China's Procurement Rules Vex Global Vendors
Regulations, Quietly Released in October, Appear to Require Chinese Government Agencies to Buy Technology With 'Indigenous Innovation'
BEIJING -- Global technology, service and manufacturing companies are raising concerns to the Chinese government over new rules they fear could restrict or block foreign vendors from selling high-tech gear to China's government agencies.
More than two dozen major industry groups from North America, Europe and Asia -- representing most of the world's major technology companies -- sent a letter Thursday to Chinese ministries saying they were "deeply troubled" by the Chinese requirement.
The companies are responding to rules released in a circular the Chinese government posted on a Web site in late October but didn't publicize. The new rule requires vendors to gain accreditation for their products before they can be included in a government procurement catalog of products containing "indigenous innovation."
Companies that aren't listed in the catalog will theoretically be allowed to bid for government contracts. But those that are listed will apparently be given preference. The government required applications to be filed Thursday.
At stake are billions of dollars of Chinese government spending on personal computers and application devices, communication products, office equipment, software and energy-efficient products.
The overall size of government contracts that would be covered is unclear. In all, purchases through public procurement -- including nontech goods -- totaled 599.09 billion yuan ($87.7 billion) in 2008, more than triple the amount in 2003, according to the Ministry of Finance. Public procurement will account for 14% of the 40 million PCs sold annually in China this year, estimates Bryan Ma, analyst for market research firm IDC.
Signatories to the letter include the American Chamber of Commerce, the Business Software Alliance, the Semiconductor Industry Association and the Information Technology Industry Council.
The letter reflects global industry concerns that the criteria outlined in the notice would make it extremely difficult for foreign suppliers to sell into the procurement market, even for companies that have made substantial investments in China.
"Implementation of this system will restrict China's capacity for innovation, impose onerous and discriminatory requirements on companies seeking to sell into the Chinese government procurement market, and contravene multiple commitments of China's leadership to resist trade and investment protectionism and promote open government procurement policies," the letter read.
People familiar with the letter said China's move is an apparent effort to press companies to transfer technology to Chinese companies.
It's a "series of policies designed to promote Chinese companies...to press foreign companies to transfer technology and locate [research and development] in China, and to discriminate against foreign companies and weaken their ability to compete," said Jeremie Waterman, Senior Director of Greater China for the U.S. Chamber.
Officials from the three Chinese agencies that jointly issued the notice, the Ministry of Science and Technology, Ministry of Finance and the National Development and Reform Commission, didn't respond to requests for comment Thursday.
Foreign executives and government procurement experts say they believe the rules don't apply to the massive purchases by companies owned by the Chinese government, though the government didn't respond to requests to clarify the point.
The procurement rules come at a time of rising global concern about protectionism amid continued economic uncertainty. Chinese officials have been among the most vocal in complaining about alleged protectionist measures against their country by other nations including the U.S.
But foreign companies and officials have complained that Chinese rules discriminate against their companies. China's state-owned railway system, for example, is forbidden from using foreign technology in some of its projects this year. China also has rules that openly limit foreign investment in key sectors such as chemicals and information technology.
China is a World Trade Organization member, but it hasn't yet signed on to the organization's voluntary Agreement on Government Procurement, which bars discrimination against foreign companies bidding on government projects.
Public complaint or defiance against government policy are unusual in China, precisely because the state wields so much economic power. But a similar group of technology companies banded together earlier this year to push back against Chinese government plans to require that PC manufacturers include Internet filtering software called Green Dam-Youth Escort with all new PCs shipped in China. After protests from those groups, the U.S. government and Chinese consumers, authorities delayed the mandatory installation plan indefinitely.
The procurement circular expands on rules issued in 2006 that explicitly require government agencies to favor indigenous technology in their purchases, as part of Beijing's broader effort to foster domestic innovation and wean China off costly foreign technology.
Foreign business groups have long complained about the procurement guidelines. But until the recent announcement of the indigenous-technology catalog, the government's requirements were seen as vague.
Companies say they learned of the new requirements only in November. In its 2009 White Paper, the American Chamber of Commerce in China said the indigenous product catalog was yet another "burdensome obstacle for U.S. companies."
Other nations, including the U.S., have procurement policies that give preference to products that are produced locally. But industry officials say that basing procurement preferences on the origin of a product's intellectual property is unusual and difficult to enforce. They point out that it could also affect Chinese companies, many of whose products include foreign innovations.
The November notice leaves many issues unclear, but "it does look like the intellectual property must be developed and owned in China, and it does look like trademarks must be originally registered in China," says Jeff Hardee, vice president and regional director for the Business Software Alliance in Asia, an industry that represents companies including Microsoft Corp., Adobe Systems Inc. and Cisco Systems Inc.
The circular says application instructions specify that all products in the catalog must "have Chinese intellectual property and proprietary brands," and intellectual property by applicants must be "totally independent of overseas organizations or individuals."
The Thursday application deadline gave companies a window of weeks to apply.
"With these provisions, it would be very difficult for any products that are copyrighted by foreign companies to qualify. Even for wholly owned companies or joint-venture companies in China, it would appear to be very difficult," Mr. Hardee says. "The uncertainties, coupled with a very short deadline, we think [creates] a very challenging situation. And so we would encourage the government to reconsider going forward with this policy."
—Kersten Zhang contributed to this article