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High-Tech China: Challenges and Opportunities [Rush Transcript; Federal News Service, Inc.]

Speakers: William T Archey, President and Chief Executive Officer, American Electronics Association, and Adam Segal, Maurice R. Greenberg Senior Fellow in China Studies, Council on Foreign Relations; author, Digital Dragon: High-Technology Enterprises in China
Presider: Anne G.K. Solomon, Senior Adviser, technology policy, Center for Strategic and International Studies
January 18, 2006
Council on Foreign Relations Washington, DC


Council on Foreign Relations
Washington, DC

ANNE SOLOMON:  All right, ladies and gentlemen, why don’t we get started?

I’m Anne Solomon.  I have the privilege of being the presider for this session to consider a question of great interest to all of us, and that is China’s potential to become a global technology superpower.  If so, when?  And what are the security and economic implications for the United States?

Our two speakers this morning that I’m going to direct questions to are two individuals that have—that are uniquely qualified to address some of the key issues.

William Archey is president and CEO of the American Electronics Association, which is our nation’s largest industry association representing information and communication technologies.  Bill has served in senior leadership posts in the government and the private sector, and next month he will take his twenty-third trip to China.

Adam Segal, whom many of you may know, is the Maurice R. Greenberg senior fellow in China studies at the council’s office headquarters in New York.  Adam is an expert in Chinese domestic politics, technology, foreign policy and security issues.

I’m going to direct the first question to you, Bill.

And that is, China has just announced a 15-year technology plan.  It’s designed, as the president of the Chinese National Academy of Sciences said, to break the international monopoly on strategic high technology and to ensure national security.  So what do we know about this plan?

WILLIAM ARCHEY:  Well, it was announced rather quietly on New Year’s Eve day, and its full name is the National Planning Outline for the Middle- and Long-Term Science and Technology Development, 2006 to 2020.  The full plan has not been released publicly; it will be at the end of the month.  And as you were referring, Anne, the head of the National Academy of Sciences did make some public comments about it.

And basically it’s the blueprint for the next 15 years in terms of where they would like to end up and where the expenditures will go.  Its aim is to create something that is called in the paper a “national innovation system.”  The plan calls to—for China to greatly strength its independent innovation, as you’ve suggested.  And it also has a program, quite explicit, about development of the Chinese science and technology base.

And then, lastly, it’s got a couple—or three areas that it wants to emphasize.  And the key sectors beyond that of general technology, which would be integrated circuits and others, is they want to target energy, space exploration, and then, of course, the military, and in the environmental and urban planning area using technology.

They also note in their—in this report that China counts for 15 percent of world total consumption, but only 5 percent of the economic value.

So based—and then lastly, a very large section, not the details except we know that the section is rather detailed, on even greater investments than over the last 10 years in the university system, particularly in the area of math, science and engineering.

SOLOMON:  Adam, let’s talk about China’s assets, how successful they’ll likely be in pursuing this plan.  How do you see their strong points and their weaknesses in terms of technological development?

ADAM SEGAL:  Well, I think China clearly has a set of assets and a clear set of institutional legacies that it is working around.

The set of assets I would say are, first, I think you speak to any technology leader in the United States, any U.S. business person, and they come back from China and they tell you that China’s leaders get it in the sense that they think of technology as a strategic tool for China’s development.  And I think there’s a sense that in the United States right now, our focus is more dissipated, and we really are not getting it in the same way that China’s leadership are.  So it’s clear that the Chinese leadership is focused and it is able to mobilize resources from the top down.  That may also be one of its greatest weaknesses, but that’s clearly right now the ability to mobilize a huge amount of resources.

China now is spending about 1.4 percent of GDP on—(inaudible)—science and technology expenditures.  The goal for 2020 is about 2.5 percent.  So it’s going to—the trend is clear; they’re going to be spending more and more resources.

The second clearly is talent.  And that is not only this educational push that Bill mentioned, but Chinese ex-pats who have five, seven years experience in Silicon Valley or teaching at Carnegie Mellon or Route 128 are now going back to China.  They are either setting up their own labs or they are working in multinationals.  They’re setting up their own companies.  And you have—I think there are questions about the numbers, but you have somewhere 300,000 engineers being trained every year compared to 50 (thousand) or 70,000 in the States.  So clearly a huge source of talent there.  And increasingly, I think people are thinking about science and technology competition in the future as being competition over talent.

Third, I think China’s openness is clearly its greatest asset.  And that is that multinationals, U.S. universities—every business wants to be part of China now, and there is a significant amount of technology transfer not only just in hardware, but in software, which I think is increasingly important.

So management skills, integration skills, these are the areas that the Chinese need to ramp up the quickest.  And these are the areas, I think, that—where we’re going to see the most impact in the next five to 10 years.

On the weakness side, I think we can all say government policies.  So top down is a very hard way to kind of drive innovation.  It’s very hard to tell people okay, tomorrow you’re going to be innovative or tomorrow you’re going to be entrepreneurial.

We have the whole question of kind of the software environment.  And by software, I mean very broadly meaning legal protection of property, intellectual property rights, transparency, governance.

And then I think you have a number of cultural and social barriers to innovation and entrepreneurship.  Chinese universities tend to be based on passive learning.  Professors are generally promoted based on seniority and hierarchy.  There’s not a lot of individual initiative in the Chinese system.

SOLOMON:  You mentioned that foreign firms are anxious to establish a presence in China.  They’re putting key corporate functions in China, including research and development facilities.

Bill, how do you think that your companies evaluate—when they’re trying to make decisions, what kind of criteria do they use when they’re making decisions on placing research and development facilities in China?

ARCHEY:  Well, one is what Adam alluded to, which is the quality of the talent.  Adam and I were talking about this last week.

When I was in China last year, we met with a number of our own member companies, and I asked them if—I had been hearing that back in the States that, be careful about looking at the numbers about Chinese engineers, because I had been told that a number of people feel that Chinese engineers are, in fact, inferior to Western engineers.  And I asked the heads of—the country heads of five of the most big American multinationals, and their response to that was that that was true maybe as recently as three years before, but that it was no longer true, and that they were absolutely the equal of a Western engineer.

They did make an interesting observation about one aspect, which is is that one of our companies, about 500 employees in China, 42 of them are Ph.D.s.  And he made an interesting observation.  He said, as opposed to a Ph.D. in, let’s say, engineering and science in the States or in the West, the difference in China is is that they tend to be focused on a very, very micro-specific area in their Ph.D. work, and they tend not to be as broad-based as somebody coming out of the West.  And he said that sometimes is a problem, but on the other hand, if you’re looking for somebody with that specific expertise, they’re terrific.  So—and—and considerably less expensive.

But I think the other thing that our companies look for, whether it’s R&D or anything else over there—this is particularly true in semiconductors, and this is a problem for us in the United States—is the concessions that are granted by the Chinese government in terms of coming.

For example, in the integrated circuits area, the opening gambit is five years total tax vacation, then a half total tax vacation for the next five years—50 percent of what the tax could be—usually free land, and lots of the other things that go with it.

In terms of the R&D, I think that it’s basically the same notion.  Is the talent there relatively less expensive than in the West?  And I don’t think that delta is going to change an awful lot as it has in India, by the way, in just the last three years.

I’ve got a company that hired 300 software engineers four years ago, and they hired about a hundred of them about a month ago in India.  And they noted that the hundred that they hired about a month ago were—it went from about 28 to 30 percent of what it would cost in the West to 47 percent of what it costs in the West in this space of four years.  They think the delta in India is going to narrow very, very quickly.

SOLOMON:  You mentioned the concessions the Chinese government is offering to Western companies.  What about pressure for technology transfer, training, issues of intellectual property rights?  What do your company members say about that?

ARCHEY:  They say that there is enormous pressure to do that, and some acquiesce and some don’t.  It’s very interesting to compare some high-tech companies in the United States with some high-tech companies from Japan because the Japanese have tended to resist the technology transfer requirement.  Not that they haven’t done some, but in comparison to American companies they’ve tended to hold it back.  And I don’t know how much longer they’re going to be able to continue to do that, but they are.

I mean, I’ve—there are some people who feel that—I’m not one of them—that the Chinese strategy of thank you for transferring your technology and thank you for training all of our people, goodbye, we’ll take it from here.  I don’t think it’s quite that extreme at all, but there is some sentiment along those lines.

So it’s a—I think that the technology transfer thing is not going to stop.  I think they’re now—and we saw this with the 15-year plan—that it’s very clear that what they want to do is exploit that towards indigenous development of technology.

SEGAL:  Anne, if I might—


SEGAL:  And it’s been very much the last year and a half a kind of open question about what these R&D centers are doing in China.  And I think when they first stared, many people said well, they’re doing a lot more D, a lot more development than they are doing research.  And that most of what the research centers were doing was localization and applying technology for a Chinese market.

It was clear that there was a great deal of pressure on U.S. companies to set up R&D centers in China.  Look, Microsoft is clearly is constantly being hammered by the Chinese government in one way or the other, either because the Chinese want to develop open-source software or they think Microsoft has back doors that they’re afraid that the NSA can use to spy on Chinese users.  So Microsoft clearly had political reasons to set up its research center and say that no, no, no, it’s not doing just D; it’s going cutting-edge technology.  And in the case of Microsoft it may be true, but across the board I think there’s still a great of question about how integrated those facilities are with the global strategy of U.S. companies.

I think Bill’s exactly right.  Japanese companies have resisted that, but I think they are slowly being worn down by the Chinese side.

I think the larger kind of impact is going to be more of a demonstration effect in the sense that, in many ways, U.S. R&D centers in China are more tapped in and more linked with other Chinese technology companies than their Chinese competitors.  Local Chinese companies have been doing very little horizontal cooperation and joint research.  The MNCs tend to reach out to these companies more.

The other demonstration effect is what I mentioned earlier, which is the heads of these labs are now jumping from U.S. companies to Chinese companies back to U.S. companies to maybe Chinese agencies.  So you’re getting a lot more talent flow and sharing that you had before in the Chinese market, and these people are bringing skills that they didn’t have before.

SOLOMON:  What about skills for managing technology?  Apparently, there’s a lot of competition for the top managers.  Does China have the kind of capability that—human talent for managing high-tech firms that U.S. firms need and that they need?

ARCHEY:  Well, if I might, if you talk to executives from our companies and you ask them what’s in fact one of the single biggest problems they’re facing, probably half are going to say poaching.  There is an enormous turnover of particularly skilled engineers in American companies or in any companies in China.

They will also say that the people coming out of—and this is as recent as a few weeks ago—that the graduates coming out of the business schools still do not have, if you will, in their DNA the idea of being entrepreneurial.  And they think that the managerial know-how is still a ways away, and it’s still going to be—it’s going to take some time for them to catch up.

It’s very interesting that some of the companies that you talk to—we’re looking at Silicon Valley circa 1990—they’re suggesting that now with a generation of younger graduates coming into the company, particularly in the engineering skills, that they’re going to start spinning off their own companies in another five to 10 years.  And they think that’s going to be rather interesting to see how that evolves.

SEGAL:  And I mean, as Bill mentioned, there was a McKenzie report that came out in October 2005, if I remember correctly, that did a survey of companies and said only 10 percent of the people that come through the door do they believe have the skills necessary to work in a multinational.  So that was not only the management and sort of integration skills, but also the language was a huge part of that.

I think on the Chinese side, we’re beginning to see another cycle of entrepreneurs, indigenous entrepreneurs.  But again, there’s a whole skill set that just isn’t fully developed yet.  We have to remember that on the American side, you have this whole infrastructure of support—venture capital, marketing specialists, you know, people that have gone through several product cycles from the initial innovations to the final marketing.  When do you bring out version 2.0?  When do you bring out version 3.0?  These skills are just not very well developed in the Chinese context yet.  It’s a new market.  It’s a market that’s still extremely competitive.  There’s a lot of competition based on price, not necessarily on innovation.  So within Chinese companies you have, I think, a real deficit on those skills.

The other issue is that many of these first generation of entrepreneurs were scientists.  And they were extremely farsighted, bold people, but perhaps not the best managers.  So you had a great deal of these companies where there’s a saying in Chinese that everyone—you know, it’s better to be a head of a chicken than the tail of an ox.  And everyone wants to be the boss, so eventually you have a small company, two or three people, and then it breaks up because everyone thinks that they should be the boss.  So you have a real problem, I think, of management (there ?).

SOLOMON:  (Inaudible)—certainly don’t want to be the head of a chicken.  (Laughter.)

All right.  Adam, you mentioned capital and capital markets.  What about the availability of venture capital in China?

SEGAL:  Well, I think everyone is looking to venture capital as to be some kind of—to rescue the Chinese system, right, because private lending, bank lending, is still policy-driven.  It’s still mainly going to state-owned enterprises.  There have been numerous policy iterations that have come out and said that small businesses and start-ups should be getting more funding.  There are a number of innovation funds, torch plans, (development ?)—(inaudible).  So there are all these venues for money to go to these firms, but it’s still very, very hard for small companies.

Small companies have to have a great deal of collateral.  That’s why you see them building large buildings and buying real estate, because the banks won’t make loans.  When you finally do grow big, that’s when you finally can get some business attention.  You’ll finally now have something like a 10—I want to say billion, but it can’t be that much, can it?—loan, a kind of standing loan you can get at a bank.  So once companies grow big, they get attention.

It’s clear that there is a wave of VC interest in China now.

SOLOMON:  Foreign VC?

SEGAL:  Foreign VC.  You know, I read in several blogs from, you know, Sandhill Road, and everyone seems to be going to China now.  The joke is, you know, on the flight over, you see more people than you do at that big breakfast place in Silicon Valley.

But it’s clear the Chinese, like everything, want to do this themselves.  So there were restrictions that came out about when you could set up a(n) offshore company, which is the main way that there’s been exits.  Those seems to have been redefined, but the NDRC—the National Development and Reform Commission—has also new policies about promoting Chinese VPs and giving support to domestic firms.

So we, you know, we’ve seen this across every kind of policy arena.  Foreigners are allowed in in the beginning, but it’s basically to build up Chinese expertise and then help Chinese firms.

SOLOMON:  Let me ask you a question that’s talked about here in Washington, and that is the relevance of China’s technological development to U.S. security concerns and interests.

You wrote sometime ago an article that started out by suggesting that there’s a link between high-tech trade and relationships and Chinese military modernization.  How do you feel about that now?  And how can the U.S. pursue its trade advantages while protecting its technology in the security area?

SEGAL:  Well, I think the link is clear, and I think we all kind of in a gut instinct feel that the richer and more technological sophisticated China becomes, the more powerful the Chinese military will become.  I don’t think there’s much doubt about that.

I think the question for U.S. policymakers is where we can actually affect that and what we can do.  And I think that that’s where our policy tools are severely limited, and some of the decisions are, in fact, probably hurting us more than they are hurting the Chinese.

As I said, I think there is a wide range of export controls on some specific technologies that are in place and should remain in place.  But increasingly, especially when we think about a Taiwan scenario, which I think is the most likely chance for us to come into conflict with the Chinese, we’re talking about integration skills and a whole range of software skills that it’s going to be very hard for the United States to stop China from developing, all right?

The Chinese already buy very advanced platforms and weapon systems from the Russians, and even with the EU ban from the European Union.  So they’ve had the Su-27 and the Su-30 and the Sovremenny destroyer and Kilo-class submarines.  They’re clearly already going to have the hardware.

So one of the great advantages for the United States has always been the Chinese have had difficulty integrating all these systems and having the C4ISR—the command, control, computers, communications, and intelligence, surveillance and reconnaissance skills—to put all of these things together.

But that is slowly going to develop, and it’s actually been developing  perhaps at a faster pace than we expected.  And if the U.S. doesn’t sell a dual-use technology, it’s clear the Japanese or the Europeans will.

So the issue is, how do we stop those soft skills from migrating?  And it’s clear we are looking at ways of doing that.  There has been the regulations about deemed exports.  And also Chinese and other foreign students in the United States, how much access do they get to technology?  I think that those clearly have to be considered.

But some of the provisions being considered in the case of the Chinese and Indian students, it had to do about where you were born and not your citizenship.  So a Chinese who had Canadian citizenship would still be considered Chinese and would have to get the restrictions.  Eventually Commerce decided this wasn’t a good idea, and I think the reason that they decided it wasn’t a good idea probably is because groups like Bill’s and others said this is going to hurt the U.S. competitiveness, it’s going to hurt the U.S. universities, right?  Forty percent of Ph.D. students in the sciences are foreign-born now, and we’re dependent on Chinese and Indians to staff our labs.

And so the question is, for our long-term competitiveness, we can’t thrive and survive without being part of the global environment, and trying to cut off the Chinese from it I think will do much damage to us.

ARCHEY:  Let me comment on that because Anne alluded to my government service, which—my last government service was running export controls out of the Commerce Department back in the days of the Evil Empire.  And I also had the distinct privilege of being the co-chair of the interagency task force under the White House on technology transfer to China in 1984, and it was very interesting because it was a year-long effort.

And basically the reason why we had a kind of a breakthrough in early ‘85 was because the Joint Chiefs of Staff wanted to see technology transfer take place to China for a very simple reason.  In 1984, there were almost 70 Russian divisions on the Chinese border, and the Joint Chiefs of Staff wanted to see the Chinese military tactical capability be upgraded in order to make sure that 70 Russian divisions stayed on the Chinese border.

But in those—in that period of time, I’ve been out of government for almost 20 years, and you would have thought with the end of the Evil Empire that export controls would, too, depart.  If anything, they’re more complicated today than they were when I was there.

And the other thing about it is is even back in 1985, there is an element in the political process of Washington that is dying to make China the son of the Soviet Union.  And one of the ways you—and the other way you make that happen is is that I used to say that—sometimes quite publicly—that export controls was the last refuge of political scoundrels because basically, when you think about it, members of Congress have so few opportunities to express their concern or their distaste for a certain country’s behavior, so what is one of the few options you can opt for?  Put export controls or sanctions on them.

And there’s right now, to follow up on what Adam said, there’s a—it’s called the catch-all regulation that is right now being prepared in the Commerce Department.  It’s clearly targeted on China.  It’s going to impose a whole new set of requirements on companies.  It’s going to have a whole series of “gotcha”s, if you will, to it in terms of what effort was made.  And this is without question the single biggest concern of our companies is what happens with this regulation followed by deemed exports.

The deem export issue—

SOLOMON:  Could you explain what deemed exports are?

ARCHEY:  Deemed export is basically you’ve got a foreign national in the United States who’s going to have access to your technology in a company.  Well, you’ve got to get an export license for that person in the United States to have access to that technology.

And the problem has not been the denial of them—most get approved—but it’s a four- to six-month process before it ultimately gets approved.  And the estimate is is that 80 percent of deemed export applications by a company are for Chinese nationalists.  And so this is not a minor issue.

But it’s amazing to me how export controls remain the issue.  And it still is a significant factor in the U.S.-China relationship.

SOLOMON:  Adam, would you say export controls are unfeasible, unworkable?  And will the Europeans, Israelis, others do what we’re—our companies are restricted from doing by the U.S. government?

SEGAL:  I think you have to define unfeasible.  I think there are the increasingly narrower and narrower set of technologies that we are the sole provider of.

And I—as you said, I wrote and article in The Washington Quarterly.  I tried to come up with those technologies where—it’s very small.  It’s very hard to figure out what they are, and because so much of this is now, you know, commercial, off-the-shelf technology.  So much of it is IT technology that is being used on both sides.

That said, you know, it’s clear we should be considering—continuing to put pressure on the EU to maintain the arms embargo on China.  I think that that is the right decision.  I think finally being on the same page as the Israelis about what they do and don’t sell is a step in the right direction.  But there’s a huge and an ever-growing range of technologies that are dual-use that we really are not going to be able to control.

ARCHEY:  Let me just make a final point about that.

In the 1980s, which receives almost no attention, we talked about export controls toward the Soviet Union, and we were very close to a number of NATO countries, particularly the Brits.  Very quietly, one of our staunchest supporters was France, but it was a very different model.

The French took the view that you can’t control all the technologies, and the more you try to control more and more of them, the less effective you are.  And they had a view that it is high fences around a very small number of technologies, along the lines that Adam’s suggesting.

I would suggest that, given the ubiquity of technology, the fusion of technology, it is harder now than it was 20 years ago to control technology.  But this notion of kind of going to the French point of view I think has a lot of merit, which is high fences around really significant technologies that could make a true strategic difference.

SOLOMON:  Well, let me ask you a question on a different area.

Over recent months, a number of American companies—Microsoft, Google, Yahoo, Cisco—have acquiesced to pressures from Beijing to restrict Internet content or access, or in one case actually to provide information that led to the conviction of a local journalist.  Should U.S. firms be concerned about acquiring a kind of stigma of compromise with—to Beijing’s pressures?  Will this be a problem either with their own shareholders or with the Chinese consumers themselves that they hope to woo?

ARCHEY:  Given that every company you mentioned is a member of mine, I think that Adam ought to be answering this question.  (Laughter.)  And—

SOLOMON:  I’m sorry; I put you on the spot.  (Laughs.)

SEGAL:  I think it’s—

ARCHEY:  You don’t have to worry about your funding from this.  (Laughter.)  So go ahead.

SEGAL:  One day I’m going to have to leave the council, so—(laughter).

No, I think it’s clear, you know, the—that there is going to be a groundswell of pressure on these companies to do something.  I’m not sure if a congressional intervention is the right way.  It may be shareholders and the U.S. consumers who say we are not going to reward companies that are participating and actively participating.

And I think there has been some instances where the companies have actually gone farther than they necessarily had to.  I mean, the argument about being—having to follow Chinese laws may not have necessarily been true in some cases where it depends where the server was and what they were asking for in the specific cases.

But the argument that being there is good for the Chinese consumer, you know, I think is a bet we’re all willing to make, but we just keep losing, all right, because the Chinese consistently seem to be able to regulate every technology—technological advance, right?  So first it was the Internet was going to be like Jello, according to President Clinton, but the Chinese did, in fact, manage to nail it to the wall.  Then came, you know, text messaging, and we thought, well, maybe this will be a more diffuse way, but the Chinese now can filter text messaging.  Blogs have all, you know, quickly been consolidated.  So at some point, we’re going to have to figure if taking the money off the table is (just ?) a good bet.

My own personal feeling is it’s, you know, like many things with China, it’s not going to be external pressure.  It’s not going to be Congress.

The Chinese themselves are so driven to become technologically innovative, right?  So that the fact that this 15-year plan and that when Wen Jiabao and Hu Jintao’s speech on these plans and had the new 16-character kind of guidance of these plans, you know, the first four characters are to develop what Bill said, this independent, innovative capability, all right?

So essentially, there’s going to be a tension there between controlling information and wanting people to be truly innovative.  So I think eventually—and this is the long-term—(inaudible word ?) we’ve all made with China—is that it’s going to come from the inside; that scientists and technologists and students are not going to basically stand for this type of control of access to flows of information.

SOLOMON:  On another area, the OECD, Bill, recently came out with a report that in 2004, China exceeded the United States in terms of information, communication and technology exports of goods—laptops, cell phones, things of that sort.  The components for those goods are imported by China primarily now, I believe, from Taiwan, Japan, Asian countries.  This is a shift.  Previously, many of these components were imported from Europe and the United States.

I wonder what the implications are of these changes for U.S. firms?

ARCHEY:  Well, one of the things that I think is a natural evolution is the relationship that China has established in the last couple years with the ASEAN countries.  And I remember Fareed Zakaria’s column about three years ago in Newsweek when he commented on the APEC meeting and that the president went over and met with a number of the heads of state to talk about their cooperation in terrorism, and President Hu went over and talked about economic cooperation.  And in fact, Zakaria noted that this was possibly the greatest diplomatic achievement of the year, and nobody notices.

And I think that that’s going to continue.  But the other side of that, though, is that on some of the really what you would call family jewel technologies, China’s very dependent still on the United States.  I mean, the largest market in the world for chips after the United States is China; 22 percent of the world’s consumption, 80 percent of which is provided by foreign international companies that have to be imported in.  In fact, they import more chips per year, last year, according to the same OECD, than they—they imported in terms of value more chips last year than they did steel.

And I think that what you’re going to see is an effort on their part on this whole thing of becoming more independent, but I’m not sure how quickly that’s going to happen.  I mean, an example.  In semiconductors, which is the one industry they really want to make massive leaps in, last year there was $12 billion of investment in the semiconductor industry.

That’s going to go to about probably close to 40 billion (dollars) by 2010.  Eighty percent of that investment is from other than China.  And even though a company like SMIC is now already making 90-nanometer chips, they’re probably going to get down to .65 this year—they’re good, by the way, and our companies think they’re very, very—have a lot of respect for them—but the fact is that the semiconductor industry is essentially a foreign industry in the country of China.  And I don’t see that gap being narrowed substantially.  Despite how good the chips—some of the Chinese are, the American lead on this is enormous.

SOLOMON:  Time to give the audience a chance to answer—to ask questions.  I’m going to invite council members, also members of the press, to ask questions.  I’m going to ask you to wait for the microphone, and when you ask a question, please start by giving your name and your affiliation.

Let’s start with this anxious person in the very back of the room on the right.

QUESTIONER:  Thank you.  Irvin Chapman from Bloomberg Radio.  Not too long ago we were all worried about the Japanese taking over one industry after another—cars, electronics, what have you.  Now the worry is shifting to China, which is going to send their first car to this country next year.  Picking up, however, on the last comment on semiconductors, should we start worrying about China replacing Japan as the industrial leader that stresses us?  And if so, when should we start worrying?

SOLOMON:  Adam, do you want to take that?

SEGAL:  Well, I think we should worry; the question is about what and how much.  I think the Chinese case is different than Japan, not only because of certainly scope and scale and because the Chinese market is much more open, right?  With the Japanese it really was a question about industrial policy and market access and forcing the Japanese to open.

I also think the question about China—and in many cases India—is that there’s no longer kind of a competition over models.  It’s not the Japanese model versus the U.S. model, but it’s very much the Chinese and Indians are trying to do what we have always done, which is again, kind of this focus on innovation and technological entrepreneurship and trying to kind of beat us at our own game, if you might.

When we should worry?  You know, I think we’re at a stage right now where it’s very much the glass is either half empty or half full, right?  We could either—this panel could either be titled, “China, the technology superpower,” or, as Bill said, “China, the country still dependent on other people’s technology.”

So, clearly we know what the trends are, but how successful China’s going to be is going to be based on so many other factors, right?  The direction of the reforms more broadly.  How does the global integration of technology continue?  Does it continue at a pace or does it pull back because of protectionism?  And there are other factors, demographics, right?  We have this huge influx of Chinese in education and work and in the labor force right now, but 20 or 30 years from now the Chinese are not going to have that same talent pool.  They’re going to be old and maybe not rich.

So there’s a whole kind of other factors outside of the technology sector where I think it’s a big toss-up.  I think there are three areas—chips, clearly; telecom and headset, handsets for cell phones; and chip design, clearly where the Chinese are pushing hard and are developing capabilities faster than we expected.

Are we at a point where the Chinese have a system of innovation?  I don’t think so.

SOLOMON:  Allan?

QUESTIONER:  Allan Wendt.  Bill, you mentioned the virtue of higher fences around fewer objects, which was advocated during the days of Cocom.  The Cocom regime, of course, established agreed international standards that were enforceable, but since Cocom was abolished during the Clinton administration, what do we have now to ensure cooperation?  It doesn’t do any good if the United States is the only one trying to control the highest ends of technology exports if other countries aren’t cooperating.  How are we dealing with this problem today?

ARCHEY:  Well, we’ve got the Wassenaar agreement with a number of those Cocom countries.  I don’t know if it’s all of them.  But, you know, Allan, to go to your point, though—and when you were in the government I think you saw this as well—but one of the things about it, I don’t care what the regime is, a Cocom regime or anything else, the United States is automatically going to enforce the rules more strictly than will any of the other countries, which becomes a major, if you will, disincentive for our own trade.

And I think we’re seeing that now.  And if this new regulation that Commerce is thinking of goes in, it’s going to be even more so, because we will control it.  I think that, you know, in my days looking at the Cocom, I mean, one of the problems—and Adam’s talked about this—I mean, even now with certain dual-use technologies that we control, the Chinese are going to get those dual-use technologies from Japan, from a number of European countries—and, by the way, quite openly.  It’s not going to be covert.

And so we basically have a unilateral trade policy with export controls.  Even if you’ve got “son of Cocom” as an agreement, we’re still going to make it much tougher for our companies versus what other countries do for their companies.

SOLOMON:  Yes, at the back of the room, the individual standing up there.

QUESTIONER:  Hello.  Larry Williams with Space Exploration Technologies.  And I’m interested in the panelists’ views on the impact and implications of the Chinese legal system or lack thereof on the high tech market.

SEGAL:  You’re referring specifically to IPR protection, or just more broadly?

QUESTIONER:  Actually, both.  More broadly, including IPR.

SEGAL:  Of course, the IPR issue is a major irritation in the U.S.-China relations.  One of the interesting things, I thought, in the Wen Jaibao speech about the 15-year plan was they basically said without intellectual property rights protection, there will be no independent innovation.  And I think this kind of meshes with what you hear from U.S. government officials, is that at the very top, Chinese officials have kind of embraced the gospel of IPR protection, but of course the problem is implementation.  And we have been hearing implementation for the last 15 years and will probably hear all until we’re dead, and that’s going to be a continuing problem.

So the question is, of course, the argument is that once Chinese firms have their own IPR to protect, we will reach that tipping where the Chinese at local levels start enforcing their own rules, because there are plenty of regulations, plenty of legal protection on the books.  I am not particularly optimistic that we’re going—that optimistic that the tipping point is moving closer as opposed to farther away.  I think the problem itself is swelling so quickly that the tipping point may, in fact, be being pushed farther and farther.

I think the overall environment is still very bad because so little transparency in decisions being made, so many cases where the government very much still intervenes in decisions.  The decision of the telecoms to move the four managers around would have never happened in the United States.  It would have caused a great outcry with, you know, regulators and shareholders and everything else. 

So there’s still a long way to go, and this focus on technology as a strategic good is going to make government intervention even more likely.  So I think, as somebody explained it to me, the Chinese have a very different view of kind of market regulation, right?  It’s not just there, like it is for us, and legal protection.  It’s kind of like a dial, right?  And they want to try to figure out how they’re going to ratchet it up or ratchet it down for their use.

SOLOMON:  All right.  The woman right there.

QUESTIONER:  inaudible.  A question for both of you.  Just give me your expertise, if you had to put on a prioritization list five—three to five areas of technology where you think China will first be innovative.

ARCHEY:  Will first what?

QUESTIONER:  If we have areas of concern, areas of technology where we think China will first seek to innovate, to develop this innovative capability, what would be the five or so first?  You know, they could be specific or general.

ARCHEY:  Well, they’re doing an enormous amount of research in lasers.  And I just don’t know where it’s ultimately going to end up in terms of the actual empirical application, military or otherwise.  That’s one.  Adam and I were talking about it.  They very much would like to get up to the level of, if you will, an Intel in chips, because their view is semiconductors determine so many other things in terms of technological applications that you must be a world-class player in that, and they’re doing everything they can.

Now that’s where an export control issue does come in, because some of the leading-edge semiconductor manufacturing equipment is still pretty much prohibited or at least is—you’ve got to do a variation off of that.  So that’s something where, it’s interesting it’s seen as a security issue, it also may be seen as an economic factor, as well, in terms of the relationship.

Beyond those two, I don’t know.  Adam?

SEGAL:  I think the 15-year plan, as Bill said, is going to list IT and manufacturing, aerospace, environmental—which was the first in the list that I read—I said aerospace already?  Energy, environment—

SOLOMON:  Biotech.

SEGAL:  And biotech.  Those are clearly where much money is going in and they’re going to continue focusing on. 

I think the most likely area of innovation is going to be something like chip design or telecom or perhaps in software, some areas of software, somewhere where you have this churn going on where you have both competition and cooperation from U.S. companies or Japanese companies, whatever the case may be, and a pretty high concentration of Chinese talent and a lot of government money being thrown at it.

But I think it’ll be, you know, like I said, we can probably count them on—we’ll be able to count them on one hand.  But I think chip design seems to be the area where they’re making the most progress.

ARCHEY:  And let me just add to that, because there’s been a fair amount of attention paid to this issue of chip design.  That if you don’t do chip design, you’re never going to really make the leaps.  Design companies have gone from about 30 to about 400 in the last three-and-a-half to four years.  But one has to be very careful at looking at that, because the ultimate viability of those chip design companies is very questionable.

And there’s probably going to be, at the most, 10 or 15 who are going to make it.  And by the way, that’s not surprising.  Take a look at the United States.  I mean, when you get beyond Synopsis and Cadence Design and few others, there’s only about 10 or 15 in the United States.  And you know, we’ve been the leader in the semiconductor industry for a long time.

So I’m only being slightly more pessimistic about the chip design than perhaps Adam is, because of the fact that there’s going to be tremendous number of those who are just going to go by the board.  They’re not going to make it.

QUESTIONER:  Camille Caesar from Commerce.  Everyone talks about the dependence on foreign - (inaudible)—science and technology, as if this is just the way that it has to be.  And I guess my question is this:  If you’re concerned about the (locii ?) of science and engineering innovation moving (closer ?) to China (as opposed to ?) the United States, and I’m not suggesting that you are, but if you’re concerned about it as a national security matter taking place in the next five to 10 years, is there—and I know this isn’t exactly your area, but is there, do you think, an education policy that might actually advance the interests of the United States in this regard?

ARCHEY:  I’d like to take that because, you know, at about the same time as Adam’s book, we issued a paper called, Losing the Competitive Challenge—the Competitive Advantage: the Challenge for Science and Technology in the United States, last February.  I would note to you that the Democratic Party first in early December came out with a competitiveness agenda with a whole series of things with a big emphasis on education.

Two weeks later, the Republican party came out.  We were pleased to be the cosponsor of the Republican summit on competitiveness.  You’ve got a National Academy of Sciences paper, of which some people in the room are from the National Academy, which has actually gotten some attention in the White House.  And fourth and not last, I think you’re going to see in the State of the Union address specific reference to the American competitiveness challenge and to a fairly strong emphasis on a program in education somehow or other, maybe math and science, it may be something else.

I will tell you, and the other thing you should pay attention to is, it was released last week and got almost no attention, but the Business Roundtable has done a series of surveys nationwide and a series of focus groups on American attitudes about this changing world.  China came up to the top.  And 70-something percent of Americans think that China is an imminent threat economically.  That’s it’s not in 20 years, it’s not in 10 years.  And there was an enormous sense, which by the way was a big surprise.  They did a survey of both elites and John Q. Public.  There was only one real major split, because there was an agreement that the issue was, math and science, we’ve got to have more kids taking it; and the difference was that the elite said, and also improving immigration H-1Bs and all that would help to relieve the problem.  John Q. Public didn’t want to see increases in immigration.

 But the point I would make to you right now is, when we issued our paper in February, I made the point then to my staff that I said, you know, this is going to take nine months of gestation before anybody pays much attention.  It was literally nine months later that the Dems and the Rs passed their papers.  You could have had a meeting on Capitol Hill last February on competitiveness that would have been in a phone booth and that’s about it.  Now, I will hasten to add that one of my staff made the note that, well, Bill, for an awful lot of the younger staff, they don’t even know what a phone booth is.  (Laughter.)

But I think that the country is waking up.  The public part of official Washington is waking up.  I think this is also very unusual in another regard.  This is, in my judgment, going to be the only issue this year that’s going to actually be taken up by the Congress that’s going to be bipartisan.  And both parties are going to be desperate to have a positive agenda that actually might help somebody.  And I think that there’s going to be a real emphasis on the math and science education issue.  Our kids are—it’s always fascinating to me.  Our kids in fourth grade are equal to just about anybody in the world.  They go down slightly in the eighth grade, and by senior year in high school, it’s a disaster in comparison to other countries.

Of course, I argue that the only continuous variable was they continue to go to school.  But the interesting thing about this is, something is happening out there.  I’m not sure what it is, but people are really getting nervous about this and about the fact that China graduates almost five times more engineers than does the United States.  India graduates twice as many.  And I mean, here you’ve got Korea.  It’s got one-sixteenth of our population, one-twentieth our GNP.  They graduate almost the exact same number of engineers as we do.  And at some point in time, that delta is going to show up in terms of our competitiveness.  I think the country’s waking up.

QUESTIONER:  Thank you.  Paula Stern with Stern Group.  I wanted to build on that with a question about quality as well as quantity.  You just gave us the stark numbers.  And there was a study that just came out by Duke last week about what is an engineer and how is it defined in China versus the United States?

And an economist or someone playing with the numbers would look at what’s going on in China and just say, well, our lunch will be eaten eventually, but as you pointed out, Adam, the demographic trends, there are other trends which are not economic, and one of the ones that—and competition, the fact that you’ve got competition in certain areas where things happen faster and more effectively.  One of the questions is the qualitative, the demographics.  My thesis is that we have been competitive and innovative because we have been diverse and we have borrowed from everybody.  The problem, as I was mentioning to Bill, at least in IT and in computing sciences is that the participation of women and minorities in IT and computer sciences has declined, whereas it has increased and is—(inaudible word)—all around.

So I would like you to address this issue of diversity both here in the United States as a piece of our innovation and what we’re doing about it, education and otherwise, versus what you think will happen in China.  Because I appreciate that they have at least appreciated women more because of their communist/socialist background than others, and maybe they are going to be better than India in that respect.  I want you to kind of deal with this, the (qualitative ?) demographics.

SEGAL:  Yeah, I think there are two issues.  I think you’re exactly right.  And I actually had a piece in (the FT ?) last week that said, you know, all this money going into scholarships is a good thing, we should support it, but a great deal of what’s missing is, you know, trying to enliven science and technology for actual students, right?  A hands-on, face-to-face approach to make students want to make the decision to go to engineering school as opposed to getting an MBA or a JD, and it’s especially important in under-represented groups.

And so Georgia Tech with African American engineers, and I think Carnegie Mellon with women in computer sciences are clearly two programs that we need to be spending more time on.  And other universities, I think, have dropped the ball.  They are increasingly focused on getting international students and expanding their presence abroad, and they should be doing more at home.

On the Chinese side, I don’t have the numbers for how many women are engineers.  I would suspect that the idea that women hold up half the sky was a socialist kind of dream that probably has, you know, turned out not to be so true.  I think the larger issue about management and integration across cultures and diversity, I think clearly we’re far and above anyone in the world.

So my sense is, if the world is in fact changing, if it’s increasingly important to be able to manage across cultures and geography and time, then this will still be a major strength for us.  And the Chinese and the Japanese and Koreans will have difficulty doing this because they don’t attract foreign students.  They don’t have an area where people, you know, want to come to China.  Now some people do because they want to make their business name, but it’s still not like the United States.

The Indians may be a different case.  They have a long history of being able to do this and they may be better positioned for it.  If the world is more kind of the same, then it may not matter so much and just the raw numbers we’ll help China.

SOLOMON:  At the very back of the room on the left.  Very back of the room. 

QUESTIONER:  Thank you very much, I appreciate it.  My name is Jim Lande and I’m in the Office of the Director of National Intelligence.  I would be interested in your perspective, looking at China, high-tech China as a national actor on a playing field with regional neighbors and competitive neighbors across the globe.  What are its strategies and tactics for competing, what it sees as its competitors in the high-tech market, and what should we watch for?  Thank you.

ARCHEY:  Are you saying, what is China trying to do to defeat its competitors?

QUESTIONER:  Yes, China and it’s authority’s strategies and tactics for defeating its competitors, including us, India, anyone else you’d care to name.  Thank you.

ARCHEY:  I’m not sure there is such a strategy right now, except that—because I think they’re still at a, if you will, a beginning stage in some of these.  That question may be rather interesting in another 10 or 15 years, but I don’t see it.  Adam, do you?

SEGAL:  I mean, I always—I pretty much characterize China’s strategy as a techno-nationalist one, in the sense that the Chinese clearly want to reduce their dependence on foreign sources of technology, either the United States or Japan or Korea, whoever it may be.  That is clearly the goal, right?  But the tools are increasingly not what we would consider as traditionally techno-nationalist, right? 

So because China joined the WTO, it has fewer and fewer policy tools that it can use.  Of course, there are all these other things still happening—pressure on U.S. companies (to transfer ?) technology, subsidies for chip makers, tax breaks for Chinese game companies to go online and produce their own things.  So it’s clear that they have this strategy of pushing forward.  You know, as we said, this 15-year plan is about self-reliance in the technology.

There was an interesting commentary on this strategy in—I’m sorry, I should add one other thing.  One other part of the strategy that’s garnered a lot of attention in the United States is the development of standards, right?  So the Chinese should have their own WAPI standard, their own DVD standard, their own Internet standard, their own 3G standard, which is for cell phones.  So it’s clear that the standards attempt was another way to say we’re tired of other countries gaining most the royalties.  You know:  China sells 85 percent of DVDs in the world, and the Japanese and the U.S. and Europeans gather most of the royalty money, so we’re going to develop these new standards and do that.

So it’s clear that good things are happening in this push on self reliance, but at the same time that this Hu Jintao speech—excuse me, (Wen Jiabao ?) speech was carried in—(inaudible)—Daily, there was also a commentary that said, what does self-reliance mean?  And the whole piece basically said, well, self-reliance doesn’t mean we’re going to go it alone, and self-reliance doesn’t mean we’re going to change opening up and reform and inviting foreign companies in.

So they have both this techno-nationalist question, and what I would call techno-globalist, which is invite other companies in, reach out to the rest of the world, cooperate and compete.  So the objective, I think, is still indigenous capabilities, but the tools are no longer the same.  And the question is, can the Chinese keep up?  The standards policy could be a big disaster, right?  It could be the Chinese choose—you know, forcefully choose some technology standard that the market doesn’t support, right?  Or Chinese companies themselves aren’t interested in supporting.  That seems to have happened with Wi-Fi encryption, because Chinese companies said, look, we already sell all these Wi-Fi, you know, servers and whatever else, we don’t want this new encryption standard that we don’t know if we don’t know if it’s going to work or not.

ARCHEY:  Yeah.  In fact, let me just add to that point, because I’ve talked to a lot of our companies over the last few weeks about the issue of Chinese standards and was that really going to be the big worry.  And it’s interesting, Adam, most of our companies now are convinced that because of what happened with Wi-Fi, or WAPI, what’s happened where they’re really backing on off on the 3G and telecommunications and they are also—what’s the third one?

SEGAL:  It looks like 27 right now—

ARCHEY:  Well, there’s a third big one.  I’m blocking it.  Our company’s view is that the international standards movement has got so much momentum that the Chinese are going to only on occasions be able to intervene in that process.  And I think they were really very pleased about what happened with—(inaudible)—where the Chinese just said, no, we can’t go that route.

I would just do a—by the way, one other point about this question about China and about the actual question for the entire symposium.  I talked to a—he’s not the CEO, he’s executive vice president of a very large multinational high-tech company from the United States who used to be, until a year or year-and-a-half ago, the country manager in China.  And I just asked him this question:  Do you think in 10 or 15 years, China is going to become a major technological power?  And I said, are you optimistic about it, pessimistic about it, somewhere in-between?

He said, oh, I’m very optimistic.  And I said, okay, why?  And his answer was, well, it’s really very simple.  The Chinese are very smart, they are very hardworking, and if you take the two together, that clearly constitutes an unfair trade (pattern ?).  (Laughter.)  But, he said, it’s inevitable.  And he said, the only thing that worries me is there’s some people in the United States that want to stop their going forward.  And he said, I don’t think we can do that and I think our trying to do that is going to be an absolute disaster.  The issue is for us to not only keep up, but stay ahead.  And he was highly confident in his industry that we could in fact do that.  So I would just make that point because it was a wonderful comment coming from somebody who really knows China.

SOLOMON:  We’re going to have to wrap this up.  I feel guilty because I had the microphone ripped out of Carl Green’s hand there.  Do you want to take a last question, Carl?

QUESTIONER:  Thank you.  I’m Carl Green with Hitachi.  Adam, I know you were recently in Japan.  I’m just curious what you found interesting or different about the Japanese assessments of China’s technological challenge.

SEGAL:  My sense is that in the United States, at least business people I’ve spoken to and a number of policymakers that I know from the industrial associations, we have very much kind of—we think the world is now flat, right, to use Thomas Friedman’s term; that globalization and R&D are increasingly being shifted around the world; and that China is a huge part of that and that we can kind of leverage the talent there.

My sense is that Chinese—excuse me, Japanese companies are still very, very hesitant to think about China as a source of R&D talent.  Almost every Japanese company I spoke to said, yes, China is a business competitor, a commercial competitor, but it’s not a technology competitor, and it may be some day, but we’re not expecting it any time soon.  And there was the sense that the R&D there still is mostly for political reasons.

SOLOMON:  Good. 

Let me just say that this program is one of a series that the council’s Washington office is putting on on science and foreign policy, and I hope you all will look out for these programs and attend others.  And thank you all for coming.  (Applause.)







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