Earlier this week, The Wall Street Journal reported what Supply Chain Matters believes to be a troubling trend, namely that some U.S. hi-tech firms are electing to transfer more intellectual property as well as value-chain activity among China’s state-owned tech firms.  (paid subscription required) The trend among China’s internal high-tech sector would appear as though companies are no longer content to replicate innovations from foreign firms but rather lead markets with new innovation.

The principal catalyst was this week’s announcement by Dell indicating that it is significantly expanding its investments in China, including collaborating more closely with Chinese companies in sectors that the country deems crucial to national security. Dell plans to invest $125 billion, no small sum, within China over the next five years as part of what is termed as: “In China, for China” strategy. According to the report, the investment figure includes the cost of procuring additional value-chain components for the manufacturing of PC’s and servers in the country.

Dell further announced partnerships with software and cloud-based technology firms Kingsoft Corp. and state-owned China Electronics Corp., whose subsidiary, China Standard Software, provides a market alternative to the Microsoft Windows operating system. Dell’s partnership with China Standard Software began last year as the high tech manufacturer became what was termed by a China Standard executive as the first Western brand to produce PC’s utilizing that firm’s NeoKylin operating system. Another partnership involves Tsinghua Tongfang Co., where the two companies are collaborating to develop was it is described as: ”high-performance computing products.” According to the WSJ report, Tongfang produces security equipment for the government of China including metal detectors and embedded chips within national ID cards. The report indicates that Apple, Microsoft and Cisco are also meeting with Chinese officials in advance of Chinese President Xi Jinping’s first state visit to the United States later this month.

There are two important concerns related to these developments.  One is that intellectual property protection (IPP) has always been a major concern around sourcing activities within China. That risk extends to the early days of foreign firms investing within China. This latest shift in strategy among certain U.S. firms like Dell could expose more technology to such risks. Then again, some in the high tech sector would argue that these types of risks are ongoing and are part of the cost for added access to China’s vast and growing market.

Another risk is related to the ongoing Trans Pacific Partnership agreement, a proposed trade agreement among 12 nations including several Pacific Rim countries and the United States that remains in ongoing negotiation stages. This agreement, if adopted, does not include China.

As noted in our previous commentary, the stated goals of the TPP are to “enhance trade and investment among the TPP partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs.” As many in business media have observed, the TPP is all about lowering existing market barriers along with tolerances for supply and value-chain sourcing arrangements for many years to come. Some high tech companies have initiated ongoing political lobbying to insure any TPP agreement does not impose a competitive or cost disadvantage for their products, along with protecting access to a huge market such as China. And that reflects the conflict and our concern.  Are we about to witness different IP and technology transfer strategies, one predicated on access to China’s market with IP and value-chain sourced primarily internally, and one on TPP with market access, IP and sourcing spread among member TPP nations?  And, the larger what-if question focuses on whether China’s industry or government leaders elect to later block foreign based firms from future opportunities for China’s business.

In essence, market access, political, technology access and job-growth needs are all interwoven in moving parts with implications to global product innovation and value-chain strategies.

There are no easy answers and thus are the risks, perils and strategy implications that continue to unwind within today’s globally based and more globally competitive supply chains.

Bob Ferrari