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Self-Interest or Self-Immolation? GE Shares Vital Technology with Chinese Company

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Jeff Immelt sits atop President Obama’s Jobs Council, but does his company’s interest clash with the national interest?

The Washington Post reported that GE has signed a joint venture deal with the state-owned Aviation Industry Corporation of China in which the conglomerate will share knowledge of several of its prized next-generation technologies with the Chinese firm in exchange for access to the booming Chinese aviation market.

Writes Howard Schneider:

"Under the agreement with AVIC, GE avionics will be on board a new Chinese commercial airliner that is likely to become a rival to aircraft produced by U.S.-based Boeing and Europe’s Airbus. The potential competition with Boeing, coming at a time when the United States is fighting to maintain its own manufacturing base, has stirred some American criticism.

But GE executives say they have had no second thoughts. China’s airplane market is booming, and the deal was too important to pass up, they said, even at the cost of sharing the avionics technology.”

Is this a case of GE passing up long-term strategic advantages for short-term gains in market share? Executives at the company say the deal they have arranged with AVIC include “robust protections” such as “strict limits on employing Chinese nationals who have a military or intelligence background.” However, we’ve seen this situation before.

Back in June, we reported that by sharing proprietary knowledge about its 787 plane and outsourcing the construction of its parts to China, Boeing effectively enabled Chinese companies like AVIC and the Xi’an Aircraft Company to gain the technical know-how to build aircraft much like those of Boeing's. The knowledge has now filtered down to the state-owned Commercial Aircraft Corporation of China, which has since put together the C919 -- purportedly for 20% less than its Boeing equivalent, the narrowbody 737. Guess which plane rapidly-expanding Chinese airlines will be purchasing?

At least GE will be creating jobs in America with this new joint venture. GE executives say that some 300 engineers and software designers will be put to work in the US with this deal, but then, the number of Chinese jobs created “would be much higher.”

There’s also another problem with this strategy of keeping research and developing in America and moving manufacturing production abroad that GE and many other multinationals employs. In an article titled “Does America Need Manufacturing?,” Jon Gertner of the New York Times talked about how there is an intrinsic link between manufacturing and innovation that's severed when one is moved away from another.
Industries like semiconductor chips — the heart of computers and consumer electronics — require the establishment of “an industrial commons,” the skills shared by a large, interlocking group of workers at universities and corporations and in government. The commons loses its vitality if crucial parts of it, like factories or materials suppliers, move abroad, as they mostly have in the case of semiconductors. At first the factories leave; the researchers and development engineers soon follow.

The most punishing effect, however, may be the one that can’t be measured — the technologies and jobs that aren’t created because the industrial ecosystem is degraded. The semiconductor industry, for example, led to the LED-lighting and solar-panel industries, both of which are mostly based in Asia now. “The battery is another fascinating example,” Pisano told me. “The center of gravity is Asia. But why?” If you go back to the 1960s, he says, the American consumer-electronics companies decided they were better off in Japan, and then Korea, where costs were lower. “And then you have to ask: Who had the incentives to make batteries smaller or more powerful or last longer? Not the car industry. The consumer-electronics industry did.” This explains why the U.S. is now playing catch-up with lithium-ion batteries. It also underscores the vulnerability of an economy with a shrinking manufacturing sector. “When one industry moves,” Pisano says, “there can be other industries in the future that follow it that you couldn’t even anticipate.”

According to the 2010 report published by the General Aviation Manufacturers Association, the aviation industry is one of the few sectors in US manufacturing that still has a positive contribution to the balance of trade. GE’s deal with China’s AVIC raises questions about whether this is simply the inevitable outcome of globalized competition or if this is the beginning of the hollowing-out of yet another manufacturing industry, one that has arguably a much greater history and stronger American identity than the auto industry. Schneider’s Post article title says that GE is “all-in” with China, and only time will tell if -- and how badly -- Americans will lose this hand.
POSITION:  No positions in stocks mentioned.