TRAVEL: High-Tech Transfer Hesitation Kills China-US Rail Deal

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Bottom line: Reluctance to transfer its technology killed CRI’s breakthrough deal to build the first US high-speed rail line, showing that emerging Chinese tech leaders must be more open to such transfers if they hope to succeed globally.

CRI’s high-speed train to US derails

The story that has seen China’s rapid modernization using western technology took an unusual twist last week, when a US firm aiming to build America’s first high-speed rail line abruptly canceled its tie-up with a Chinese partner over technology transfer issues. The US builder of the line connecting Los Angeles and Las Vegas was quite direct, blaming its decision on Washington’s condition requiring that rail cars for the project be locally manufactured.

While XpressWest wasn’t more specific, its brief announcement strongly implied that its Chinese partner, China Railway International (CRI), was unwilling to make the necessary technology transfers for the project to go ahead.

Most cross-border technology transfers to date have flowed from the west to China for the simple reason that the former was far more advanced and the latter had little to offer in return. But high-speed rail is one area where China may finally have an advantage over many of its western peers, after gaining a wealth of experience from building a national rail network costing hundreds of billions of dollars.

Companies with such cutting-edge technology are almost always wary of sharing that knowledge, over concerns of intellectual property theft and helping to foster development of new rivals. But such sharing is also part of doing business, and policies requiring such transfers have been liberally used by Beijing to help China develop competitive high-tech sectors in areas like telecoms equipment and computers.

Such transfers also create competition that keeps the market healthy and fosters innovations that ultimately benefit the entire global economy. Accordingly, China should be prepared to accept the same conditions that it often imposes on the west, and encourage its emerging field of state-run leaders like CRI to enter into similar technology transfer arrangements that ultimately benefit everyone.

China has emerged over the last decade as a global leader in high-speed rail, following Beijing’s decision to invest heavily in the area as part of a broader drive to build up the nation’s transport infrastructure. China’s high-speed rail network currently totals nearly 20,000 kilometers and 10,000 more are planned by 2020, easily surpassing all such rail in the rest of the world combined. Total cost of the network is estimated at a staggering $300 billion or more.

Having invested so much money in the technology, Beijing is understandably eager to export some of that know-how by building high-speed rail lines for other countries through CRI, the main builder of such projects. It has scored a few contracts to date in developing markets like Indonesia, though many have relied on project financing from China.

Export Breakthrough

CRI achieved a major breakthrough last fall when it formed its partnership with XpressWest to build a high-speed line connecting Los Angeles and Las Vegas, covering a distance of about 300 miles (480 kilometers) at an estimated cost of around $5 billion. But the landmark agreement was suddenly terminated last week due to Washington’s requirement that rail cars be locally manufactured, since the line was being funded with federal money. (English article; Chinese article)

It wasn’t immediately clear why CRI declined to agree to build rail cars for the project locally, and higher costs in the US were probably a factor. Such technology transfer also could have ultimately trained local US workers in the field, giving them the experience and know-how to eventually set up their own rival companies.

Such a process is an important part of the healthy development of emerging high-tech sectors, and China has used it liberally to help build up some of its biggest corporate names like telecoms giant Huawei, PC leader Lenovo (HKEx: 992) and new energy car maker BYD (HKEx: 1211; Shenzhen: 002594). Western high-tech leaders like Ericsson (Stockholm: ERICb) and IBM (NYSE: IBM) willingly bring their technology to China, often in the form of joint ventures, partly with the understanding that the engineers and professionals they train will ultimately go to local companies or even start up rival firms.

The collapse of the CRI-XpressWest partnership represents a big lost opportunity for both sides, since it would have given CRI a foothold in the west while also helping to nurture related technologies in the US. In the future, Beijing should encourage big state-run players like CRI to be more open-minded about exporting not only their products but also their technology, in a process that will ultimately advance the companies’ own interests while also promoting development of cutting-edge global industries.

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