Originally published on BusinessWeek.com.

China exporters trade on U.S. know-how

THE ASSOCIATED PRESS

April 15, 2007

By DANIEL LOVERING

PITTSBURGH

At a small laboratory in Pittsburgh, workers assemble 2-by-3-foot metal boxes connected to computers–devices used to measure the hydrogen-absorbing qualities of various materials.

The instruments, designed to help researchers study possible sources of hydrogen fuel for hybrid vehicles, carry a hefty price tag –about $100,000 each. Advanced Materials Corp. has sold units to customers in Italy, Singapore, Taiwan, India and other countries.

But one nation has bought more than any other: China.

The country better known for flooding the U.S. market with cheap toys and other imports is injecting billions of dollars into the bottom lines of U.S. manufacturers of certain big-ticket, highly engineered products –including locomotives, nuclear power plants and aircraft. But analysts warn that demand will likely wane as China’s manufacturing capabilities improve.

“There is no question that jobs are being created here in the United States … because of increased exports to China,” said Louis B. Schwartz, president of China Strategies LLC, a Pittsburgh-based consulting firm. “This is economy-wide. There are so many nooks and crannies.”

The products generally depend on the expertise of workers and technologically advanced facilities in the United States. Advanced Materials builds its high-tech instruments domestically because local workers have the necessary skills and scientific knowledge, according to S.G. Sankar, the company’s president and chief executive officer.

Larger companies tell a similar story.

Westinghouse Electric Co., which is owned by Japan’s Toshiba Corp., recently forged a deal worth an estimated $4 billion to build four nuclear reactors in China. That contributed to the nuclear energy company’s plan to build a new $100 million research center in the Pittsburgh area and add at least 1,000 employees within five years.

At a production facility in Erie, GE Transportation, a division of General Electric Co., has built nearly 100 locomotives for China and has orders for 300 more. The 450-acre plant, which employs about 4,600 people, has been adding employees, said Patrick Jarvis, a company spokesman. Engines for the locomotives are made in Grove City, about 68 miles away, at a plant that employs more than 800 workers.

Another company, Berlin-based Bombardier Transportation, recently completed 11 transit vehicles for Beijing’s airport at a facility outside Pittsburgh.

The company, a subsidiary of Bombardier Inc. of Montreal, has plants across the globe and three joint ventures in China. But for the people movers, “there’s not a capability to build that technology in China yet,” said company spokesman David Slack. “It’s high-tech work,” he said.

U.S. exports to China rose 32 percent in 2006 compared with the previous year, from $41.8 billion to $55.2 billion, according to figures compiled by the U.S. Department of Commerce. Imports grew about 18 percent, from $243.5 billion to $287.8 billion, during the same period.

Leading exports included integrated circuits, parts and accessories for automated data processing machines, parts for oil and gas field machinery and semiconductor measuring and checking devices. Other major exports included aircraft, medical and surgical instruments and plastics.

Pennsylvania alone exported about $1.26 billion in machinery, transportation equipment and other goods to China in 2006, up from $933 million in 2005.

“We’re seeing exports go up by double digits each year … which translates into jobs back here,” said Dan Onorato, Chief Executive of Allegheny County. He will be traveling to China with a delegation in mid-April.

Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business, said demand for sophisticated U.S.-made products had grown because “the Chinese can’t make those products for themselves yet, and you can’t readily transfer production over there.”

China’s advantageous currency exchange rate, which keeps its exports cheap and has long been a point of diplomatic contention, has not affected high-tech products as much as it has goods made with low-cost labor, he said.

“The real problem on the export stuff is that they’re not letting stuff in,” Morici said. “It’s hard to sell cars there. … They want you to build them there.”

Companies that can export to China will benefit, but “there is a real danger we will export a good deal of our industrial know-how and have nothing left to sell,” Morici said.

The United States has filed complaints against China at the World Trade Organization over copyright policy after U.S. Trade Representative Susan Schwab said American companies were losing billions of dollars annually from piracy levels in China that “remain unacceptably high.”

For some companies, it may be better to avoid putting such intellectual property rights at risk by doing business with China, said Dennis Unkovic, a lawyer who works with companies that export products to China.

“Before, it was a manufacturing job-shop for the world,” he said. Now, “they’re buying more of the kinds of products they wouldn’t have bought five or 10 years ago,” such as medical technology devices.

At the Advanced Materials laboratory, the chief executive officer, Sankar, said part of his small firm’s cachet is that it sells more than scientific instruments –it offers his 30 years of experience and the support of his staff.

“I don’t think we can move this operation to China or any other country at this point,” he said. “It wouldn’t make sense.”