CHINA: LIMITATIONS ON TECHNOLOGY ABSORPTION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00928R000200080004-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: June 1, 2009
• Sequence Number: 4
• Publication Date: December 1, 1983
• Content Type: REPORT

China: Limitations on
Technology Absorption
Secret
EA 83-10247
December 1983
296
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Directorate of Secret
Intelligence
China: Limitations on
Technology Absorption
This paper was prepared by
Office of East Asian Analysis, with contributions
fro Office of Imagery
Analysis. Comments and queries are welcome and
may be directed to the Chief, Development Issues
Branch, OEA
Secret
EA 83-10247
December 1983
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China: Limitations on
Technology Absorption 25X1
Key Judgments China has embarked on a program to improve its capability to absorb-
Information available that is, to understand and integrate into the economy-advanced technol-
as of 14 December 1983 ogies. China's close participation with Western firms should contribute to
was used in this report.
the development of an absorptive capability superior to that of those less
developed countries that invite Western companies to build industries but
do not take an active role in the planning and operation of projects.
China's achievements over the next 15 to 20 years will not, however, meet
Beijing's expectations. Chinese industries will progress technologically and
provide China with a greater variety of products for domestic and export
markets, but their average technological level will continue to lag that of
the developed world.
Imported technologies have contributed greatly to China's ability to
produce commodities it once had to import. We believe that China has
most effectively used those technologies imported for the petroleum
refining and extraction, aluminum, chemical fertilizer, and shipbuilding
industries-basic industries in which it has considerable experience. China
has not, however, had great success in duplicating or improving foreign
technologies in the ferrous metals, electronics, and aircraft industries.
China's ability to absorb technologies has been circumscribed by:
? A limited body of skilled technical personnel.
? The lack of incentives for plant officials or planners to seek advanced, ef-
ficient production methods or equipment.
? The diversity of political and geographic jurisdictions involved in technol-
ogy acquisitions that contributes to poor planning and problems in
identifying priorities.
? The concentration of available material and human resources on military
programs.
Over the past five years, China's leadership has tried to define the
economy's future technical needs better and to focus both national and
international resources on them. Beijing is testing new training programs
and industrial management and financial reforms designed to encourage
qualitative and technological progress. Such reforms, however, have been
very narrowly applied and are meeting stiff resistance from entrenched
managers and workers. We believe a shortage of skilled personnel will
remain a constraint for many years
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EA 83-10247
December 1983
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Beijing has been disappointed with the level of Western participation and is
trying to make China more attractive to Western investors. The huge
whole plant deals of the past are giving way to joint ventures, licensing,
purchases of used factories, and other arrangements that are less costly and
more applicable to China's existing industry:
? We expect the Chinese to seek more planning, design, and other
conceptual aid, especially from those US firms that supplied the technol-
ogies or designs for previous development projects.
? Japan will probably be most involved in China's efforts to upgrade
existing plants and in large infrastructural projects for which China
wants extensive low-interest financing.
? Beijing has also discussed a few upgrading projects with the Soviet Union
and with East European countries. China prefers the more advanced
technologies available from Western firms, however, and will probably
agree to only limited Bloc participation.
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Key Judgments
Technology Acquisitions-The Background
Technology Utilization and Absorption-The Record 3
Factors Inhibiting Absorption
Poor Systems Planning 4
Bureaucratic Squabbling 4
Inappropriate Technologies 5
Policy Changes Affecting Technology Absorption 5
Redefining Requirements 5
Focusing Resources 6
Reforming Industrial Management 6
Attracting Western Participation 7
Encouraging Exports 7
Obstacles to Improved Technology Absorption 7
International Implications 8
Prospects for Change 9
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China: Limitations on
Technology Absorption
Faced with a weak, war-ravaged industrial base,
China in the 1950s acquired industrial facilities from
the Soviet Union that were the mainspring of industri-
al development for two decades. Since the early 1970s
China has added more than $13 billion in foreign
whole plants and major equipment in an attempt to
modernize this aging industrial base (see table 1).
Additional investments in designs, blueprints, techni-
cal specifications, and training total perhaps $2 bil-
Table 1
China: Whole Plant and Major
Equipment Imports
lion.
China, however, has lacked the institutional struc-
tures, manufacturing capabilities, and skilled person-
nel to take full advantage of imported technologies.
When unable to duplicate or integrate imported tech-
nologies into its older industrial facilities, China has
had to reenter world markets to acquire additional or
upgraded capabilities.
The aim of this paper is threefold:
? To assess China's past effectiveness in using and
absorbing industrial technologies.
? To review recent policy changes and proposals de-
signed to enhance China's ability to use and absorb
technologies.
? To assess the role foreign firms are likely to play in
improving technology absorption capabilities.
The analysis in this paper is restricted to imported
industrial plants and equipment, whose progress is
more readily monitored in the Chinese press and in
reports by foreign industrialists involved in the proj-
ects. We also distinguish "utilization"-the ability to
put acquired technologies into operation-and "ab-
sorption"-the technical ability to understand and
integrate acquired technologies into the economy. F_
Technology Acquisitions-The Background
Many Western nations maintained trade embargoes
against China in the 1950s. For economic and politi-
cal reasons China turned to the Soviet Union for
development assistance. The Soviets provided 156
projects, mostly in such primary industries as petro-
leum refining, iron and steel, machinery, and chemi-
cals. When Moscow withdrew its support in 1960,
1963-66
1967-71
1972-76
2.7
1977-79
8.1
1980-83
2.5
China had sufficient technical capability to complete
the unfinished projects, albeit far behind original
schedules.
In the early 1960s China turned to Western Europe
and Japan for new plants and equipment. In 1966 the
Cultural Revolution undercut both the newly estab-
lished economic ties with the West and the application
of scientific, technical, and educational skills that
reflected advanced "Western" methods and attitudes.
Those educated Chinese who could have contributed
to their nation's growth and development were har-
assed, the educational system was decimated, and a
whole generation of potential scientists and techni-
cians was lost.
In the early 1970s Beijing briefly resumed purchasing
plants and equipment and then undertook a massive
acquisition program in 1977. At the same time, many
Chinese policymakers began to question whether Chi-
na had taken on too much and whether it was giving
too much emphasis to heavy industry. Since 1979
China has signed for only $2.5 billion in whole plants
and major equipment and has redirected its efforts
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Highlights of China's Industrial Technology Import
Experiences
Petroleum. Until the late 1970s China relied on early
1950s technology to find and produce oil. This tech-
nology was adequate to exploit some fields, but not
for complex or deep deposits. Some Western equip-
ment was imported but not used effectively. In 1978
Beijing realized the drought in new oilfield discover-
ies thwarted ambitious goals for oil production and
exports. The State Council opened the industry to
Western equipment and technology, even allowing
foreign firms to take over much of the offshore
exploration program. Joint ventures to produce drill
bits and offshore rigs-initially from imported parts
and eventually from entirely domestic sources-are
progressing well.
Refining. The standard. processing units at China's
oil refineries are either 1950s Soviet equipment or
copies of Western units the Chinese studied in Cuba
in the early 1960s. The Chinese have modified both
the Soviet and the Western crude oil distillation units
to increase capacity. Throughput of the 1950s Soviet-
style units was increased from the original design of
20,000 barrels per day (b/d) to 40,000 to 50,000 b/d,
and of the Western designs from 34,000 b/d to 50,000
b/d. The Chinese also use a copy of a Western 12,000
b/d catalytic cracker to convert heavy oils into gaso-
line, gases, and light diesel fuels. The Chinese contin-
ue to build this unit in their rneries, but we have
seen no modifications to it.
Chemicals. Chemicals accounted for nearly half the
value of whole plant contracts in 1963-79. China has
reproduced intermediate-level synthetic fiber technol-
ogies in every province, but, even after building copies
of more sophisticated petrochemical and fertilizer
plants, continued to import those plants, probably
because it is still easier and cheaper to buy certain
equipment and controls. Imported chemical plants
are plagued by unskilled operators, interruptions in
power and raw material supplies, and substandard
product quality, but on average operate at 60 to 80
percent of design capacity (some have temporarily
exceeded design capacity). Most plants imported in
the 1970s were parts of huge complexes that severely
taxed the human, technical, and material resources
available; China is now turning to smaller projects to
upgrade plants and develop consumer chemicals for
export.
Metals. Large-scale projects also characterize tech-
nology acquisitions in China's metallurgical indus-
try. The two major iron and steel projects, at Wuhan
and Baoshan, were poorly planned, and construction
shortcuts at Wuhan nearly buried the whole project.
A more recent project in the aluminum industry has
progressed smoothly, probably because China has
extensive experience building aluminum plants. Beij-
ing is concentrating now on upgrading plants such as
An-shan, their largest iron and steel plant, and on
improving ability to produce alloys and metal prod-
ucts needed for modern industrial development.
Machine Tools. Although Beijing wants to build
sophisticated tools for international markets, most of
China's machine tool exports are still relatively
simple, general purpose machines destined for less
developed countries. China has copied Western ma-
chine tools for 25 years with limited success and since
1979 has obtained foreign help to upgrade the indus-
try, largely through licensing and joint ventures. A
major impediment to meeting international machine
tool levels is China's inability to produce mechanical
and electronic controls.
Electronics. China started in the late 1960s to use
foreign technology and equipment to expand its elec-
tronics industry with particular emphasis on compo-
nents. Substandard facilities and raw materials, as
well as other problems, have kept capacity utilization
offactories producing high-grade components at 30 to
40 percent. Chinese-developed computers, based on
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US systems, are used in industry, but utility is
limited because designs were altered and they are not
compatible with foreign peripherals and software.
Imported consumer electronics plants (televisions) are
now in operation and forcing domestic factories to
seek upgrading help to compete in terms of product
mix and quality. Beijing is restructuring the electron-
ics industry and itemizing priorities, importing design
and manufacturing technologies, and making assem-
bly arrangements to improve the industry's use of
foreign technology.
Transportation. China's air, rail, and road sectors
have purchased aircraft, locomotives, vehicles, and
some air and rail traffic management systems but
have shown little serious interest in Western manu-
facturing technologies. On the other hand, the mari-
time sector has thrived on cooperative production
arrangements that are bolstering shipbuilding and
freight container output for export. Recently, the
automotive industry started to obtain foreign assist-
ance to manufacture parts and jeeps. These joint
projects in the transportation sector initially rely
heavily on foreign materials and equipment, with
plans for increasing use of Chinese produced compo-
nents.
Textiles. China has extensive experience producing
textiles from cellulosic fibers (rayon, acetate) and
natural fibers, but built its entire chemical fiber
(nylon, polyester, acrylic) industry with imported and
copied technologies. Inconsistent size and processing
characteristics of their chemical fibers have forced
the Chinese to use imported fibers to make many
export fabrics and to seek help in correcting process-
ing deficiencies. The Ministry of Textile Industry is
contracting with foreign firms to advise on methods
to improve fabric quality and modernize fabric treat-
ment capabilities (dyeing, preshrinking, water-repel-
lency).
its efforts toward specific equipment purchases, co-
operative projects, and conceptual technologies, large-
ly to support the development of a labor-intensive,
export-oriented light industry. Two long-term goals
now drive China's foreign technology acquisitions: a
desire to become more self-sufficient and eventually
reduce capital imports, and more efficient industrial
use of energy and raw materials.
Technology Utilization and Absorption-The Record
We believe China has had remarkable success utiliz-
ing imported industrial technologies, given the techni-
cal, bureaucratic, and political obstacles it has faced.
Our sectoral analysis suggests that the Chinese oper-
ate many imported plants and equipment at rates 25X1
comparable to those in other less developed economies
and in some cases at the level of developed nations.
For example, imported plants, using oil from fields the
Chinese developed, account for 95 percent of China's
ethylene capacity and have been instrumental in the
rapid increase in the production of synthetic fibers,
plastics, and films. Imported plants also account for 25X1
80 percent of China's high-grade nitrogen fertilizer
and half or more of television production capacity. F_~
The key to China's successful exploitation of imports
has been a core of technicians and engineers, many of
whom were foreign trained. These people have been
able to continue expanding China's industries using
technologies of the 1940s and 1950s, particularly in
the energy, transportation, and machine-building
sectors. They were too few to permit the luxury of
extensive new product and process research, however,
and were therefore unable to make significant im-
provements on most older technologies. Westerners
were impressed, nonetheless, with some Chinese
achievements-for instance, the development in the
1960s of the Daqing and Shengli oilfields
The core of skilled personnel has diminished over the
years because of aging and political harassment and
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because of the sparse numbers of scientific and tech-
nical workers who graduated during the years 1967-
76. China's educational system is now providing a
modest number of new engineers and technicians who
are generally well grounded in engineering and pro-
cess theory;' however, many Western industrialists
have found them unable to apply theory to industrial
operations. Beijing now looks to the West not only for
technologies, but also for the training and education
to support utilization, absorption, and economic devel-
opment.
Factors Inhibiting Absorption
Although China has been able to use many of its
acquired technologies, it has a mixed record in ab-
sorbing them. Like other centrally planned economies,
China has trouble reconciling its economic planning
system and the authority of the central government
with the autonomy needed by industries to research
and adapt technologies. The diversity of political and
geographic jurisdictions involved in the Chinese deci-
sionmaking process encourages inefficient compro-
mises and complicates the arrival at a consensus on
economic plans. In turn, the rigidity of the plan-with
its tight resource allocations and output demands-
stifles the flexibility and spontaneity that spur innova-
tion in market economies. China's recurrent anti-
Western campaigns also inhibit factory managers and
engineers from forming the close relationships with
foreign firms and counterparts that could help im-
prove absorptive capabilities. As a result of these
systemic problems, a number of factors limit China's
ability to absorb foreign technologies
Poor Systems Planning. The Chinese have not always
planned new projects well, in the main because they
have been slow to adopt the extensive preplanning
required for construction of modern industrial plants.
They often have installed expensive foreign equipment
only to find that raw material or electric power
supplies are inadequate. The Wuhan steel mill, for
example, was built with inadequate power supplies,
and until new power sources were arranged, large
parts of the city of Wuhan were blacked out whenever
the steel mill operated.
' Of nearly 140,000 graduates of institutions of higher learning in
1981, only about 22,000-16 percent-studied engineering, agri-
The Chinese have also tended to overestimate their
abilities to finance, install, supply, and operate ad-
vanced plants and equipment. In 1978 after purchas-
ing several very small (by international standards)
plants to produce polyester and its component chemi-
cals, Beijing ordered equipment for what was to be the
world's largest polyester complex. Once the extent of
costs and feedstock requirements became clear, the
scale of this project was reduced and much of the
equipment stored until 1983. Where an intermediate-
size plant would have been adequate, manageable,
and probably operating by now, overconfidence result-
ed in a costly and, so far, unproductive exercise.
Lack of Priorities. Each time China has entered
world markets for civilian industrial plant and equip-
ment it has initially focused on one or two sectors but
then negotiated for a full spectrum of technologies.
This inability or unwillingness to concentrate re-
sources on a carefully developed priority basis has led
to increased competition for construction and other
industrial materials, wasteful duplication of facilities,
and dispersal of the relatively few qualified personnel
among too many projects.
Bureaucratic Squabbling. Many Chinese agencies are
involved in the acquisition of foreign technologies,
each with its own interests. Bureaucratic infighting
over the types and sources of foreign technologies
frequently has led to high-level arbitration. In rare
cases, such conflict has contributed to industrial
progress: the Ministry of Metallurgy was once forced
to buy $1 million in testing equipment to improve the
quality of its oilfield drill pipe because the Ministry of
Petroleum preferred to buy Japanese and US pipe. In
general, however, the friction has caused only political
tension and delays.
Rivalry among firms and between provinces or cities
has also inhibited absorption by undermining needed
intraindustrial cooperation. In mid-1982, an article in
Hongqi (Red Flag) described "regional economic
blockades" in which localities, choosing to manufac-
ture products themselves, refused to ship materials
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elsewhere for processing or to share new methods or
technologies. Plants with advanced methods or equip-
ment, regardless of source, also are not always willing
to share their knowledge with other plants for fear of
losing their competitive edge. Recent Chinese emigres
new technologies that are more efficient but that
might reduce their gross output value
report that the practice continues.
Inappropriate Technologies. China's technology ac-
quisitions through the 1970s concentrated on primari-
ly capital- and energy-intensive heavy industrial proc-
esses that proved difficult to absorb because of their
large scale and complexity. These provided China an
extensive base for developing downstream consumer
and light industries-for example, plastic products
from petrochemical plant output. But we believe
China might have more effectively used its resources
to acquire less sophisticated technologies and to con-
centrate on developing machining, assembly, and con-
sumer goods production that get the most out of
China's largest resource-labor.
Furthermore, by buying foreign-made capital goods,
China neglected its own machine-building industry,
which has continued to churn out unwanted mediocre
machinery and, thus, has developed huge inventories.
Industrial planners could have incorporated domesti-
cally made machinery, but they turned instead to
Western manufacturers because of higher quality and
quicker delivery. some
domestic manufacturers, seeking opportunities to up-
grade Chinese industry, have tried to stop customers
who wished to turn first to Western suppliers. For
instance, in 1982 officials at Daqing oilfield wanted to
import US submersible pumps, citing an urgent need.
A Ministry of Machine Building factory fought the
purchase, however, so that it could import parts for
assembly in China and thus learn the technology.
Months passed before a compromise permitted the
oilfield to import some complete pumps and the
factory to assemble others.
Incentives. Chinese industry has had little incentive to
manufacture quality goods, cut costs, or innovate.
Enterprises have not been judged on their production
costs-which are understated because raw materials
are priced below their true value-or on the quality
and marketability of their products, but on the gross
value of their output. As a result, factory managers
and planners have been reluctant to risk investing in
Concentration of R&D on the Military. China can
marshal its technical, financial, and human resources
to achieve high-priority military objectives. The de- 25X1
cade-and-longer development programs for ICBMs
and the Han- and Xia-class nuclear submarines are
exam les. 25X1
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This program did not suc-
ceed, primarily because of the lack of a suitable
airframe. The priority given these military programs
has limited the resources available for research and
development of civilian industry. China has thus had
few resources to concentrate on selected civilian pro-
grams, such as the development of the Daqing oilfield
in the 1960s and the expansion of the chemical
fertilizer industry in the early 1960s and again in the
Policy Changes Affecting Technology Absorption
Since the late 1970s China has been reevaluating its
economic status and development goals. Policy de-
bates continue, especially over the level of foreign
participation and the degree to which market forces
should influence the economy. Yet several basic ob-
jectives are clear: reduce and redirect investment;
upgrade the technological level of existing plants; 25X1
increase exports; and improve efficiency, product mix,
and quality. Extensive discussions in the Chinese press
suggest that Beijing expects changes in factory man-
agement, training, and planning to have major benefi-
cial effects on China's absorptive capacity.
Redefining Requirements. Part of the reevaluation 25X1
has been an intensive review of past technology
acquisitions to define future needs better. China's
official press and importing agencies have made clear
a desire to increase output of consumer goods and 25X1
improve product quality. Problems in energy conser-
vation and air and water pollution have underlined the
need to seek technologies that improve the operations
of existing plants. The central government's emphasis
on these aspects of technology transfers is intended to
force technology recipients to use acquisitions more
effectively.
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Technology importers also express to Western suppli-
ers a greater awareness now of the need for extensive
feasibility studies. Instead of expecting suppliers to do
advance work automatically (whether or not contrac-
tually required), the Chinese are doing more them-
selves or hiring foreign engineering firms. When
outside consultants do feasibility studies, Chinese
engineers participate to study their techniques.F_
Focusing Resources. China has issued numerous
guidelines designed to concentrate financial, material,
and human resources on priority projects; principal
goals include increased exports and, in the long run,
an enhanced ability to produce a greater diversity of
goods. The State Council has directed a reduction in
capital investment and a shift of remaining invest-
ment funds to priority projects. A special working
group of the State Economic Commission (SEC) has
selected and set priorities for categories of projects
designed to upgrade existing factories that will re-
quire the acquisition of some 3,000 items of advanced
equipment or technology in 1983-85. According to
Zhu Rongji, a vice minister of the SEC, 80 percent of
China's growth in output value over the past 30 years
or so has been from new plants, while only 20 percent
has been through improving the efficiency of existing
plants, nearly the reverse of industrial nations. The
SEC hopes to narrow that difference.
China also has extended authority to selected cities
and provinces to import foreign technologies to up-
grade factories. So-called central cities-such as
Shanghai, Tianjin, and Chongqing-have been en-
couraged by State Council directives to organize
projects that cross ministerial and provincial lines and
require outside expertise. In addition, central authori-
ties encourage and provide some funding for interre-
gional economic cooperation. Last year the State
Planning and Economic Commissions and the Com-
mission of Science, Technology, and Industry for
National Defense publicly announced the beginning
of formal planning for closer cooperation between
defense and civilian industries. Defense has been a
primary recipient of research and development re-
sources and imported technologies and, if this pro-
gram is fully implemented, the prospects for a better
diffusion of technology from military to civilian enter-
prises will improve.
These measures are long-term approaches to develop-
ment and are being resisted by entrenched managers
and workers-press sources
make it clear that Beijing already has had trouble
getting localities and factories to reduce unauthorized
investment-and are subject to changing priorities.
Upgrading may run into other even more practical
problems; some foreign industrialists who have seen
the plants China wants to modernize describe them as
beyond repair.
Reforming Industrial Management. China is trying
to streamline its industrial bureaucracy and reform
management practices to increase efficiency and ad-
vance technologically. Corporations have been formed
to better link research, development, and production
functions in priority sectors such as energy, transpor-
tation, electronics, and petrochemicals. Enterprise
consolidation and specialization programs are the
focus of industrial reorganization plans. Inefficient
factories are being closed or switched to different
product lines. Plants that once were vertically orga-
nized and aimed at total self-sufficiency are now
specializing; groups of interdependent plants, each
responsible for certain components or subassemblies,
are affiliating for the manufacture of final goods.
Identification and closure of plants will be easier for
the government when responsibility systems are in-
stalled at more enterprises. Traditional plant manage-
ment-more often than not a party committee-
assured that the production plan was met, but with
little or no concern for process efficiency or product
quality; state subsidies covered losses and provided no
incentive to cut costs or improve output. Responsibil-
ity systems give plant managers greater fiscal ac-
countability and personnel control; plants can retain a
portion of their revenues for reinvestment; innovation
is to be rewarded; and, after an initial adjustment
period, deficits will not be covered by the State.
These various reforms have been introduced in only a
small number of enterprises, and some have been
misapplied or even rejected by plant managers.
Resistance has been high because many of the pro-
spective changes threaten the current benefits and
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status of both bureaucrats and plant managers, as
well as pressure them to perform at levels that may be
beyond their capabilities
Attracting Western Participation. Since the flurry of
plant and equipment purchases in 1977-79, the Chi-
nese have attempted to obtain more conceptual tech-
nologies that are less costly and more applicable to
existing production hardware. A primary vehicle for
this has been more active cooperation and direct
participation by Western firms through licensing,
consultancies, technical service contracts, and joint
production. According to a 1982 China Daily article,
these four methods accounted for nearly 30 percent of
the value of technology contracts in 1981, up from less
than 1 percent in 1978
Beijing has also tried to modify its legal system to
help protect foreign firms and technologies. The Chi-
nese, disappointed by the low level of foreign partici-
pation, hope that more comprehensive laws will in-
crease the confidence of Western industrialists in the
Chinese business environment. In October 1983,
Xinhua News Agency announced a forthcoming revi-
sion of customs regulations that would afford prefer-
ential treatment to imports destined for projects that
have foreign participation. To relieve the concern of
many Western firms about violations of licenses and
proprietary technologies, China joined the Interna-
tional Association for the Protection of Industrial
Property in May 1983 and is expected to issue a
patent law soon
Obstacles to Improved Technology Absorption
Beijing's efforts to refashion China's economic system
will be slowed by some inevitable constraints. We
believe bureaucratic inertia-a preference for the old
"comfortable" ways of operating and a desire to
protect existing managerial perquisites and jobs-
will continue to delay managerial and structural
reforms. At least one province (Liaoning) has reacted
harshly to failures by factory officials to implement
reforms and generate profits, firing those whose plants
suffer chronic losses. Most regions, however, appear
to be moving more slowly
The leadership is encountering trouble controlling
resource use. Localities and enterprises persist in
building unauthorized projects. Diversion of construc-
tion materials to these projects and their subsequent
demands for energy and raw materials promise to
impede Beijing's plans further. In addition, the unau-
thorized projects often do not mesh with the advance-
ment objectives and tend to prolong the use of the
outmoded technologies Beijing is trying to replace.
Specialization and interdependence is also taking
place primarily in areas where transport requirements
already strain available capacity. We believe that
transport systems will have difficulty moving addi-
tional components from manufacturing sites to distant
assembly plants. Unless the transportation system can
reliably deliver the parts and components for interde-
pendent industries, the specialization effort will falter
and slow the drive for efficiency and modernization.
25X1
25X1
Encouraging Exports. Although a principal reason for
export promotions is to increase foreign exchange
earnings, another benefit is that producers are forced
to make technological improvements in product mix
and quality to compete successfully in international
markets. To support this goal, many of the joint
production agreements allow China to receive new
production technologies and/or equipment and pay
the supplier in product. This program has been suc-
cessful in a broad range of product lines, from
international shipping containers to cosmetics, with
few serious quality problems
Development of skilled personnel may well be the
biggest stumblingblock. China has a huge bureaucra-
cy and some 350,000 industrial enterprises that need
managers, technicians, and engineers. Yet of the more
than 10,000 students and advanced scholars in the
United States, fewer than 15 percent are studying
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Table 2
China: Student Specializations
Physics
Chemistry
Medical/health
Engineering (unspecified)
Electrical /electronic/communications
Mathematics
Mechanical engineering
Nuclear
Agriculture
Materials/ metallurgy
Space/ astronautics
Geology/geography/oceanography
Management
Civil engineering
Aeronautical engineering
Industrial engineering
Hydrodynamics
Lasers/optics
Architectural engineering
17.9
11.5
10.4
8.5
8.3
7.7
3.0
2.9
2.5
2.4
1.9
1.5
Less than 1
Less than 1
Less than 1
Less than 1
Less than 1
Less than I
Less than I
Reluctance of foreign investors will further impede
progress. Costly negotiating delays, aggressive Chi-
nese acquisition of as much free advice and technol-
ogy as possible, and Beijing's play of vendors against
one another continue to disillusion many firms. Inves-
tors also are likely to remain wary of projects until
they are assured that China's forthcoming patent law
will protect patented processes and equipment. Fur-
ther, firms continue to refuse to
sell China technology because they fear China will
use their plants and technologies to produce export
goods in direct competition with them.
International Implications
We have already seen that China is buying fewer of
the large-scale expensive factories and complexes that
attracted international firms in the 1970s. Many of
the factories Beijing is now importing are used plants
idled by the recession of 1980-82. China has acquired
textile and machinery plants from the United States
and chemical plants from Europe in this wa . Addi-
tional such purchases are likely
China is seeking designs and other conceptual tech-
nologies rather than hardware, and this may benefit
US firms. Although Japan was the dominant contrac-
tor for those plants bought in the past, US designs and
technologies were the basis of many. We believe the
Chinese will return directly to those US firms for help
and consultation as they try to design their own
equipment and processes.
subjects with direct application to industry-engi-
neering, management-while a disproportionate 60
percent are in scientific and research fields (see table
2), which have indirect or long-term impact on indus-
try. The few engineers and managers trained in the
United States and elsewhere are augmented by those
Chinese who receive practical training on site at
Western firms. The effectiveness of these trainees
continues to be slowed by rudimentary foreign lan-
guage skills. Beijing also plans to establish eight new
management training centers patterned after the suc-
cessful joint PRC-US school in Dalian. Agreement
has already been reached with the Japanese to estab-
lish one of these centers, and the others are under
discussion with Canada, West Germany, France,
Australia, Hong Kong, and the European Communi-
Japan will probably be the most involved in advising
on plant upgrading, partly because the Japanese effort
is coordinated through the Ministry of International
Trade and Industry (MITI) and Japanese financing is
available at interest rates acceptable to the Chinese.
The Soviet Union wants to help upgrade some of the
plants it supplied in the 1950s, and several East
European countries also are studying projects slated
for modernization. Soviet and East European technol-
ogies are not as advanced as those in Japan, the
United States, and Western Europe, but Beijing has
recently agreed to allow the USSR to upgrade at least
two, and possibly four, factories.
25X1
L~DA"I
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Secret
Prospects for Change
Beijing recognizes that past periods of isolationism
resulted in technological stagnation. But China's lead-
ers also are persuaded that many less developed
countries involved with multinational corporations
have relinquished too much of their decisionmaking
authority to the foreign firms. In the Chinese view,
these firms keep host-country workers in labor roles
and do not share technological expertise or financial
benefits. We believe the present economic leadership
in Beijing expects-by modifying China's economic
management and educational systems and through
temporary alliances with Western firms-to develop
an absorptive capacity that will eventually permit
greater self-generated technological progress.F_~
We believe that China's active participation with
Western firms in establishing modern industries will
eventually contribute to the development of an ab-
sorptive capability superior to that of those less
developed countries that have relied on Western firms
to build and operate modern plants within their
borders. We also believe that China's ambitions for
technological progress and increased self-sufficiency
over the next 20 years are unrealistic. Beijing's con-
centration of domestic and foreign resources on par-
ticular sectors and its attempts to reform industry and
management should foster more effective use of tech-
nologies. We believe, however, the process will be
slower and more complicated than Beijing's official
pronouncements suggest.
We expect Beijing to become increasingly and unal-
terably linked with other nations in trade relation-
ships, yet Beijing will remain extremely sensitive
about the extent to which contacts with Westerners
may influence Chinese society and culture. Move-
ments such as Beijing's current "cultural contamina-
tion" campaign are intended to limit unwanted social
and political influences but have a potential to disrupt
beneficial economic and technical contacts. Barring
unanticipated disruptions in these international eco-
nomic ties, Chinese industries will advance into more
contemporary processes and products previously avail-
able only through imports. Their average technologi-
cal level will continue to la the West: the ap will
narrow but will still exist
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Secret
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