OM in the News: China Discovers the Dangers of Reverse Engineering

It has been almost a year since we wrote a blog on how China has pulled ahead of competitors by reverse engineering many high-tech products, including bullet trains. It turns out though, that such an approach is not without dangers as The Wall Street Journal  (Oct.3, 2011) points out under the front page headline “China Bullet Trains Trip on Technology” (with a 5 min. video clip embedded in the article). As you may recall, during a July lightning storm, two of China’s bullet trains collided in Wenzhou, killing 40 and injuring 100’s. More recently, two trains collided in Shanghai, injuring 280.

 Thus arises the issue of deep international distrust over China’s questionable use of foreign technology, including weak intellectual property protections. For in fact, key components in China’s high-speed rail system come from Japan’s Hitachi Ltd. Fearful that Chinese technicians might reverse engineer and steal their signaling technology, Hitachi locked many components in a “black box” design. This approach made it harder to copy, but as a downside, made it harder to understand during testing and use. By withholding technical blueprints, known in Japanese as zumen, troubleshooting the gear was also more difficult. “Providing zumen means we completely trust the buyer of our technology”, says a Hitachi exec. He adds, we do not want  a buyer who would “become a competitive threat in other markets”.

In less than 7 years, China has built a bullet-train network larger than the ones Japan and Germany took decades to construct. According to the CFO of the company working with Hitachi on the signaling systems, China has made it a “very clear mandate of localizing the product. Basically, foreign players are not allowed to bid independently for high-speed rail projects”.

Discussion questions:

1. Why don’t all companies transferring technology to China protect their “zumen”?

2. How has corruption played a factor in China’s rail system?