It’s well-known that China has some serious issues with protecting intellectual property. From cars that are knockoffs of the name brand models (the Brilliance H530 is so similar to the F10 BMW 5 Series that enterprising vendors in China sell conversion kits to change the car into a low-buck 523i) to serious accusations of state-on-state cyber warfare, most global companies only reluctantly venture into agreements with Chinese companies. Sure, they really want access to that large and growing market, but they are also deathly afraid about how their hard work on research and development may help their local Chinese partners more than them in the long run.
Intellectual property concerns were paramount when Ford sold Volvo to Chinese automaker Geely, so much so that Ford had to build protections into the agreement. Concerns over transfers of GM’s IP that resided within Saab are what sunk all rescue efforts undertaken on behalf of the long-struggling, now-dead Swedish brand. In a nutshell, GM didn’t want to see itself competing against its own IP in China in a few years.
The U.S. is taking Chinese cyber spying seriously, recently accusing a group that has ties to the Peoples’ Liberation Army (PLA, or China’s powerful military) of breaching security at dozens of U.S. companies – many in defense or other strategic sectors. The U.S. has warned China of trade, diplomatic, and other consequences if China’s behavior continues. China, for its part, angrily denies that it has any culpability for the attacks, but there are far more smoking guns that show China’s responsibility for these attacks than China cares to admit.
What does this mean for the auto industry – both China’s independent automakers, many of whom aspire to eventually grow to a global scale, and for the current global automakers? I think sometimes of the butterfly struggle story that many of us have heard. Whether it’s true, I don’t know, but the moral of the story is that if you help a butterfly out of its chrysalis, its wings will not get enough blood circulating through them, and it will never fly.
If China’s automakers skimp on R&D, or steal R&D, and if the butterfly story holds true for them, it may mean that they will struggle to compete on the larger stage outside of China. According to a report cited by Automotive News, China’s automakers spend about 2 percent of their revenue on research and development. The global norm is 4 percent. This means that they’re either going to remain behind the curve, or they’re going to have to steal their way to parity with their fast-moving, aggressive global competitors. Frankly, because they need to catch up to their western peers, China’s automakers should be spending a larger percentage of revenues on R&D, not a smaller one. Also, if China’s automakers don’t invest in their own R&D and rely on stolen trade secrets, it will eventually cause their western partners to balk at sharing technical know-how with them, which will harm China’s industry.
The report linked above also says that it will be ten years before any Chinese automaker is competitive on the global stage. Funny how when I first started following the business side of the auto industry closely eight years ago, many felt that China would be selling cars in the U.S. within the next 18 to 24 months. The world has changed dramatically since then (global economic crisis, continued growth of China’s domestic industry, and some ill-fated attempts to sell Chinese-branded cars in Europe among other things).
China’s auto industry is on an accelerated development past compared to the track that previously-developed countries’ auto industries took. It took U.S. automakers decades – more than a 50 years – to get to the point that they were competitive with the best in the world. It took Japan’s automakers about 20 years. It took Korea’s automakers a little over 10 years. China’s may take about that long. But stealing intellectual property – whether that theft be of engineering materials or the design of vehicles – is no way for China’s industry to move into the future.
The other parallel between China’s industry and the U.S. is the way domestic brands are losing market share. Decades ago, the Big Three (which we can’t even call them anymore; now they’re just the Detroit Three) commanded about 90 percent of the U.S. market. Today that share is less than 50 percent. China is seeing something similar; the country’s domestic brands like Geely, Brilliance, and SAIC are losing share to their joint-venture partners that can rely on western car-development know-how. Chinese buyers aren’t stupid, and they are willing to spend more money to get a superior product. But once the home team’s products achieve parity, or near parity, with the offerings from GM, Volkswagen, BMW, and Audi, those brands and others will need to watch out.