Technology collaboration for cross-border technology transfer

Technology collaboration for cross-border technology transfer cases of clean tech ventures from

China

Dr. Artie W. Ng Research Fellow, Public Policy Research Institute, Senior Lecturer, School of Professional Education and Executive Development, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, China Tel: +852-3746-0713; E-mail: [email protected]

Introduction

Abstract While there is increasing interest to develop clean technology (Clean Tech) solutions in response to concerns about climate change and greenhouse gas (GHG) emissions, recent financial crisis in developed economies may have hindered financing and development of Clean Tech ventures for their global market expansion. In the case of China, a number of Clean Tech ventures have gone through rapid developments from early stage to expansion stage and obtained external financing from private equity as well as from the capital market. Although prior studies have revealed the challenges of cross-border technology transfer due to disparities in national cultures combined with unease about intellectual property protection, Clean Tech firms from China have developed their own experiences in enhancing technology transfer upon monitoring and assessing complementary advanced technologies within the international arena. Through case studies, this paper aims to explore their experiences in facilitating technology transfer from developed economies in various forms of market-driven collaboration. Cases of emerging Clean Tech firms that enable cross-border technology transfer of green energy through corporate alliance, joint ventures (JVs) as well as mergers and acquisitions (M&As) are illustrated.

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Technology transfer has long been considered as a means to maximise the potentials of a technology that will benefit the stakeholders in both home and host countries. Although there is continuous interest in facilitating technology transfer across borders, there are ongoing problems with companies involved in crossborder technology transfer for various organisational and managerial issues. Some of these problems have been revealed in prior strategic alliances, joint ventures (JVs) and mergers and acquisitions (M&As) transactions in China throughout the past decades of the country’s rapid economic growth. Such issues include but are not limited to intellectual property protection, effectiveness of management controls and cultural differences in overall management. In the next stage of China’s economic development, it is anticipated that there will be increasingly emerging multinationals from China. They will seek growth and expansions through advancement in the value chain with adoption of advanced technologies. With the current concerns about climate change and environmental sustainability, there have been opportunities for the rapid growth and development of firms that deliver solutions of clean technology (Clean Tech) as stimulated by pertinent international energy policy for their ability to reduce greenhouse gas (GHG) emissions. Chinese Clean Tech firms with strong presence in the domestic market have started out to seek advanced technologies in order to enable their local

Tech Monitor • Sep-Oct 2011

and international developments (Carey et al., 2010). Although there may not be relevant policies in place to facilitate international technology transfer, these ventures from China that actively monitor new and advanced technologies make use of market mechanisms to create distinctive forms of collaboration vehicles to absorb and deploy viable technologies. In light of these innovative developments, this paper aims to explore various optimal forms of collaboration for a high-growth Clean Tech firm to facilitate international technology transfer and global market deployments.

Prospects of technology transfer for clean tech In response to the problems with climate change, the United Nations (2009) reported on the significance of international technology transfer from advanced nations to developing countries for their transition in adoption of low-carbon energy technologies. The key technologies that can be used to mitigate climate change are pertinent to (i) energy supply, (ii) end-use and infrastructure, (iii) CO2 capture, storage and sequestration, and (iv) reduction of other sources of GHG emissions. It is viewed that international technology transfer of Clean Tech would enable better economies of scale for commercialisation while taking advantage of the resulting speed to global markets. Nevertheless, there are challenges in accomplishing such cross-border transfer of technology. As noted in a report by United Nations (2009):

Technology collaboration for cross-border technology transfer ‘…Technology transfer involves the complex processes of sharing knowledge and adapting technology to meeting local conditions. Domestic technical and managerial capacities, institutions and investments in technological learning all influence the effectiveness with which technology can be absorbed and adapted. These considerations complicate the measurement problem.’ It was also well noted that while public-private partnership would be needed to enhance the development of technology transfer, an appropriate model is yet to be designed for successful deployment in a developing country. In order to scale up the mitigating measures to climate change, OECD (2010) advocates that public-private financing needs to be increased significantly in the coming years and that international cooperation to accelerate transfer of Clean Tech needs to be maximised.

Models of clean tech ventures in China To facilitate technology transfer between two entities, the common forms of collaboration would comprise strategic alliance or some form of mutual agreement, JVs, and M&As. During the early days of economic development in China, JVs were encouraged for local Chinese firms to form partnership with foreign firms that are able to bring in capital as well as technological know-how into the country. These so-called Sino-Foreign JVs are formed for specific purpose within a limited period of time. These are not permanent entities that possess a R&D capability. However, it is criticised that JVs could end up in conflicts, as a local partner might learn well the key technologies during the JV period and is able to run and develop the business independently thereafter. Weston et al. (2004) pointed out that other potential problems of JVs could even end up in early termination when the two partners were unsuccessful in developing alignment of interests in operations and knowledge transfer. In light of the growing international business activities among China’s

tions. Through actively monitoring and assessing critical technologies, both strategic alliances, JVs and M&As with counterparts within the value chain of an industry are viewed as options to obtain complementary resources alternative to organic growth.

Through actively monitoring and assessing critical technologies, both strategic alliances, JVs and M&As with counterparts within the value chain of an industry are viewed as options to obtain complementary resources alternative to organic growth.

Developing an optimal collaboration

emerging enterprises, there have been studies about their growth and development through means of international M&A transactions. It is remarked in a prior study that knowledge-seeking type of acquisitions of technology by Chinese emerging multinationals was a key reason for their cross-border M&As (Rugman and Li, 2007). On the other hand, Rui and Yip (2008) suggest that Chinese enterprises would use cross-border M&As to acquire strategic capabilities to turn around their competitive disadvantages in technologies and global presence. Chinese enterprises are keen to acquire international management skills, as foreign firms are increasing their presence in the domestic markets of China. Such strengthening up of capabilities would be further leveraged by their competitive advantage in manufacturing and labor costs. In prior case studies of cross- border M&As by emerging Chinese multinationals, it is suggested that their key objectives are to acquire strategic assets for enhancing their critical competencies through upgrading new technology and transferring intangible assets back home (Deng, 2009). For the forthcoming development of the emerging Clean Tech sector, it is anticipated that certain degree of consolidation could take place through international M&As; in fact, M&As in this emerging sector have been reportedly increasing in the past few years (PricewaterhouseCoopers, 2009). Larger players with financial backings could seek acquisitions of complementary resources in order for them to create synergies with economies of scales and advanced technological solu-

Furthermore, according to the study on technology transfer of Clean Tech by the United Nations (2009), there are a number of barriers which need to be addressed to enable effective technological innovation and diffusion. The suggested activities required to deal with these barriers are summarised in Table 1. In addition to dealing with these development barriers, one would need to address local legal issues concerning with intellectual property protection in relation to technology transfer. If the objective is to transfer technology in a timely fashion, one may consider developing a strategic alliance through executing a project-specific cooperation agreement. While strategic alliance is rather unstructured and short-lived, a JV model would enable the development of an entity to house a technology through intellectual property licensing. Subsequent to the formation of a JV, one needs to consider the capabilities required in operations within a typically limited period under a JV agreement. The operations would have to involve staff from both foreign and local partners. However, as a JV is unlikely to be permanent enough to create further technological innovation, its ability to extend into R&D activities for subsequent growth and expansion is questionable. On the other hand, a permanent organisation structure developed through mergers or acquisitions could facilitate more long-term R&D activities and continuous technological innovation. Deeds (2001) reveals that there is a positive relationship between R&D intensity, late stage technical capabilities, absorptive capacity and the amount of entrepreneurial wealth created by a high-tech venture. Adopting the resource-based


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Technology collaboration for cross-border technology transfer Current development activities Applied R&D grant funding directed at prioritised projects

Barriers Inadequate support for relevant applied research as existing efforts are minimal

Work required to address current barriers

• Need to adapt existing technologies or develop

new technologies to meet local energy and climate needs • Facilitate product development for potential commercial relevance • Promote North-South and South-South technical cooperation

Technology accelerators Uncertainty, lack of information designing and funding projects to and skepticism about in-situ evaluate technology performance costs and performance; lack of end-user awareness

• Reduce technology risk and costs by independent

Business incubator services, such as business development advices to start-ups

Lack of seed funding and business skills within technology start-ups — cultural gap between the research and private sectors

• Promote investment partnering opportunities

Creation of new business by bringing together key skills and resources

Limitation on market structure, inertia and lack of carbon value impede development of start-ups.

• Create new high-growth businesses to both meet

Seeking early-stage funding for energy and climate technology venture through co-investments, loans or risk guarantees

Lack of financing for early stage technology/product development

• Enhance access to capital for emerging

collection and dissemination of performance data and lessons learned

and stimulate market demand • Develop local commercial and technical capabilities

businesses that demonstrate commercial potentials • Increase private sector investment through demonstrating potential returns

Table 1. Types of intervention to address local barriers Source: United Nations (2009)

view, Sher and Yang (2004) finds that in the value chain of technology industry possessing higher R&D intensity and R&D manpower would enable improvement of firm performance in the longer term. Another study that looks into the high-tech sector also confirms the criticalness of R&D expenditures in combination with other intellectual capital as resources for the technology firms’ performance in a longer term (Ng, 2009). Alternatively, one would consider the use of M&A to develop Clean Tech for continuous developments as a real option for further business expansions (Ng and Nathwani, 2011). As such, when designing an optimal corporate structure for technology transfer, one needs to consider critically the relevant advantages and constraints. Table 2 delineates the objectives, con Corporate disclosures by Daimler, Germany and BYD, China.

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straints and other key variables that need to be addressed in three different structures of collaboration to facilitate technology transfer.

strategy would in fact be effective when there was no requirement on control of behavioural events but focus on contemporary events.

Cases in point

Electric vehicles — from alliance to JV BYD Company of China (BYD) is an enterprise based in Shenzhen, China, with exposures in IT, automobile and alternative energy businesses.1 After over 10 years of rapid developments, BYD has grown from a small company of 20 employees in 1995 to a sizable corporation with both domestic and overseas operations. In addition to its expansion inside China, BYD has offices in the United States, Europe, Japan, Republic of Korea, India and Taiwan province of China. BYD entered the auto industry in 2003 and started auto moulding, auto parts manufacturing, as well as building traditional high-quality fuel vehicles. Thereafter, BYD has developed electric

Through case studies, the author aims to illustrate some of the contemporary China-based Clean Tech firms’ adopted various collaboration structures to enable international technology transfer. In research of social sciences, case study is frequently adopted to study complex phenomena. Yin (2003) pointed out that case study was adopted in a number of situations to explore new knowledge in organisational, social, political, and related phenomena. It was suggested that case study method would enable to embrace the ‘holistic and meaningful characteristics of real-life events’. These events were to include organisational and managerial processes and the development of an industry. Case study


Technology collaboration for cross-border technology transfer Strategic alliance Advantages

Constraints

JV

• Collaboration for a specific • Forming an entity to pursue but limited scope of work • Enhancing technology monitoring and assessment • Accelerating the deployment of advanced technology with local partner’s market knowledge

specific business opportunities through exploitation of a technology not available within a local market • Timely transfer of technology with local commercialisation • Actively assessing the technology being transferred

• Creating a merged enterprise with

• Relatively short period of

• Usually bounded by a

• Requiring capital to finance M&A

collaboration • Limited continuous innovation

Other issues

M&A

• Exploratory about future collaboration

multinational capabilities and market exposures • Possessing the intellectual property • Enabling deployment of knowledge and technology across borders in a timely and effective manner • Enabling continuous technological innovation and transfer

timeframe • Limited deployment of IP in terms of time and scope • Experience, skills and knowledge of local staff on asset management • Further technology development and innovation may not be enhanced

transactions

• Cross-cultural management skills • Absorptive capacity of senior management and leadership

• Local regulations and compliance requirement, such as anti-trust legislations

• Cultural differences in

• Post-merger organisational integration • Internal knowledge and technology

management • Joint corporate governance and management control issues

transfer

• Maintaining momentum for continuous R&D and product innovation

Table 2. Key factors in determining a structure for technology transfer

vehicles, energy storage stations, and solar power stations among other green energy projects with its own R&D capabilities. It aims to grow further for its focus on developing green energy solutions. In 2010, Germany’s Daimler AG (Daimler) announced that it would form an alliance with BYD to develop an electric vehicle to be sold in the Chinese market. Under the agreement, Daimler and BYD would develop a new electric vehicle specific to the needs and requirements of the Chinese market. The vehicle would be marketed under a new brand jointly created and owned by Daimler and BYD. Moreover, a common technology centre will be established in China to develop, design and test this electric vehicle. This alliance is described by BYD’s chairman as a ‘technology partnership’, and there would be complementary competences Corporate disclosures by Shenhua and GE.

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to be combined through the alliance. The objective of this alliance is to take good advantage of BYD’s experience in battery technology and Daimler’s knowhow in electric vehicle architecture. Subsequently, a JV was then announced to formalise this Sino-Foreign alliance. Clean coal technology — JV Shenhua Group Corporation Limited (Shenhua) is a diversified energy company with integrated business in production of coal, power generating, railway, port, shipping, conversion of coal to liquids and coal to chemicals.2 Established in 1995, it is a State-owned Enterprise (SOE) in China and considered to have played an important role in the country’s economic development. Having gone through a period of strong business growth, Shenhua is committed to carrying out environmentally friendly and energy-saving projects as an imperative to fulfil its corporate social responsibility. Shenhua currently operates over 50 coal mines with an annual coal output exceeding 300 million tons.

General Electric (GE) and Shenhua announced in 2009 that they had signed a memorandum of understanding that would seek to improve cost and performance of commercial scale gasification and integrated gasification combined cycle (IGCC) solutions based on GE’s clean coal technology. Shenhua is one of the world’s largest coal and energy companies, with coal reserves, coal-fired power generation and a national role in the development of new coal-related technologies such as coal-to-liquids and carbon sequestration. Such initial alliance was then turned into JV formation in early 2011. This JV will bring about industrial coal gasification applications in China as well as the development of commercial scale IGCC plants with carbon capture technology. The mature clean coal technologies possessed by a US-based technology giant would be transferred to a major energy consuming country in the world through this Sino-foreign JV.


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Technology collaboration for cross-border technology transfer Solar power — cross-border M&A deal The third case in point is related to a cross-border M&A transaction executed by Suntech Power (“Suntech”) — a solar panel company founded by a research scientist in Wuxi, China in 2001. After a period of high growth and rapid development, it was listed on the New York Stock Exchange in 2005. It has now a global presence and one the world’s largest producer of silicon solar modules offering a range of related solar power solutions including off-grid systems, home applications and even solar power plants. Its solar modules have been installed not only in China but also in over other 80 countries. It continues its organic growth through international marketing and sales through its offices in 13 countries. Suntech maintains its strengths in the value chain from R&D to high-tech manufacturing. It has currently multiple manufacturing sites in various parts of the world, including China, Japan and the United States. In 2006, Suntech announced its decision to acquire MSK — a Japanese photovoltaic-technology company.3 MSK was one of Asia’s largest manufacturers of PV modules, with over 20 years of experience in the industry. The acquisition enabled Suntech to break into the rapidly growing Building Integrated Photovoltaic (BIPV) market and to utilise MSK’s expertise and existing global sales channels. Through this acquisition, Suntech would on one hand be able to enter into the Japanese market, being considered one of the fastest increases in solar panel installation; on the other hand, Suntech as a multinational is able to distribute this product and know-how to its global customer base, including the sizable market of China.

Discussion From technology monitoring and assessment to collaboration Prior to selection of a partner for collaboration, it is critical for a firm to actively monitor and assess the advancement Corporate disclosures by Suntech.

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Technology monitoring

Technology assessment

Partner selection

Strategic & financial analysis

Due diligence

Confirmation of collaboration

Fig. 1. Key processes from technology monitoring and assessment to collaboration

of technologies in the sector as well as the companies who have possession of such technologies. As illustrated in Figure 1, technology monitoring and assessment are considered as the starting point for seeking technology transfer through collaboration with the leading technology providers. Such initiation requires strong absorptive capacity of the management team in analysing the dynamics of any emerging technologies being developed by a particular enterprise in the market place. For instance, in the field of solar panel technology, it is envisaged that the next generation of technology through material improvement in efficiency would drastically alter the existing value chain of solar panels and the cost structure in place (Dhere, 2007). A firm possesses neither the internal technological capability nor any forms of collaboration with an external partner possessing such technologies would easily be left behind in the next phrase of technological advancement. The cases in point suggest these emerging Clean Tech firms from China have obtained substantial operational experience in their respective fields and are proficient in assessing viable and complementary technologies for their existing business. Challenges in the postcollaboration confirmation era While it is demonstrated in the three cases that technology leaders are selected as the collaborating partners, success of collaboration, nevertheless, depends on the effectiveness of integrating operations between two parties of diverse national and organisational cultures. The integration process could take time to complete with an aim to deploy the technologies to local as well as overseas applications. Furthermore, if collaboration is a permanent arrangement through M&A, the merged organisation needs to figure their renewal of


R&D capability for continuous product innovation and quality management. During such an era, a local partner needs to utilise its absorptive capability to learn about the advanced technologies from its overseas partner and yet to diffuse such know-how for continuous product innovation for its local commercialisation. In the area of alternative energy, such as electric car, its application for local use needs certain modifications in order to integrate with the local technological infrastructure and to comply with relevant local policies. For instance, BYD’s prior extensive experience in developing electric cars for the domestic market is particularly valuable in designing the specifications for local use while incorporate elements of technological innovation from Daimler. However, such knowledge transfer and continuous product innovation processes takes enormous efforts from both sides in facilitating amalgamation of intellectual capital. In the case of Shenhua, their rich operational experience in the coal fuel and power generating industries as well as understanding of the local regulatory environment would greatly enhance the commercialisation of the clean coal technology of GE into China. On the other hand, Suntech being an emerging multinational firm with established operations in a number of countries in the East and West, its acquired building integrated photovoltaics (BIPV) technology can be customised and introduced not only in the market of China but also in a number of country markets through its existing sales and marketing channels worldwide.

Conclusions Through the above three brief cases, it is demonstrated that there have been ongoing technology transfers via the emerging Clean Tech firms. Both strategic alliance and JV have enabled

Technology collaboration for cross-border technology transfer specific types of technology transfer. In the case of Shenhua, GE’s mature clean coal technology is expected to complement its scalable coal operations in China through multiple project implementations. For BYD, technological innovation together with Daimler’s is expected to take place through their jointly built technology centre in China while utilising BYD’s complementary knowledge about battery technology and local market barriers. The two parties have taken a two-step approach from strategic alliance to JV formation for a relatively more permanent collaboration and innovation initiatives. At last, the case of Suntech with strong R&D capability in solar panel technology unveils a form of timely reverse technology transfer through overseas acquisition of a complementary technology. Suntech being a leading global player in solar panel development chose to acquire unique and complementary product know-how to enhance its existing portfolio of offerings through its international client base. These three cases suggest that a potentially optimal form of collaboration for technology transfer would vary with reference to a firm’s existing complementary capabilities, its strength in domestic market development and its absorptive capacity of advanced technologies. Both JV and M&As are able to overcome the problems with intellectual property protection as the intangible assets are either jointly possessed and managed in the case of JV or fully acquired and owned in the case of M&As. While there is no one single solution to facilitate cross-border

technology transfer, market mechanisms seem to provide some viable solutions for effective cross-border technology transfer in the case of Clean Tech sector of China. The initial steps of technology monitoring and assessment play a key role in ensuring complementary resources to be combined in the subsequent collaboration, such ultimate success would also depend on the effectiveness of subsequent knowledge transfer and reconfiguration of intellectual capital for further product innovation. All in all, these experiences would be relevant and useful to emerging Clean Tech ventures among others in the Asia Pacific markets.

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