Rising sun: technology transfer in China.

Watson, Jim

China's rapid economic growth has monopolized the news in recent months. The annual gross domestic product (GDP) growth rates of around ten percent that were common in the 1990s have continued in the early years of the 21st century. China's investments in new factories, offices, and other infrastructure have driven this growth. The implications for global supplies of raw materials are considerable. In 2003, China accounted for 27 percent of world steel consumption, 31 percent of global coal demand, and 40 percent of world cement demand. As a result of this growth, China's demand for oil has also risen steeply, with imports up 40 percent in the first half of 2004. China's economic development has significant implications for national and global energy supplies.

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But what does this growth mean for China? The speed of this development has posed the most serious challenges for Chinese policy makers. One of the most pressing problems in China is the increasing frequency of power shortages. Power companies are struggling to build enough generation and transmission capacity to meet soaring demand, particularly for air conditioning in the prosperous eastern provinces. Meanwhile, there is pressure to tackle the environmental impacts of China's coal-dominated energy system.

Tensions between economic growth, energy security, and environmental protection goals are familiar to many countries. For a developing country the size of China, however, they are particularly acute. While experts agree that one way to help resolve these tensions is to invest in cleaner, more efficient technologies, they disagree on the best way to do this. Most tend to advocate a move away from coal towards other supply options such as natural gas, renewable energy, and nuclear power. Many also point to the huge potential for improvements in energy efficiency, particularly in Chinese industry.

While Chinese firms and research institutions have capabilities in relevant energy technologies, there is still a significant gap between their means and the international standard. Technology transfer from foreign companies will be crucial for the Chinese government to achieve its policy goals. Unfortunately, past experience has shown that this kind of technology transfer is difficult. Contrary to statements by some Chinese policymakers, technology transfer does not simply involve commitments by industrialized states to donate new technology to developing countries. These difficulties, however, have also shown that real progress is possible if collaborative arrangements are carefully planned.

Moving Away from Coal

Opportunities for a technology transfer of cleaner energy to China will depend on the historical legacy of coal as the dominant energy source. Due to large domestic reserves that are cheap to mine, coal accounts for almost two-thirds of national energy consumption (see "Burned Out"). Coal is used to generate 80 percent of China's electricity. It is also used to meet a significant proportion of energy demand in industry and households.

Although its share of national energy consumption has fallen in recent years, coal is expected to continue to be China's largest source of energy. Absolute annual consumption is now on the rise after the declines that were reported in the late 1990s. According to the US Embassy in Beijing, consumption increased from 1.4 billion tons in 2002 to 1.6 billion tons in 2003. But the declining share of coal in Chinese energy supply coincides with steeply rising demand for other sources of energy. Oil consumption in China is growing particularly rapidly and is beginning to replace coal in many economic sectors, partially because of the huge rise in car ownership and use. The increase in oil consumption has reinforced China's position as a net oil importer, which has also contributed to rising global oil prices.

Gas has historically played a limited role in China's energy system and currently supplies only three percent of consumption. The Chinese government has been supporting gas development projects to reduce pollution from coal-burning in coastal cities. These include the expansion of imports, either by pipeline from Russia or new liquified natural gas terminals on the southeast coast. They also include the construction of new pipelines to access China's indigenous gas resources, particularly in remote western provinces. The largest single investment is a recently completed 4,000 kilometer pipeline from the Tarim Basin gas fields in Xinjiang Province to Shanghai.

In addition to fossil fuels, China consumes significant amounts of energy from carbon-free energy sources. Most carbon-free usage occurs within the electricity industry alongside coal, oil, and natural gas (see "Which Watts"). China's electricity industry is the world's second largest after the US industry. It has recently made headlines as demand has outpaced supply growth. According to the People's Daily newspaper, the industry's capacity reached 400 gigawatts (GW) in May 2004. However, this was not sufficient to avoid power shortages and emergency demand reduction measures in many regions.

While efforts to increase the supply of electricity have focused on new coal-fired power plants, the use of non-fossil technologies is also expanding. Historically, the largest of these technologies has been hydro power. China's hydro capacity is increasing with the construction of the Three Gorges Dam on the Yangtze River. This project will have a capacity of 18 GW, around five percent of the current total in China. China is also one of the only countries in the world with an active nuclear power program aiming for a modest 8.5 GW of capacity. Also in the non-fossil category are the various renewable energy technologies which are attracting a lot of interest from policymakers and companies in China, but have had a negligible impact to date.

Cleaner Coal Technology Transfer

Technology transfer is a complex process, often misunderstood by policymakers wishing to encourage it. Technology transfer entails more than the export of new equipment from one country to another. A special report on cleaner technology transfer by the Intergovernmental Panel on Climate Change introduced a more comprehensive and challenging definition. The report argues that technology transfer should also include "... the process of learning to understand, utilize, and replicate technology including the capacity to choose it and adapt it to local conditions and integrate it with indigenous technologies." The majority of energy technology transfer to China has focused on treducing the environmental impacts of coal use, known as cleaner coal technologies. These technologies range from incremental (more efficient industrial boilers) to more radical (state of the art electricity generation based on coal gasification).

Perhaps the largest of these efforts is the Japanese government's 1992 Green Aid Plan (GAP). The GAP includes cleaner coal demonstration projects in many Asian countries, including China. Despite an average expenditure of US$30 million per year, the GAP has only been partially successful in facilitating technology transfer. No follow-up orders for the equipment used in the demonstration projects have been placed, largely due to the high cost of the imported Japanese equipment. In response, there has been a shift in policy to favor equipment that can be manufactured (at least in part) by Chinese companies. There is also a recognition that Japanese equipment designs must first be simplified before they are "appropriate" for the Chinese market.

GAP has also been severely hampered by the complete absence of Chinese equipment manufacturers from the process. Equipment transfer, training, and design cooperation are targeted at user industries (for example, steel and cement) rather than those involved in the design and manufacture of equipment in China. When questioned about this aspect of the GAP, Japanese officials give two explanations. Some argue that Chinese companies do not possess the capabilities to assimilate Japanese technology. Another more convincing view, also put forward by Japanese companies, is that they are worried that technology transfer will weaken Japan's commercial position and create future competitors.

A second example is the US Department of Energy program, which is more modest than the GAP. During the 1990s, the Department of Energy made several attempts to transfer technology from its domestic cleaner coal research and development program to China. These efforts increasingly focused on plans to finance and construct a demonstration power plant based on Integrated Gasification Combined Cycle (IGCC) technology. While there is much enthusiasm for the IGCC within China, the project has not proceeded beyond a series of feasibility studies. IGCC technology is considered to be too risky and expensive by commercial financiers even for deployment in countries who belong to the Organization of Economic Cooperation and Development. Meanwhile, the US Congress declined to contribute to this program in China because of political tensions over the Kyoto Protocol, human rights, and Taiwan.

A third example of a technology transfer effort is the World Bank's program to improve the efficiency of industrial boilers. There are around 500,000 of these boilers in China. Most burn low quality coal with efficiencies much lower than the international average. The World Bank project aims to subsidize the acquisition of licenses for new boiling technologies by Chinese firms. Despite this laudable aim, the project has run into numerous problems and delays. It took six years to identify suitable technology licensors due to the reluctance of major international firms to take part on the World Bank's terms. Furthermore, many international boilermakers were concerned about intellectual property protection because of the Ministry of Machinery's insistence on covering all Chinese boilermakers.

Corporate Perspectives

These three examples of state-led technology transfer illustrate some of the challenges of achieving results. They show how governments and international agencies fail to note the motivations of private firms. Peter Evans, a Professor of Economics at the Massachusetts Institute of Technology, argues that "a sponsoring state must secure the cooperation of private firms to promote the transfer of technologies to areas where they are lacking.... [Firms] generally have limited interest in sharing design, production know-how, or other capabilities that would increase a developing country's ability to manufacture these technologies locally." In addition to concerns about competition, firms have other reasons to be cautious about engaging in technology transfer to China. According to numerous surveys, unclear business rules and a lack of intellectual property protection in China continue to be sources for hesitation. This perception has prevailed despite a rash of new Chinese legislation that was introduced in the run-up to World Trade Organization (WTO) accession. As a recent report in The Economist puts it, "foreign multinationals are loathe to admit it, but doing business in China is far from easy--and often not very lucrative."

The same article cites the case of the flagship West-East gas pipeline project, which was developed in partnership with Gazprom, Shell, and Exxon-Mobil. In June, the partnership fell apart after the Chinese government cut the rate of return for foreign investors to a much lower figure than expected. As The Economist observes, this project did little to allay the concerns of international firms: "after three years of fraught negotiations, they now walk away with nothing, leaving behind their designs, field-development plans, and technology." Examples such as this do not tell the whole story. Conversations with managers from foreign and Chinese firms show numerous examples of successful technology transfer.

On the whole, Chinese firms have found that the easiest way to gain some expertise in new technology is to buy a new piece of cleaner energy equipment from a foreign firm. Because of the high cost of imported equipment, there is strong incentive for foreign firms to subcontract the manufacture of large components to Chinese firms. Although this means that "high-tech" component design and manufacture is often retained by the foreign firm, the Chinese recipient still gains a significant amount of new information from the arrangement. This is the case for those technologies that are developing rapidly where the foreign firm can afford to be more relaxed about its competitive position.

Many investment projects go much further than simple equipment imports and local sourcing. Foreign firms often offer operator training as well as design and management training as part of technology transfer deals. In some cases, the Chinese firm lacks the money to pay for these additional activities. In others, they are included in the overall package. Inclusion of these activities is more common in strategic partnerships such as joint ventures in which a foreign company is seeking to establish a base in China. In such partnerships, the foreign firm has a direct interest in ensuring that their technology is used as effectively as possible. The country obviously benefits from this arrangement as well.

One key issue that is often mentioned by both Chinese and foreign firms is absorptive capacity--the ability of a Chinese recipient firm to effectively utilize new technology. Chinese technological competence is world-class in some industries such as electronics, but many companies still lack the necessary skills and facilities. This is partly because of a separation in China between manufacturing, which is carried out by companies, and research and development, which is carried out by design and research institutes.

Implications for the Future

Reform of the highly pollutive state-owned enterprises is just one way the Chinese government can improve the conditions for cleaner technology transfer. More effective implementation of environmental regulations would provide clearer financial incentives for Chinese firms to reduce their emissions and would provide a greater justification for investments in new technology. Other examples that are often mentioned by firms themselves include help with the identification of potential technology partners, particularly for small- and medium-sized firms and a less prescriptive approach to state-led technology transfer programs.

These factors will need to be considered as China's energy system evolves over the coming years. A draft National Energy Plan from the Development Research Center of the State Council was produced in 2003 and has been formally adopted. It includes ambitious plans for the use of cleaner technologies throughout the economy by 2020. One target is the development of a massive 100 GW of renewable energy plants by this date, including 70 GW of small hydro power, 20 GW of wind power, and 10 GW of biomass power. There is also an emphasis on the expansion of nuclear power--to 40 GW by 2020--and advanced, cleaner coal power. The less glamorous kinds of cleaner technology, particularly to improve energy efficiency, are given significant attention in the National Energy Plan. While many of these offer incremental improvements to current technologies, widespread deployment could make a contribution to economic and environmental performance. Interestingly, the use of international technology is not a goal for the Energy Plan. Instead, it states that Chinese technological capabilities must be strengthened to reduce, and perhaps eliminate, the need for foreign involvement. This view is probably unrealistic. The capabilities of Chinese firms in cleaner energy technologies still lag far behind the international standard. The acquisition and assimilation of technologies to close this gap must be an essential part of China's energy transition.

RELATED ARTICLE: BURNED OUT

The figure above illustrates China's energy consumption over the last 20 years. The area shaded black indicates the amount consumed in coal. The rate of energy consumption for the other resources is measured in equivalents of coal. The dark grey area is oil consumption, the light grey area is natural gas consumption, and the light area is hydroelectric and nuclear consumption combined. China has historically been dependent on coal, which is why many of the technology transfer initiatives focus on so-called cleaner-coal technologies that would not force China to alter its consumption patterns.

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Lawrence Berkeley National Laboratory

RELATED ARTICLE: WHICH WATTS?

The graph above shows China's capacity to generate electricity from different sources over the last 20 years. The black area is the fossil fuel capacity, which is primarily composed of coal. The dark grey area is the electric capacity from hydropower. The shaded areas above the dark grey are the combined electric capacities of nuclear and wind power. China's hydroelectric capacity is expanding as projects such as the Three Gorges Dam near completion. The Chinese government has also indicated its plans to focus on generating energy from renewable sources such as biomass and wind power.

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Lawrence Berkeley National Laboratory

JIM WATSON is a research fellow and Lecturer for Science and Technology Policy Research at the Freeman Centre at the University of Sussex.