COLUMN ONE : China: the Ultimate Buyer’s Market : Corporate giants are bowing to Beijing’s demands that they trade technology and jobs for access to 1.2 billion consumers. Critics say deals will boomerang on U.S.

The turnabout of corporate giants such as AT&T; illustrates the economic power and savvy of the new China.

When China asked AT&T; to help build the country’s telephone system 16 years ago, the U.S. telecommunications firm decided that the country’s backward economy wasn’t worth the risk. A decade later, remembering the slight, Beijing cut AT&T; out of the action in what was fast becoming the world’s biggest telecommunications market. Instead, China chose more cooperative foreign players from Europe and Japan.

Last year, AT&T; was granted another chance. And in a contest to supply transmission equipment, AT&T; aced its rivals by offering a system so advanced that it was considered too militarily sensitive to transfer just a few years ago.

Not long ago, China had to beg foreign companies to bestow their dollars and expertise. Now, the Chinese hold most of the cards. And the world’s premier firms are falling over each other to win China’s business--often by handing over some of their best technology.

“The formula is simple,” says AT&T;’s executive vice president in China, Jim Bercaw. “Technology for market share.”

Some worry that the cost is too high--that U.S. companies, in wooing the unimaginably big Chinese market, are trading away America’s competitive edge, not to mention jobs.

But more and more U.S. firms are making that trade-off, even though China’s Communist leaders have made no secret of their intentions to leverage foreign technology and production techniques into a powerful domestic manufacturing base.

Hardly a day goes by that U.S. companies aren’t trumpeting yet another major triumph in China.

General Motors strikes a $1-billion deal to help manufacture mid-sized sedans for China’s emerging middle class. Motorola Inc. invests $720 million in a semiconductor plant in the bustling port city of Tianjin. McDonnell Douglas and Boeing Co. battle fiercely to win a role in a $2-billion program to build a 100-seat jetliner for China’s booming domestic travel market.

Although the price of admission to the Chinese marketplace is high, U.S. companies say the potential payoff is too big for them to ignore, whether they are producing Barbie dolls, beer or airplanes.

“China is the biggest aircraft market in the world,” says John Bruns, staff specialist for McDonnell Douglas China, the company’s subsidiary there. “We can help provide at least part of what they need and benefit from it. If we don’t, they can get help from Europe or even the Russians.”

But from Tokyo to Bonn to Washington, nervous policy-makers, executives and union leaders are voicing fears that foreign companies are creating a Chinese industrial boomerang that will return to haunt them.

Critics are pressuring the Clinton Administration to slow the flow of technology and jobs, arguing that the Chinese government is using its enormous market to blackmail foreign companies into parting with prized technology and jobs.

Although China still ranks among the world’s poorest countries, its 1.2 billion people already are moving markets with their combined economic clout.

In semiconductors, for example, China is expected to become the world’s biggest market in as little as 10 years. The U.S. Semiconductor Industry Assn. says China’s poor legal protections, unfair barriers and targeting of pillar industries--semiconductors, aerospace, computers and automobiles--pose a serious threat to U.S. companies if left unchecked.

“The Chinese right now do not have the ability to copy the microcodes off of our semiconductors,” says Kevin Brett, an association spokesman. “But the key word is now. “

With an election year looming and pressure from powerful aerospace unions mounting, the Clinton Administration recently agreed to look into the claims that this shift of production and technology to China threatens the future competitiveness of the U.S. aerospace industry. The interagency review and recommendations are supposed to be wrapped up by year’s end.

“I’m gravely concerned about technology transfer,” U.S. Trade Representative Mickey Kantor says. “We recognize that we have an obligation as we open markets and work with other countries to make sure we also produce jobs here at home.”

In an interview, Kantor expressed the immediate concern that the United States not allow Asia’s governments to create an equivalent of Airbus Industries, the European consortium that has become the chief competitor of Boeing and McDonnell Douglas.

“What we don’t want to do is what we did with Airbus and create a rival, subsidized, state-owned company which Airbus is, which literally took jobs and capital and market share from McDonnell Douglas,” Kantor says.

The dilemma of how to handle technology transfer to developing countries is hardly a new one. A decade ago, it was the Japanese. Then it was the Koreans and the Taiwanese. Now, it’s the tiger cubs of Southeast Asia, India, and--most problematic of all--China.

China casts a shadow so large that the whole world, even Japan, is worried. The Japanese--whose companies have balked at turning over state-of-the-art technology to their Chinese partners--know firsthand how a country can leverage second-hand know-how and become an industry leader.

“There’s a good reason they are stingy with their technology,” says one U.S. executive, recalling Japan’s own strategy in becoming a power in semiconductors and automobiles. “Japan is afraid of creating another Japan.”

In addition to its size, China’s on-again, off-again relationship with the United States and its Asian neighbors raises concerns that it could quickly turn from collaborator to competitor and even translate its economic clout into a military threat.

How worried should the world be?

Some analysts argue that technology cycles move so quickly today that U.S. industries will have moved to the next level before China, many of whose factories still operate with antiquated equipment and Communist-era management philosophies, can seriously compete.

And in the meantime, American firms will be forging strategic partnerships that will give them entry to the Chinese market, creating an economic interdependence that will benefit all by marrying China into the community of industrialized nations.

Moreover, those who refuse to play by China’s rules do so at their own competitive peril because others are happy to play.

“This is a thorny area, and one that you’re going to hear a lot more about over the next couple years,” says David Cole, executive director of the Office for the Study of Automotive Transportation at the University of Michigan. “But keep this in mind. If you’re looking at doing business with the Chinese but you’re afraid you’re going to give your technology away, and you don’t, then somebody else will. And you’re just going to be competing against your competitor’s technology.”

The Chinese want technology, capital and training in modern manufacturing techniques. Their most powerful tool is in restricting access to their market only to foreigners willing to make a trade.

Another China stratagem is the never-ending deadline. Companies looking for deals typically scramble to polish their pitches before the decision deadline--only to have the announcement delayed if the Chinese agencies aren’t happy with the offers. Auto officials pushed back the selection of the Shanghai sedan joint-venture partner three times while they considered last-minute “refinements.”

“The Chinese deadline forces foreigners to negotiate,” says Stephen Schnell III, General Motor’s managing director in Shanghai.

The stratagem apparently works. This fall, in the final days of the battle between General Motors Corp. and Ford Motor Co. to be China’s partner in a $1-billion sedan joint venture, GM president John F. (Jack) Smith boasted that his company was ready to “bring that [technology] to a new level.”

Sure enough, after leading Chinese officials on a tour of GM’s top-secret research and development laboratories in suburban Detroit and pledging to invest $40 million in five technology training institutes in China, GM won.

“The difference between us and others is that through our joint venture, China is going to learn how to design and build a car,” says Rudolph Schlais Jr., GM’s president of China operations. “We’re the only ones who could offer that.”

And perhaps the only ones who would. Earlier this year, Chrysler lost a $1-billion minivan deal to Mercedes-Benz after it refused to license production of its minivan components. And Toyota was knocked out early in the sedan competition because of its reluctance to transfer up-to-date technology, say Chinese government officials.

“Japan is the No. 1 investor in China, but mostly in low-tech industries,” says William Chen, a director of Shanghai’s International Trade and Service Corp. “They are afraid if they transfer technology, China will catch up.”

The prospect of a powerful Chinese aerospace industry is particularly alarming to the United States.

China is a relatively minor player in aerospace, although it has produced a small jet called the YUN-12 as well as the Long March rockets, which have been propelling foreign satellites into space for about half the cost of U.S. and European rivals.

“We built our rockets ourselves,” boasts Chen, the Chinese government official. “We didn’t have help from the U.S. or Russia.”

The Asian giant’s aerospace ambitions marry a strong government mandate for technological advancement with the leverage of its booming domestic market. Over the next 15 years, China is expected to buy $100 billion worth of airplanes.

The centerpiece of China’s plans is the Asian Express, a 100-seat project with the South Korean government. Boeing, McDonnell Douglas and the Europeans are vying for a role even though they essentially would be creating a competitor for their own smaller jets.

Top Chinese and Korean officials have said the foreign partners will be judged on how much technology they would contribute. And Boeing and McDonnell Douglas executives have reiterated their willingness to play the game by China’s rules.

“We are committed to transferring technology in the 100-seater, and we have significant technology,” Michael Zimmerman, president of Boeing China Inc., said in Beijing in October.

U.S. aerospace manufacturers believe that their participation is critical, if only to stay on good terms with Chinese officials who will influence future purchasing decisions in the world’s fastest-growing aviation market.

While Boeing is the market leader, St. Louis-based McDonnell Douglas has been the most aggressive in transferring technology and production to China. The company began co-producing its MD-80s in Shanghai in 1985 and several years ago won a contract to produce 40 of its MD-90 twinjets for the Chinese domestic market--20 in China and 20 at the company’s Long Beach plant.

“We’re in the business of making money for our shareholders. If we have to put jobs and technology in other countries, then we go ahead and do it,” Peter Chapman, McDonnell’s China president, said bluntly earlier this year.

But over at the headquarters of the International Assn. of Machinists and Aerospace Workers, these deals are viewed as yet another repudiation of a productive, highly skilled, highly paid U.S. work force. It is a key issue in the machinists’ strike against Seattle-based Boeing.

“Whether through arrogance, complacency or shortsightedness, we [the United States] have consistently underestimated the ability of the rest of the world to be a serious commercial competitor in a high-tech industry,” says Matt Bates, a spokesman for the 33,000 striking Boeing workers. “You would think we would’ve learned a few lessons on that score.”

As the Clinton Administration weighs its options, Bill Reinsch, the U.S. under secretary for export administration, said one likely scenario would be to persuade other aerospace nations to join in pressuring China to quit its heavy-handed tactics. But U.S. executives are skeptical that such an approach would succeed in an industry renowned for cutthroat competition.

Indeed, until recently, U.S. companies were more likely to complain about too little technology going to China. For years, export controls stopped the movement of high-tech secrets to unfriendly countries such as Iran, North Korea and Syria and blocked American businesses from winning deals.

In 1993, Hughes Space & Communications Co.’s negotiations to co-produce satellites in China were interrupted by U.S. technology sanctions against China for selling missile components to Pakistan. Three months later, Germany’s Daimler-Benz Aerospace won the satellite deal.

With Cold War tensions ebbing and competitive pressures rising, Uncle Sam is easing controls on sales to China of such items as Intel’s Pentium computer chip, widely available from other foreign sources. Now, the Pentium is sold in street-side computer stores all over China.

In any case, the portrayal of China as the economic villain of the ‘90s seems off-base to some.

Ken DeWoskin, a China expert at the University of Michigan, acknowledges that the country has demonstrated its scientific prowess over the past two decades by producing nuclear bombs, missiles and satellites.

But he says China’s size has made it an easy target for exaggerated claims about its threat and its potential.

According to DeWoskin, China has not had great success using foreign technology to produce globally competitive high-technology products. Indeed, U.S. executives establishing joint ventures in China have found it difficult to transfer technology without spending heavily on training and keeping tight control over the manufacturing process.

In 1993, a decade after beginning a joint venture with Volkswagen that produced the Santana auto, the Chinese partners tried to launch their own version--only to discover they did not have the capability to make even a modest design change such as stretching the rear door a few inches.

“People describe China like a fertile field in which there will be a wild, weed-like blossoming,” DeWoskin says. “It’s more like a rice paddy. It takes very intensive cultivation in order to get a few sprouts to grow.”

The savviest U.S. firms give away as little technology as possible, treat local employees well to enlist their loyalty and write as much legal protection as possible into their contracts.

“You have to be paranoid,” says Billy Robbins, a Los Angeles lawyer specializing in intellectual property issues in Asia. “I tell my clients that when you go in there, you should make the assumption that your business partner in China will do everything they can to steal your technology and do everything they can to compete against you.”

The controversy over technology transfer is sure to heat up as China’s trade surplus with the United States expands to nearly $40 billion this year and an estimated $50 billion next year, second only to Japan’s.

Right now, that imbalance comes from sales of T-shirts and tennis shoes. What will happen when China is exporting cars and computers that U.S. companies taught them to make?

At the moment, the possibility seems far off. But U.S. officials are warily watching a change in the composition of trade: The United States has begun exporting more low-end items such as farm products and fertilizer--usually the domain of developing countries--to China, which is sending more and more finished goods back.

“The balance of trade is shifting in a curious way,” Deputy U.S. Trade Representative Charlene Barshefsky said after a November trip to Beijing. “That is a very undesirable situation.”

Farley reported from Beijing and Iritani from Los Angeles.