Sep 16, 2011

Role of Government in Nurturing Innovation (Part II): China’s Awkward Quest for Bullet Train Technology

We recently talked about the role of government in nurturing innovation.  The clear evidence was that China would not be in the wind power industry had it not been for government regulation:
But the fact is that none of this would have been remotely possible if China did not regulate the market to allow its own industry to become strong. May be there is a place for regulation - as long as the protection is for a short time, targeted and with significant competition. We know that rivalry and scarcity are drivers of innovation - so as long as money is not given out freely, it might encourage innovation and give national companies a chance to become strong. Countries could consider outsourcing innovation when necessary, not just buy the whole system from a foreign provider. May be the reason why Indian regulation did not work was because they did not have a large number of companies competing for contracts. In fact, they probably regulated the number of companies...
The article China’s Awkward Quest for Bullet Train Technology in Knowledge@Wharton highlights a few more considerations.  Here is the overall background:
It took just seven years for China to build the world’s biggest -- and purportedly most advanced -- bullet train system. That lightning speed and the political capital invested in the showcase program come with more liabilities than acclaim. The collision on July 23 on a high-speed line near Wenzhou may not have derailed Beijing’s ambitions to dominate cutting-edge passenger rail technology, but it has shed light on the program's shortcomings.
Some problems should have been expected because development of large systems such as wind mills or high speed rail (HSR) is complex and requires time.  There is only so much a country can do to accelerate implementation to catch-up with others.
Transportation experts assert that the accident was a consequence of China's haste. New lines have opened in quick succession, and corners inevitably cut to meet deadlines -- the most visible evidence of which being the low-tech, crumbling rail stations dotted across the country that have yet to be upgraded. “China’s high-speed rail program proceeded at breakneck speed, with a far faster roll-out than any other country has attempted, and this was seen as a matter of pride,” says Richard Di Bona, technical director of LLA Consultancy, a transport consulting company based in Hong Kong.
According to Tsung-Chung (T.C.) Kao, a professor at University of Illinois's Rail Transportation and Engineering Center at Urbana-Champaign, China is facing up to the fact that it failed to spend enough time testing the high-tech system. “They built the HSR system and networks too quickly and there are many bugs … that have to be fixed now,” adds Kao, a former vice president of Taiwan High Speed Rail Corporation, who was part of an 11-year HSR project on that island.
The rush to speed-up innovation caused problems in Chinese wind power industry as well.  I still believe that there is a role for government in nurturing innovation.  However, the overall scale/type of problems in the high speed rails is a bit different.   Here are some lessons from the article:
  • Unlike wind mills, there were only a couple of companies developing HSR in China.  Unlike wind mills, there was only one major customer (Railway Ministry).  The lack of customer and supplier diversity actually prevented true competition / rivarlry and and reduced the drive for innovation.  The lack of diversity also drove corruption.
  • HSR became primarily driven by politics and national pride instead of innovation.  This is much harder to do when there is a diversity of customers and suppliers.
    So in the contract decisions was based on politics, rather than technology, says Ryoji Nakagawa, a professor of international relations at Ritsumeikan University in Kyoto.
    National pride reached its apex this spring when a Railway Ministry spokesperson boasted during the unveiling of the Beijing-Shanghai bullet train that the Chinese rail system had surpassed Japan’s renowned Shinkansen
  • HSR is much more complex compared to wind power and requires significantly larger investment.  It is difficult to maintain government nurturing environment for very long-term.  Even at break-neck speed, roll out of HSR probably takes a order of magnitude higher resources and time.
    “It took 18 years for Japan to develop a bullet train that could run at 300 km/h after the Tokaido Shinkansen opened in 1964," says Kamiura. "We spent so much time just improving rail track technology to be able to take the speed from 200 km/h to 300 km/h.” Even today, the maximum speeds for most of Japan’s bullet trains are 240 km/h and 270 km/h. The Sanyo line, connecting Osaka to Hakata in Kyushu, raised its maximum speed to 285 km/h in 1997 and to 300 km/h in 2006.
  • Chinese HSR companies were very closely tied to foreign partners and the project became technology transfer instead of innovation.
    The reality, experts say, is that at best China has integrated the technology of its overseas partners, rather than leapfrogging it. The main so-called CRH2 trains rolled out as China’s own were produced under a joint venture between state-owned CSR Qingdao Sifangand Kawasaki Heavy Industries. According to experts, the CRH380A is based on the same technology as the CRH2 and Japanese bullet trains, and on July 23,it was a CRH2 train that slammed into a train developed in a joint venture between Bombardier of Canada and CSR Sifang Locomotive and Rolling Stock Company, known as a CRH1.
Finally, the national pride also led to pressure to file for patent protection (to demonstrate that China was innovating).  It is important for R&D managers to remember that Trade Secrets are probably as important as - in not more than - patents in a true IP-based innovation protection strategy.
Seeking such patents is a double-edged sword. Commercial considerations are only part of the reason why China wants such patents. “Again, this is a political statement," says Kao. "They want to show off their success to the top leaders and bosses,” who want evidence that the government's huge investment in the bullet train program is paying off.
But the process would force China to reveal details of its technology -- even possibly that it made limited changes to the technology transferred by its foreign partners, Nakagawa contends.