Chinese President Hu Jintao's arrival in Washington yesterday was accompanied by the announcement of the imminent signing of a major joint venture between General Electric and China's state owned Avic to produce sophisticated avionics (airplane electronics) in China for sale to Chinese and other airplane producers.
No doubt intended as a way of pouring oil on the troubled waters of U.S.-China trade relations by demonstrating mutually beneficial cooperation between U.S. and Chinese industry, the announcement instead demonstrated precisely why the waters are troubled.
Let's start with GE Chairman and CEO Jeff Immelt. About a year ago, in the course of a dinner he thought was private, Immelt complained that China is a miserable place in which to do business. It was bent on expropriating GE technology and made selling in China very difficult if not impossible unless a company also produced in and transferred technology to China, he opined. A few months later, Immelt spoke of having an epiphany about the dangers of off-shoring too much GE production. In the GE annual report, he wrote of the need for and his intent to put more investment in the United States and to bring some of GE's foreign production back to America.
But the announced deal will take things in the opposite direction. The investment and production will be in China and the technology (much of it initially paid for by U.S. tax payers and the Defense Department) will be transferred from the United States to China, thereby enabling China's aviation industry to move more quickly toward its goal of overtaking the U.S. and Europe in commercial and military jet production.
So what's going on? GE's Vice Chairman John G. Rice put it bluntly in commenting on the fact that China is expected to buy $400 billion of airplanes over the next twenty years: "We can participate in that or sit on the sidelines. We're not about sitting on the sidelines." Rice added that: "This venture is a strategic move that we made after some thought and consideration with a company we know. This isn't something we were forced into by the Chinese government."
Okay, but why can't GE sell to that big market without a joint venture with a state owned Chinese company? Why can't it just make the avionics in the United States and export them to the Chinese aircraft makers and airlines? After all, China doesn't have this technology right now. So GE is a lower cost and infinitely more sophisticated producer than Avic.
Well, one reason might be that if GE doesn't do this deal, another avionics maker might. But hold it. That has to mean that the Chinese are effectively making access to this big market conditional on producing in and transferring technology to China. So who is Rice trying to kid. Maybe the Chinese government didn't call him up and shout directly over the phone that "Mr. Rice we command you to do a joint venture with Avic and to transfer your technology and production to China." But Rice is not as dumb as he thinks we are. He was afraid that if he didn't produce in China, he wouldn't have a chance at the business.
And Immelt did say that he had cleared all this with the U.S. Departments of Commerce, Defense and State.
But that raises an even more interesting question. Will we be hearing of any joint ventures between U.S. and Chinese companies that will transfer Chinese technology and Chinese based production to the United States? I'm sure your guess was "no." And you're right. But why don't Obama and his Commerce, Defense, and State Departments make it clear to the Chinese that if they want to sell in the U.S. market they need to produce something here and transfer some technology here? China is way ahead of the U.S. in the production of solar panels for example. This is a technology being fostered by the Obama administration. Why not get the Chinese to help us in solar panels just as Immelt and GE (with the apparent approval of the Departments of Commerce, State, and Defense - and the White House) are helping them with avionics?
After all, isn't what's good for the Chinese goose also good for the American gander?