Automotive market China China warns its manufacturers against excessive technology transfer

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Reversal of the debate: The Chinese Ministry of Commerce has warned domestic OEMs not to export too much know-how for electric vehicles.

The Ministry of Commerce (Mofcom) in Beijing is reported to have summoned executives from leading automakers for a meeting, according to Bloomberg, which cited sources who were not named. Chinese automakers planning new factories abroad were advised to consider exporting "knock-down kits," according to officials. The overarching goal is to avoid revealing too much of the new innovations that have allowed companies like BYD, Geely, Chery, or SAIC to become leading manufacturers of electric and hybrid vehicles in their home country.

Knock-down kits are pre-manufactured components that are assembled in the respective foreign market, while the original production of individual key components remains in the home country.

Such arrangements are not unknown in the industry. These kits are differentiated between SKD (Semi Knocked Down) and CKD (Completely Knocked Down). However, China as the country of origin for such manufacturing practices is a new development.

For many years, it was primarily foreign automakers that were concerned about protecting their know-how while manufacturing in China, often alongside domestic joint-venture partners. The tug-of-war over the varying "localization rate" of companies like Jeep, Volkswagen, or Toyota is as old as the Chinese automotive industry itself. Foreign manufacturers have always sought to benefit from the Chinese market while trying to avoid disclosing too much of their expertise. This balancing act reflects the broader dynamics of international business and technology transfer, particularly in key sectors like automotive manufacturing where proprietary knowledge is a critical asset.

Now, the Chinese are turning the tables. In January, the Chinese automaker Great Wall Motors signed a contract with EP Manufacturing Berhad (EPMB) in Malaysia for joint vehicle production based on the CKD model, recently reported by the industry portal "CNEVPost".

The situation for factories in Europe

Chery has also announced that its planned car factory in Spain will use CKD and will not manufacture all components locally, reports the industry portal "36.kr". Chery plans to revive a former Nissan car factory near Barcelona in collaboration with a local partner. SAIC has a similar agreement for a factory in Pakistan.

As many Chinese OEMs are currently considering new factories in Europe, partly to avoid EU Commission tariffs, the new knock-down debate cannot be separated from the political tug-of-war over market access for Chinese companies in Germany, France, or Italy.

From Brussels, initial statements are emerging in which leading officials are critically discussing CKD and SKD concepts from China. Apparently, there are considerations to impose minimum requirements on technology transfer to the Chinese. The debate is conducted under the heading "Rules of Origin" (in English "rules-of-origin requirements").

"How much of the added value is created in the EU and how much know-how will be in the EU?," EU Trade Commissioner Valdis Dombrowski recently asked in an interview with the "Financial Times." "Is it just an assembly plant or is it a proper car production factory? That is a substantial difference."

Agreement with Brazil

In Brazil, BYD and Great Wall Motors have reportedly agreed on a localization rate of about 50 percent in order to be able to export vehicles manufactured there to other Latin American markets without tariffs, according to media reports.

However, such localization negotiations are always challenging for both sides. For instance, the EU hopes that by attracting globally leading Chinese electric vehicle manufacturers like BYD to set up operations in Europe, it can advance electrification and also create jobs within the EU.

From a Chinese perspective, it is frustrating that Europe, the USA, and Canada resort to protectionism and tariffs to curb the growth of the successful Chinese auto industry in order to protect their own companies. At the same time, they are expected to provide "tutoring" with their know-how in the electrification and smartification of cars.

According to a Bloomberg report, Chinese officials have warned Chinese managers not to be seduced by investment incentives in Europe to disclose their secrets. "Made in China" has become a valuable asset worth protecting in the automotive industry for the first time.

*Henrik Bork is the Managing Director at Asia Waypoint, a consulting agency specializing in China, based in Beijing. "China Market Insider" is a project of Vogel Communications Group