new criteria, according to Chinese press reports.
We also believe Beijing will improve the match between imported technology and
the needs and capabilities of users, gradually boosting the economic payoffs to factories
introducing foreign technology. Import decisions by central agencies such as the State
Economic Commission or the Ministry of Foreign Economic Relations and Trade will
begin to reflect what these agencies have learned from surveys undertaken in 1986
about why past import projects succeeded or failed. Factories will make better use of
imported technology as they gain experience using feasibility studies to guide both
equipment selection and related adjustments in factory conditions, resource supplies,
and training. Managers will probably become increasingly sensitive to the benefits of
technology introduction--and the costs of poor technology use--as a result of recent
factory management reforms designed to make individual factories managers
responsible for the profitability of their enterprises. Political uncertainties in Beijing
following Party Chairman Hu Yaobang's ouster in January that have put related wage
and price reforms on hold will limit the effectiveness of managerial reforms, however.
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We believe the sectors likely to benefit most from improved use of foreign
technology are textiles, food processing, household appliances, consumer electronics,
packaging, metallurgy, printing, and plastics. Because Beijing is aggressively promoting
exports--and favors technology imports for projects that will generate exports rather
than improve production solely for the domestic market--we expect Chinese goods in
these sectors to be increasingly competitive in international markets. Foreign
technology will help China improve quality control and upgrade packaging factors that
have limited China's penetration of many export markets.
Barriers to Technology Assimilation
o The vertical structure of Chinese industry continues to make it difficult
for users of imported technology to obtain needed raw materials,
components, trained managerial and technical personnel, and energy
supplies controlled by other ministries or by the Academy of Sciences.
Calls for increased "horizontal linkages" between factories, and between
enterprises and research units show Beijing's awareness of the
bureaucratic barriers that now exist, but Beijing continues to have difficulty
implementing the concept.
o Too few skilled technical personnel are available to handle the difficult
task of assimilating foreign technology. Although links with universities
and research institutes are growing as a result of Beijing's encouragement
of domestic trade in technology, we believe that progress has been slow,
and that few factories have hired technical consultants to work specifically
on assimilation of foreign technology.
Insufficient funds for the assimilation phase. Most allocations for
technology imports do not provide a cushion for maintenance or repair
services, additional training, or spare parts purchases after installation,
Chinese proponents of such funding
changes argue that Japan spends five to seven times more to assimilate
an imported technology than to acquire it initially.
Consequences for Technology Suppliers
Despite Beijing's attempts to cut back duplicate purchases, many foreign
technology suppliers will find improved opportunities to sell to China during the current
Five-Year Plan (1986-90). Overall spending on foreign technology is slated to increase,
accelerating in the latter years of the plan. The focal areas for technology import will
be the energy, transport, telecommunications, raw materials processing, textile, light
industry, machine-building, and electronics sectors. We also expect China to make
greater use of foreign experts to conduct feasibility studies, consult on technology
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import needs, and provide managerial and financial advice. We believe that the shortage
of foreign exchange will prove to be the limiting factor on China's technology imports
for the remainder of the decade. Chinese buyers will probably look for ways to acquire
foreign technology without making large outlays of foreign exchange--for example,
buying used equipment or the rights to dated technology processes, or leasing
equipment instead of purchasing it.
Beijing's new policies will probably create additional layers of bureaucracy with
whom foreign suppliers must negotiate, prolonging negotiations. Foreign technology
suppliers also will face greater pressure to engage in cooperative production projects,
such as joint ventures and license agreements. The ability to provide
government-backed concessional financing--already a decisive factor--will become
increasingly important to foreign firms selling technology to China.
Beijing will continue to find technology from Western Europe and the United
States more desirable than that from Japan, in our judgment, but the Soviet Union is
also emerging as an important source of China's technology (see figure 2):
? We expect the US share of China's technology imports at least to stabilize--and
probably to increase--over the next five years. US firms will benefit from
policies linking equipment purchases to cooperative production, but will face keen
competition from European firms, which often include attractive financing with
their bids to supply equipment and production technology.
? The market position of West European technology suppliers will remain strong.
In the last three years, West German and French suppliers have won several large
contracts on the basis of favorable technology and financing packages, a trend
we expect to continue. West European suppliers have also benefited from
Beijing's desire to diversify sources of technology, and reduce dependence on
Japan and the United States.
? Japan's share of China's technology purchases will probably continue to erode for
the next few years, as China's central trade corporations enforce Beijing's
instructions to direct imports away from Japan--a policy first formulated in 1985
out of frustration with a ballooning trade deficit and the relatively low level of
Japanese investment, Japanese sales figures
will also begin to reflect China's suspension of imports of consumer goods
production lines through 1990 and the effect of the yen's appreciation.
? The Soviet Union's share of China's technology imports rose sharply in 1986 and
will probably continue to grow over the next few years, as Beijing and Moscow
implement a July 1985 agreement on technical cooperation, and as China's
interest in acquiring technology through barter--rather than with hard-currency
expenditures--grows. Most of the 24 projects covered by the 1985 agreement
are in the energy or heavy industry sectors; Beijing welcomes Soviet assistance
in energy because Soviet technology is relatively advanced, and for heavy
industry because it is a sector that Western investors generally avoid. Most of
the joint projects under consideration involve renovation of sites built with Soviet
help in the 1950s.
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Figure 2
China's Major Technology Suppliers, 1983-86
1983
1985
W.Germany
20.2%
France
7.5%
1984
Japan
36.4%
Other
23.9%
US
7.2%
UK
Japan
17.7%
US
14.7%
4.8%
1986
USSR
UK 11.5%
UK
9.4%
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SUBJECT: China: Rassessing the Role of Foreign Technology
Distribution:
White House
1 - Dr. William Graham, Office of Science and Technology Policy, Old Executive Office
Building, Room 358.
1 - Frances Li, Office of Science and Technology Policy, New Executive Office
Building, Room 5002.
National Security Council
1 - Doug Paal, Senior Assistant for China, Taiwan and Hong Kong, Old Executive Office
Building, Room 302.
Department of State
1 - Thomas Fingar, Chief, INR/EAP/CH, Room 8840.
1 - Hank Levine, INR/EAP, Room 4318.
1 - Bob Goldberg, Office of Chinese Affairs, Room 4318.
Central Intelligence Agency
2 - C/OEA/CH, Room 4G32.
1 - C/OEA/CH/IS, Room 4G32.
1 - C/OEA/CH/PA, Room 4G32.
1 - C/OEA/CH/EA, Room 4G32.
10- C/OEA/CH/TT, Room 4G32.
1 - ?EA/Production Officer, Room 4G48.
1 - SDS, Room 4G48.
1 - D/OEA, Room 4F18.
1 - DDI, Room 7E44.
1 - DCl/DDCl/Executive Staff, 7D60.
1 - Senior Review Panel, Room 5G00.
1 - PDB Staff, Room 7F30.
1 - NIO/EA, Room 7E62.
1 - C/PES, Room 7F24.
1 - CPASA_ , Room 7G50.
1 - C/E Room 5E18.
5 - CPAS/IMC/CB, Room 7G07.
1 - NIO/S&T, Room 7B42.
1 - OSWR/STD/SB, Room 5F43.
1 - OSWR/TTAC/TAG, Room 6C43.
DDI/OEA/CH/TT
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