The Sourcing Cycle: GE and Beyond — Weighing Technology Transfer / IP Risk in China

The Wall Street Journal recently reported that GE will become a supply partner to Comac, better known as the Commercial Aircraft Corporation of China. GE will supply "avionics systems for [Comac's forthcoming] C919 jetliner," according to the article. The WSJ cites other US companies, including Rockwell Collins and Honeywell, as key suppliers on the project as well, which aims to take on Boeing and Airbus in the "150 to 200 seat jet" market. These supply announcements are fascinating for a number of reasons, not the least of which is the extent of China's reliance on "global sourcing" to bring the type of expertise it needs into the project. In other words, it takes the concept of offset requirements to an entirely new level by not only requiring that companies selling into the region source a percentage of supplies locally, but by doing away with the Boeings and Airbuses entirely in favor of domestically built options that still rely on key underlying Western technologies.

Of course the danger of this, which no doubt GE, Rockwell and Honeywell factored into account, is that China has perhaps the worst track record in the world of reverse engineering and stealing IP (to the point of copying bills of materials for automobiles and many other examples I can't write about that involve illegal entry and theft). Without question, given that these organizations know the China game more than I do (and are also privy to things which can't be discussed), they no doubt weighted the importance of near-term revenue against longer-term IP loss in deciding to work with the Chinese state-owed aviation OEM. If the past is any indication of the future, it's likely that within a decade or two, these US suppliers will be competing against Chinese suppliers that will have entered the same markets largely on the backs of Western IP.

In the future, we'll all need to think twice about the ultimate downstream implications of our thirst for cheap Chinese goods and supplies. In effect, the Western hunger for lowering costs for lower-valued added materials, parts and components, has helped to almost entirely fund a trade surplus and state-owned investment war-chest that will ultimately come back to compete against Western organizations. GE may be sourcing cheap parts for its appliances from China to increase margins and keep shareholders happy in the near-term -- not to mention appeasing customer requirements for low-cost products -- but the highly engineered avionics components it is selling into China are being bought with the very dollars from which they've spent in the country in other areas of their business (after all, it is the Chinese government -- versus truly private industry -- that we're dealing with here). Which, knowing China, will no doubt in the end help to put future GE competitors in business.

Jason Busch

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