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June 9, 2003

CHINA: Vague draft policy apparently risks technology and intellectual property rights – paper

China has issued the draft of a new motor industry policy that, the trade newspaper Automotive News said, appears to curtail sharply the ability of foreign vehicle makers and suppliers operating there to safeguard their proprietary technology and intellectual property. Automotive News said the draft, which began circulating among industry executives late last month, specifies that 50% of all sales in China by 2010 must come from domestic companies that own 100% of the vehicle's technology.

By bcusack

China has issued the draft of a new motor industry policy that, the trade newspaper Automotive News said, appears to curtail sharply the ability of foreign vehicle makers and suppliers operating there to safeguard their proprietary technology and intellectual property.

Automotive News said the draft, which began circulating among industry executives late last month, specifies that 50% of all sales in China by 2010 must come from domestic companies that own 100% of the vehicle’s technology.

Executives last week told the paper that the provision could force foreign manufacturers to turn their technology and patents over to their local partners as a condition for remaining in business.

The transferred technology then could be used against the foreign partner, as the draft policy also states that China intends for its local car makers to be capable of competing in world markets, Automotive News noted.

According to the paper, the executives said that, by effectively limiting import penetration to a maximum of 50% of the market, the policy also appears to violate the spirit, if not the law, of China’s entry last year into the World Trade Organisation.

Automotive News said China has long made clear that technology transfer is one reason for allowing foreign joint ventures in the first place and, although the automakers share technology with their Chinese partners, they retain ownership of it.

Another provision of the draft policy specifies that any foreign company taking a 10% stake or larger in a Chinese company must share R&D and production and sales know-how with the partner, the paper added.

Another provision upholds the regulation that any automotive venture must be at least 50% owned by a local partner, effectively ruling out the possibility of a wholly owned foreign car manufacturing venture in China, Automotive News said.

The paper noted that, in negotiations prior to joining the WTO, China managed to obtain an exemption from rules that ban such limits on foreign investment. But many automotive executives had hoped that China eventually would relent and allow foreign companies to have complete ownership and control over their Chinese operations.

The draft policy appears to dash those hopes, Automotive News said, noting that the new policy is so vaguely worded that no one knows exactly what it will mean in practice.

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