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Friday, April 6, 2018

Licensing our technology to China? Shhh ... it's nicely profitable

Mike Smitka, Economics
Washington and Lee University
Bass II, RCS

As an observer and sometimes participant in industrial policy debates for 30+ years, few industries are "winner takes all." It's just not the way either technology or competition works. In addition, few technologies turn out to be national in significance. Lots of players, lots of niches, not many jobs. There's typically a long delay between invention and innovation, and initial commercialization seldom makes money. Most patents are never used.

Furthermore, producers can't capture all the benefits. Users have their place in the value chain, except for the odd discrete product they're the ones who integrate it into what final consumers purchase. If the technology lets final purchasers reorganize their businesses, they too capture benefits. As a result, the whole world benefits from advanced countries subsidizing new technology. The gain to any one country is much smaller. And it's a big world: no one country can dominate more than a few slices of the market, even when they are the size of the US or China.

So here's a devils advocate position: the more China subsidizes their push into new (for them) technologies, the better it is for us, the United States. Let China bear the costs, which are upfront, and let us reap the eventual benefits. For the MBA's out there, think net present value: it's negative.

...Don't kill the goose!...

Oh, and licensing is a fool's game, and it's not us who are being fooled. Licensing is only good for yesterday's technology, you can't license something that doesn't yet exist or has no obvious value. In the auto industry, the product cycle means that a MY2018 vehicle represents the technology of 2014-2015 – and the technology in a Honda CR-V is going to lag that in the Acura RDX. Remember, too, that licensing is only the first step. The Chinese "partner" has to then get that technology into production. That takes a good 3 years. Licensed technology is old technology.

And licensing only covers what the other party can see – that's the equivalent of Tesla's purchase of lots of robots. Yes, you've the hardware and the access to the patents. But that doesn't tell you how to make a factory full of them operate, or how to design products for which automation saves money. That's tacit knowledge, embodied in part in teams of engineers who are in turn embedded in a larger engineering operation and networked with counterparts at component suppliers and capital equipment vendors. If the Chinese want to get their factories to run and their products to work right, they have to hire teams of consulting engineers. So those licensing get fees up front, get ongoing training contracts, and are the gatekeepers for buying specialized equipment and materials and so on. All of these can be nicely profitable, while leaving the Chinese perpetually 5 years behind.

This will vary from industry to industry. But many of the companies being "ripped off" are in fact crying all the way to the bank. They just have to be careful not to boast about it lest they kill the goose that is laying the golden eggs. How long has Shanghai GM been up and running? – the Buick Sail project started around 1999, the vehicle launched in 2001. So after 20 years how have they fared? They're still in the drivers seat for their regular trips to the bank.

Yes, GM's local partner, SAIC, is in the back seat. Why? Parts is because technology isn't readily transferred. But remember where the car is headed: SAIC is also on the way to the bank. Being a passenger isn't so bad, since GM delivers profits like clockwork. Neither SAIC nor the numerous other "domestic" Chinese auto companies have managed to make regular money on their own. Entering the auto industry is hard. Better to license, and license, and license some more. Don't kill the goose!


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