Make the Foreign Serve China: How Foreign Science and Technology Helped China Dominate Global Metallurgical Industries
March 1, 2017
This paper seeks to demonstrate that China’s massive investment in capacity to produce metals is not just the result of state support, but because the country is home to the world’s largest and technically advanced metallurgical plants, its companies are able to produce metals at lower cost than most of their foreign competitors.
The first, larger part of the paper analyzes China’s efforts to adopt a blended strategy of “buy and make” to advance its metallurgical industries. Using examples, primarily from the steel, magnesium, rare-earths, and aluminum sectors, the paper documents the steps taken by Chinese enterprises, both private and state-owned, to raise their capabilities in metals-processing technology. The examples in the paper also show how these enterprises have systematically been able to strengthen their domestic capabilities by leveraging international sources of know-how and technology. The section concludes that because of changed circumstances China needs to radically alter its industrial culture and reform its scientific institutions if it is to maintain its lead in the production of metals.
The second part of the paper explains how, in addition to the easy replication of metallurgical plants and its lowcapital cost strength, China has benefited from continual government support so facilities have been built despite there being no economic justification. Such support includes preferential low-interest loans, which immunize enterprises from market signals that can warn against poor financial performance that can precipitate enterprise failure. Government support is a consequence of a policy of using state-owned enterprises to maintain social stability even at the expense of economic efficiency. Despite its financial support, Beijing has at times sought to restrain expansion of its national metals industry; but rather than deter growth government regulations have had the unintended consequence of encouraging the replacement of small and technically inefficient plants with larger and more efficient facilities.
The final part of the paper briefly summarizes the findings and their implications for how the global industry and governments might most appropriately respond going forward to the rise of China’s metallurgy industry. While trade remedies may be appropriate in some specific circumstances, Western industry would be better served by strengthening its advantages in downstream areas of metallurgical industries and cooperating with leading Chinese producers of primary materials. The paper’s title comes from a letter Mao Zedong wrote to students of the Central Conservatory of Music in February 1964 in which he said: “Make the foreign serve China,” by which he meant to adopt the good qualities of foreign cultures to enrich Chinese culture. The paper aims to demonstrate how in the post-Mao era China’s leadership has applied this aphorism to the development of the country’s metallurgical industries.
Michael Komesaroff is a principal of Urandaline Investments, an Australian consultancy specializing in China’s capital-intensive industries, and a former executive in residence at the School of International Affairs, Pennsylvania State University.
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