Home > economy, Opinion, technology > Is restriction of US export to China killing its own hi-tech industry?

Is restriction of US export to China killing its own hi-tech industry?

September 9th, 2011 Leave a comment Go to comments

Here’s one aspect of China’s manufacturing capacity that is rarely mentioned in mainstream western press. By restricting export to China, the US government is giving the largest manufacturing markets to its main competitors. The US hope that by restricting hi-tech export would prevent China from developing its own hi-tech industry. However, the reality is that companies from Germany, Japan, France and Taiwan etc are the major winners. As of now mainland and Taiwan companies accounted for 55% of the world market in Five-axis CNC machine. Technology is not a stagnant and exclusive national attribute, any country who aspire to it and willing to work hard and invest in it will develop it. There is just no exception to the rule.

There’s actually a time when the US sees China as a military allies against the Soviet Union. From 1986-1989, the US actually stop export of arms to Taiwan and instead sold military equipment to the mainland. Unfortunately, the June 4th incident destroyed all that cooperation. So instead of using GE LM2500 gas turbine like in the Type 52, the subsequent Type 52B and Type 52C destroyers use Ukrainian turbines, and instead of buying more Sikorsky S-70 helicopters, China ordered hundreds of Mil-17 from Russia. And to complicate matter, the Type 54 frigate, Type 39 submarine use engines and sub-component imported from France, Germany and Russia.

The fear that China will reverse engineered all products is a myth. There are just some sub-system or weapon system that is simply cheaper to import than to develop oneself. For example, the Chinese navy might have requirement for ten GE LM2500 turbines, however, no factory in China can make them cheaper than GE. The simple rule of economic of scale still matters, the US have over 300 in service in their navy and also export them to 29 countries. The same apply to engines and parts for the S-70, it simply doesn’t make economical sense for Chinese industry to make parts for them.

Even the vaunted US military imported many system that its industry does not developed. Small arms design such as M240, M249 which are Belgian in origin, the M9 is Italian and the HK 416 is German. The M1A1 tank uses German main gun, British CHOBHAM armor, smoke dischargers and Belgian machine guns. Even more advanced items like the T-45 Goshawk, UH-72 Lakota, HH-65 Dolphin are simply off the shelf foreign design.

In reality the US embargo of hi-tech products actually hurt US economy more than it does that of China because if the embargo was never in place in 1989, US companies would have made lots of sales taken up by producers from other countries. The biggest competitor to US as a manufacturing hub does not come from China alone, in fact Chinese industries making those dollar store item (soon to be two dollar item) are sun set industry that no business or banks in the US want to invest, the razor thin margin of 2-3 % from millions dollar of investment in factory does not make financial sense. However, US politicians and consumers seems oblivious to the fact that it is companies from EU and Japan, Korea, Taiwan etc that is having the largest TOTAL trade deficit with the US. On top of that, due to closer wages and technological content, it is where US industries should thrive in competition but did not. The problem clearly lies with the positioning of US industries, restrictive trade practice and wrong focus. Can anyone imagine Boeing, Intel, AMD, HP, Apple etc not allowed to export to China? Basically by cutting off the 2nd largest import market (soon to be the largest), the US administration is doing no favour to its industry, and economic well being of the country as a whole.

Last but not least, the US never look to its import of oil and gas as a deficit. By not addressing this real issue and blaming dollar store items and OEM manufacturing from China as the cause of the decline of US manufacturing is bordering on lunacy. By using the Apple iPhone, iPad as example, one can clearly see that China’s industrial input into the products stand at around 5-10% for nearly most OEM export. The same hold true for all Chinese OEM exports to countries worldwide. US and other multi-national corporations make anywhere from 3-10 times more on each product exported from China than Chinese OEM factories.

The following article clearly illustrate the disadvantage US companies suffered from the export restriction not just to China but many countries. It is a long read. Feel free to give your thoughts and comment.


U.S. Precision Machine Tool Industry Is No Longer A Global Competetitive Force

By Richard A. McCormack
U.S. producers of some of the most technologically advanced machine tools are in trouble, according to an assessment by the Department of Commerce. Sales of high-precision five-axis machine tools are declining. U.S. share of global exports is in a freefall. Foreign companies in China and Taiwan have caught up with U.S. technical capabilities, rendering stringent U.S. export controls moot. U.S. companies are being purchased by foreign rivals. A lack of training programs has created a shortage of skilled workers able to use the complex machinery. Commercial and U.S. government customers prefer foreign machine tools. Export controls are hampering foreign sales. The entire U.S. machine tool industry spends only $1 million a year on research on five-axis machine tools.

These are some of the findings from a “Critical Technology Assessment” conducted by the Commerce Department’s Bureau of Industry and Security.

U.S. producers of five-axis machine tools had sales of $253 million in 2008, down 11 percent from 2005 sales of $284 million. That was before the U.S. machine tool industry suffered a meltdown in 2009, when domestic consumption tumbled by 60.4 percent, according to the Association of Manufacturing Technology.

Sales of five-axis machines to domestic customers from U.S. producers declined by 19 percent from 2005 to 2008, from $242 million in 2005 to only $195 million in 2008. There are six American companies dedicated to producing five-axis machine tools, and at least 20 in China. Five-axis tools are used for the production of precision components in the aerospace industry, in making gas and diesel engines, automobile parts, and throughout the medical, textile, oil, glass, heavy industrial equipment and tool industries. “Many other industries are discovering the advantages of these machines,” says the Bureau of Industry and Security (BIS).

Yet “only a handful of U.S. producers actually manufacture five-axis machine tools in high volume and most generate less than 10 percent of their annual net finished machine tools sales from five-axis machine tool business lines,” according to the market and technology research report from BIS.

U.S. producers of five-axis machine tools exported only $58 million worth of equipment in 2008. In a tally of global exports of all machine tools, the United States — with exports of $740 million — accounted for only 4.3 percent of global exports in 2007.

In its survey of 61 American end-users that purchased 502 five-axis machine tools worth a combined $900 million, imports accounted for 70 percent of purchases. “Across model types, the number of imported models greatly surpasses the number of domestic models for grinders, mill/turns [and] machining centers,” says BIS. “However, domestic-produced mills slightly outnumbered imported mills.” The average purchase price for a five-axis machine tool was $330,000.

BIS also surveyed 109 U.S. machine tool distributors. It found that 80 percent of the five-axis machine tools they sold in the United States between 2005 and 2008 were imported, with Japanese and German machines making up the majority of models. “Five-axis machine tool distributors, most of which are selling only non-U.S. five-axis machine tool models, have clearly positioned themselves more effectively in the domestic market,” says BIS. “The growth rate of distributor domestic five-axis simultaneous control machine tool sales in 2005-2008 was 3 percent,” says the study. “This compares to a precipitous decline of 20 percent in domestic sales among U.S. producers over the same 2005-2008 period.”

There are not many U.S. producers of five-axis machine tools. Only six of the 109 U.S. machine tool companies surveyed devote 25 percent or more of their current production capacity to these high-end machines. The remaining producers of machine tools have either shifted production to other machine tool lines, or have moved production offshore. Other producers say U.S. export restrictions have forced them out of the business.

Companies making five-axis machine tools in the United States take a lot longer to build them than foreign rivals. BIS gathered information on 477 five-axis models, 96 of which were produced in the United States and 381 of which were imported. “BIS found that U.S. producers take almost twice as long as foreign producers to manufacture custom-built models, on average,” says the study. “However, U.S. producers were able to manufacture standard models 25 percent faster than their foreign competitors.”

Custom-built American models contain 84 percent U.S. content (with eight models reporting 100 percent U.S. content). “In contrast, 87 percent of reported imported machine tool models contained an average level of only 3 percent U.S. content,” says the study.

BIS asked end users to assess U.S. and non-U.S. producers on 21 purchasing factors, including such things as spindle speed, machine durability and precision and repeatability. “The United States has a competitive advantage in only one — service/support,” says BIS. “These findings are consistent with U.S. customers’ high demand for non-U.S. produced five-axis simultaneous control machine tools. A majority of purchasers do not have any domestic produced machine tools of this type in their capital stock. Several end-users claimed that they were not aware of any domestic producers capable of meeting their purchase needs. One commercial end-user responded in the survey that, ‘The overall precision, accuracy, machine tool features and control capability is not available in the United States with reasonable delivery or cost.”

BIS found that half of the commercial five-axis machine tools are purchased for government contracts. The majority of these purchases are used solely for the purpose of government work. “Non-U.S. produced models made up 64 percent of five-axis simultaneous control machine tool models in the inventory of U.S. government contractors,” says BIS.

BIS also assessed foreign producers of five-axis machines. It found that not one of the 45 companies that are indigenous to Brazil, China, India, Russia and Taiwan use U.S. technology, parts, components or materials. China has 20 indigenous five-axis machine tool companies; Taiwan has 22. None of these companies have to deal with the types of export restrictions facing American firms. As a result, these companies are able to produce all the machine tools that are in demand in China and Taiwan, plus they are “able to produce in sufficient quantity to export to other LRCs,” says BIS.

One of China’s five-axis machine tool makers has 24 distinct models. China now has 28 companies capable of building more than 1,000 CNC machine tools. There are 130 Chinese companies with annual capacity of more than 100 machine tools. The country is now supplying most all of its own demand, with only 10 percent of the market being supplied through imports. “In 2005, approximately 59,600 units of CNC machine tools were produced in China,” according to the BIS report. In 2007, the combined amount of CNC metal-cutting and forming tools produced in China was 126,268, more than double the amount produced in 2005. China is now supplying its own demand for five-axis machine tools used throughout its military.

The BIS quotes the Export Compliance Working Group of the American Chamber of Commerce in the People’s Republic of China as saying: “Given the existing domestic and joint venture development and the foreign availability of high-level machine tools, U.S. companies could not make a material contribution to China’s military development. China’s military demands are already satisfied by domestic and foreign supply.”

The United States exported 515 five-axis machine tools between 2005-2007, and only 12 of these went to China. DMTG, China’s largest producer of machine tools, exports products to more than 100 countries.

The Bureau of Industry and Security is in charge of licensing the sale of five-axis machine tools for export. From 2004 to 2007, it issued licenses for the sale of 148 machines, but only 34 of them were sold and delivered. BIS asked the U.S. producers and distributors who applied for the export licenses why so few of the orders were fulfilled. “Many respondents indicated that the customer cancelled the sale after the export license was obtained or bought a competitor’s product,” says BIS. “One Chinese customer cancelled a sale because it took the U.S. company seven months to obtain an export license, and in the end, the license conditions were too extreme in the customer’s view.”

The number of licenses issued for export of five-axis machine tools to China dropped from nine in 2006 to only three in 2007. “As one exporter noted, ‘the costs associated with the uncertainty of obtaining a license [and] the protracted process and impact on customer relations offset the financial rewards of pursuing the [five-axis] business.’ ”

The few remaining U.S. producers all said that export controls are impacting their ability to remain competitive globally. Foreign customers can obtain the comparable systems much faster from European and Japanese companies. European and Japanese governments process export licenses twice as fast as U.S. export control agencies. One U.S. five-axis machine tool producer told the BIS analysts: “Foreign entities with knowledge of the multi-axis simultaneous control machine tool industry view the U.S. export control policies and requirements as an additional burden to consider when dealing with U.S. multi-axis machine tool manufactures.” As a result, they no longer even consider U.S. producers when shopping for five-axis machine tools.

Categories: economy, Opinion, technology Tags:
  1. Charles Liu
    September 9th, 2011 at 10:02 | #1

    Allow me to give you a personal example as illustration.

    I once had an inquiry from a customer in SZ who wanted to buy some 2nd hand CNC machines (Excellon Mark VIe Airbearing, 3-axis 4 spindle) to make 2-layer PCB for video cards, not exactly rocket science. I then found these 20 year old equipment in a mothballed factory in California. Easy, unbolt them from factory floor, find a logistics company to put them in container and ship them to China, parts are still available and machinists in China are great at bringing these machines back to life.

    Wrong, these near-junk equipment with software on 5.25″ floppy disks are still classified as restricted, and I needed to go thru the hoops to apply for export exemption. The same equipment were available from Italy and Italy had no export restriction, needless to say this American lost out.

  2. September 9th, 2011 at 10:59 | #2

    Also, this idea that the Chinese must steal American IP in order to make technological advances is a HUGE handicap for America. U.S. media propaganda breeds this idea in the American mindset Chinese cannot invent.

    To my knowledge, no one I have ever worked with in the U.S. has ever searched in Chinese literature to see what ideas they are coming up with abroad.

    If we look at the search revenue share of Google, it means tons of Chinese people are searching in English on Google.com.

    The point here is that the flow of ideas and information is completely tilted towards China’s favor.

    America crawls while China runs.

  3. xian
    September 9th, 2011 at 12:58 | #3

    Short answer is yes. Americans have a strange perception where they act out their plans as though they were the only country in the world. The same phenomenon is seen with all the plans they concoct for bringing back manufacturing to the US. They all fall apart when you point out that there are foreign competitors willing to fill the holes they’ve left. This doesn’t even occur to the average American.

    Nothing wrong with reverse engineering things though, it’s a fine form of progress.

  4. September 9th, 2011 at 13:18 | #4

    @Charles Liu
    Yes, I have a friend who worked in the aerospace industry in the US. Even after going through the lengthy process of getting the permit for export to a Chinese, the FBI actually showed up at their office and do an investigation.

  5. September 9th, 2011 at 13:35 | #5

    The US still has a lot of head start in many hi-tech industries but the export restriction will certainly hurt the industry in the long run if it is continued. I don’t think the people in the industry has this false illusion that other people cannot innovate, however, the policy makers seems to believe that.

    I almost have a laugh another day having a conversation with someone who said that Canada’s Bombardier is the third largest aircarft maker in the world after Airbus and Boeing. I politely told him that Brazil’s Embraer is third and has been that for almost a decade. When Nortel goes under, the typical reaction in Canada is that China’s Huawei and ZTE have stolen its trade secret. However, they ignored the fact that both are still going strong despite no longer having anybody to copy.

    Most US folks thought the universe revolves around them. They failed to realize that all those dollar store items and OEM products would cost more in raw material costs alone if they are to be imported and to be manufacture in the US. This does not take into consideration the environmental costs. That’s why it amazes me when Trump and even Romney suggest putting a tariff on Chinese imports (which contained MNC input) will create employment in the US. I actually hope the US administration would try that for a month or more. After that experiment failed it will put a stop to this nonesense once and for all.

    My point in regard to reverse engineering is that it is only done when economically feasible or when it is necessary.

  6. Charles Liu
    September 9th, 2011 at 13:36 | #6


    Dual-use technology can be a real which hunt sometimes. And the enforcement is very arbitary. Dell and Gateway had export violations that resulted in small fines, while Asian-American small business owners are often assumed disloyal, prosecuted with espionage charge, heavy jail sentence and maximum fine akin to collective punishment of the family.

    And people say China’s judiciary is corrupt.

  7. raventhorn2000
    September 9th, 2011 at 13:41 | #7

    Solyndra-gate crisis builds in DC for Obama’s stimulus plan.

    *if you haven’t heard, US solar tech company Solyndra declared bankruptcy about 1 week ago.
    Yesterday, FBI raided Solyndra’s Fremont California office over possible “fraud, mismanagement” investigation, a sealed investigation.
    Today, FBI raided/talked to Solyndra’s executives (homes), including CEO Brian Harrison (whom I had the displeasure of meeting before).

    At the heart of the investigation: Solyndra received about $530 Million (more than 1/2 $billion) in guaranteed Federal stimulus loans in 2010. Brian Harrison came on as CEO in 2010. They effectively managed to lose $0.5 billion in 1 year.

    (Also, there was some questionable recent “financial restructuring” of the company, so that now all the bank investors would stand in line 1st to recover their losses through company’s sale of equipment and patents, but US taxpayers would effectively get NOTHING.)

    Hmm… I think Molycorp might be next.

    Taking bets, gentlemen.


  8. September 9th, 2011 at 13:53 | #8

    Solyndra is not the only, Evergreen and SpectraWatt also filed for bankruptcy in Aug 2011. Coincidence?

    The article talks about Chinese government subsidy as one cause of US companies’ demise but failed to explain why despite having half a billion from the US govn’t, Solyndra.


  9. September 9th, 2011 at 15:46 | #9

    Agreed the U.S. is way ahead in many industries.

    I have friends who work at Cisco, and talking to them, they indeed see Huawei as a worthy competitor, technology-wise too. Perhaps it’s less clear cut. I have worked with some customers where they had to send production software code into factories in China, and they would go through crazy lengths to obscure their source code. After trying such schemes for a while, they realize they created so many problems and decided to abandon.

    My prior comment wasn’t clear. I meant to say, with the general U.S. attitude that people in China cannot innovate, there is less of a pursuit of ideas from China. The reverse is true. In this sense, China gets to advance at a much faster pace, because she is absorbing ideas externally as well generating her own. Relatively speaking, of course.

  10. September 10th, 2011 at 06:43 | #10

    The US should allow the export if China can find it from other sources such as Russia, France…

    Some technologies have been stolen by China. US should also blame herself for not protecting these secrets.

  11. September 10th, 2011 at 07:00 | #11

    Yes, common folks from the western world has this prejudice that Asian, including the Japanese and Korean cannot innovate. However, it is the make up and quality of the economy that allow grounds for innovation. As Asia’s economy catch up more and more new innovation will come from there AGAIN. Everybody seems to forget that with the invention of compass, rudder, watertight compartment, gun powder and cannon, nobody can sail the seven seas and invade with impunity.

    You are right. One major the East asian region experience such tremondous growth after WWII is a lot of learning from the rest of the world. The common Chinese still look up to US products. I will take GM as an example, GM is doing very badly in Europe and Japan because people there considered GM’s products inferior. However, GM will sell over 1 million vehicles in China this year. The European and Japanese wouldn’t want to be seen in a Buick but the Chinese still has pride in owning one. More attack on China will simply brought backlash to US products in China.

    Although doubters are quick to point out that as the cars are manufactured in China, no jobs are created in the US. What a load of BS. Let’s say GM make $2000/car and split the profit evenly, you are talking about $1 billion profit going back to GM, Detroit yearly on sale of just one million cars. How many jobs would this create in the US? The same goes for Boeing, Dell, Apple, HP, and even Cocal Cola and MacDonald etc. Disney will have two theme parks in China. The one in France is barely surviving.

    If the press do an in-dept analysis of US trade relationship with all its major trading partner like Canada, China, Japan, Germany and Korea, you will come to the conclusion that Chinese market gives the most profit to US companies. The other countries on the list are those that generate real deficit for the US. Of course the press will never do that. So all the politicians and union will always bark up the wrong horse and the problem can never be solved! The reality is US companies make more profit from China than vice versa, the best kept secret in today’s business world.

  12. September 10th, 2011 at 07:18 | #12

    @Charles Liu
    The reason my writing focus on the military aspect is that the US has underlying fear that all those hi-tech stuff will go into military technology in China. However, the relationship is not always like that, before June 4th and the fall of the Soviet Union the US actually supplied military technology to China.

    Selling military technology to Red China is extremely difficult and was not done officially until 1985-1989. Prior to that it was done in a clandestine way. I read that in the late 1970s during an exchange between Chinese and US naval officers, the Chinese side lament that they have very weak anti-submarine capability. At that time the Chinese consider Soviet sub as the no.1 threat. Read the following and see if you detect any fishiness.


    The truth of the matter is that as US cannot legally give military tech to PRC, the US navy “accidentally” shot several torpedoes that was “luckily” captured intact by Chinese fishermen. Of course with June 4th and the fall of the USSR, the US started viewing China as a threat. So no more luck picking up advanced weaponary.

  13. September 10th, 2011 at 07:40 | #13

    I agree on the first point, if those technology are for sales by others US companies should benefit too.

    The US has “stolen” its fair of technology over the years too. The fact is technology cannot be “stolen” by countries that invest in R&D and infrasrtucture to acquire it. If you do not have the foundation you would have nothing even if the technology is give free to you.

  14. jxie
    September 10th, 2011 at 21:40 | #14

    For the same reason, China has been blocked out of the ISS (International Space Station) despite the calls by Europe and Russia, the so-called other ISS “partners”, to accept China as a member. The irony of that is, this in itself may actually render the demise of the $100 billion ISS, and leaves China as the only nation with a permanent manned space station.

    A chain of slow-mo events are unfolding in front of us. First due to budgetary reason, NASA didn’t replace the manned space flight capability of the grounded shuttle program, and solely relies on the future commercial manned space launching, which at best is years away. In the meantime, the plan was to utilize the Russian Soyuz rockets and capsules to bridge the gap to bring cargos and astronauts back and forth. However, shortly after the ending of the US shuttle flights, Russia Soyuz suffered an accident and is temporarily grounded. For the time being, this leaves China as the only nation with manned space launching capability.

    The clock is ticking, if the Russian Soyuz is not cleared for launch soon (November is the current deadline), the ISS will have to be de-crewed. A prolong period of de-crewing can cause the ISS to drift out of its orbit and eventually crash down to earth. Stay tuned and see how this may turn out. In the meantime, Tiangong-1 may be launched later this month.

  15. September 11th, 2011 at 07:31 | #15

    US has been protecting their secrets. There are back fires to us:

    Many high tech jobs with security clearance have been denied to Chinese in US esp. those who were not born locally.

    I bet many research projects offshore from Microsoft to many hardware companies choose India over China.

    China eventually has to protect its own IP otherwise they cannot go to the next stage of innovations.

  16. jxie
    September 11th, 2011 at 09:55 | #16

    Tony, these specific cases have very little to do with protecting trade secrets, but rather caused by a viewpoint that is quite prevalent among many hawkish ones in the US government (legislative and administrative branches) — China is an ideological enemy, a communist country, just like another Soviet Union. It’ll be a much longer comment if I try to put them in my pop psych version of Freudian chair. Consider this only —

    China’s 1H11 fiscal revenues stood at 5.7 trillion yuan. Projected based on last year’s distribution, the annual run rate is at 10.9 trillion yuan, or US$1.7 trillion. This may surprise you: it’s already within shouting distance of the projected 2011 US federal fiscal revenues, which are between $2.0 and $2.1 trillion. However, China’s 2011 military budget (core) is only about 5.5% of its fiscal revenues, by far the lowest among all major nations, including Japan. On the other hand, the US has spent something like 35% on military (core).

  17. May 12th, 2012 at 14:34 | #18

    raventhorn2000 :
    Solyndra-gate crisis builds in DC for Obama’s stimulus plan.
    *if you haven’t heard, US solar tech company Solyndra declared bankruptcy about 1 week ago.
    Yesterday, FBI raided Solyndra’s Fremont California office over possible “fraud, mismanagement” investigation, a sealed investigation.
    Today, FBI raided/talked to Solyndra’s executives (homes), including CEO Brian Harrison (whom I had the displeasure of meeting before).
    At the heart of the investigation: Solyndra received about $530 Million (more than 1/2 $billion) in guaranteed Federal stimulus loans in 2010. Brian Harrison came on as CEO in 2010. They effectively managed to lose $0.5 billion in 1 year.
    (Also, there was some questionable recent “financial restructuring” of the company, so that now all the bank investors would stand in line 1st to recover their losses through company’s sale of equipment and patents, but US taxpayers would effectively get NOTHING.)
    Hmm… I think Molycorp might be next.
    Taking bets, gentlemen.

    A bit late for updating my predictions,


    Molycorp stock fell from around $55 to under $30 in 2 days around September 20, 2011, only 11 days after I discussed it above. Today it’s lingering around $25.

  18. May 12th, 2012 at 17:58 | #19


    Molycorp recently face investor lawsuit, over allegation that Molycorp management made misleading statements to “pump and dump” the stock.


  19. Zack
    May 12th, 2012 at 19:25 | #20

    the US had better make up its mind on whether or not to sell hi tech to China, Treasury Secretary Geithner’s ‘reconsideration’ notwithstanding. China’s fast getting to the point where they’re going to overtake the US scientifically and technologically; as times goes by, the US will find its bargainin position growing weaker and weaker and China’s positioning, strengthening with every year.

    On the other hand, if the US discriminates against China and sells hi tech to India with a view towards containing China, whilst excluding China from being able to make the same purchases, then naturally, the US will find itself on the other end of Chinese reprisals; reprisals which wouldn’t at all surprise me if they involved undercutting US technological firms and owning them.

  20. Black Pheonix

Time limit is exhausted. Please reload the CAPTCHA.