It won’t be on Immelt

"It’s on me. It’s on me," GE CEO Jeff Immelt recently told the Wall Street Journal‘s John Bussey in response to a question about the wisdom of transferring technology and production to his new avionics joint venture with China’s state-owned Aviation Industry Corp. (AVIC), a company that supplies both China’s commercial and military aircraft industries.

Presumably, this was Immelt’s way of saying that he would man up and take responsibility if anything went wrong as a result of the deal. That is, of course, an admirable sentiment, but the problem is that it’s not a responsibility Immelt can take because he will never be in a position to actually have to pay for any damage resulting from the deal.

Three points have gotten mixed up in the ongoing discussion of this deal, and it is important to unscramble them. First is the issue of access to the Chinese avionics market being conditioned by Beijing on the transfer of technology and production to China. GE spokespeople keep saying that it was never told it had to make such transfers in order to get the business. This is disingenuous, and Immelt ought to tell his people shut up in order to save his own credibility. Sure, no Chinese official ever made such a direct statement to GE. But it is insulting to trade and industry experts for GE to keep denying what everyone knows to be true. Beijing’s five-year plans and its Buy China policies along with its Buy Indigenous Technology policies have made it abundantly clear to all observers of the scene that China intends to develop its own cutting-edge aviation and avionics industries and that it intends to do so by insisting that production and technology development for the Chinese market be done to the maximum possible extent in China. GE is doing this joint venture because it knows it has no chance of getting the business without technology and production transfer, and every China and trade expert in the world knows this to be the case.

The second issue is whether the technology GE is planning to transfer could leak into China’s military aircraft programs and thereby endanger U.S. national security at some future date. Related to this question is also that of whether the technology could leak out and be used by other Chinese companies to take business away from other U.S. aerospace companies like Boeing. GE says it has devised strict procedures that have been approved by the U.S. Departments of Defense and Commerce to prevent such leakage. Further, GE insists that technology is the heart of the company and asks rhetorically, "Why would we give away our future?"

When Immelt insists that "it’s on me," this is what he means. In other words, he’ll take responsibility if somehow the technology gets away from GE into places where it could come back to hurt GE or the United States.

Historical experience strongly suggests that leakage of technology in these kinds of circumstances is virtually impossible to prevent. Look, we couldn’t prevent the North Koreans from getting nuclear weapons technology even though we made every effort to stop them and certainly were not doing joint ventures with North Korean state-owned companies. And while it’s admirable for Immelt to be willing to take responsibility if something bad happens, as a practical matter, what price exactly is Immelt likely to have to pay? By the time it happens he and his top managers are likely to be long gone from the scene with bonuses and retirement packages in hand. And even if something bad happens sooner, what will "it’s on me" really mean to the companies or the U.S. forces that have to face the consequences?

But let’s assume for sake of the argument that nothing leaks out of the joint venture. So GE is cool. It continues to control the technology, and its joint venture gets the business. Earnings soar. The stock price skyrockets, and Immelt and his team and the shareholders all collect big bonuses and dividends. The deal will thus prove to have been good for GE. But what about the United States? This avionics technology is something in which U.S.-based production and workers are the world leaders. The United States has a competitive advantage in this stuff. These are jobs that Americans can claim a better right to than anyone else. Under normal market conditions, without the necessity of technology transfer in return for market access, there would be no need of a joint venture. All the technology development and production would be done in America and would be exported in exchange for something that is better done in China or elsewhere. So under circumstances of no leakage, GE may come out looking golden, but the United States would still take a hit.

Oh sure, you can argue, as GE does, that by getting the China business and doing part of the work in the United States, GE is creating new U.S. jobs as well as jobs in China. And there is some truth to this argument. But it ignores the fact that the United States is getting less than the full value of its competitive advantage while at the same time that national advantage is being whittled away with the full support of multinational GE. In other words, GE can and would benefit at America’s expense. So nothing would be "on" Immelt. The cost would be on the American worker, researcher, and U.S.-based producer.

That leads to the final point. The real problem here is not GE or Immelt. They are doing what is logical and best for them in the prevailing circumstances. As former Commerce Department official James Lewis told Bussey, "U.S. companies are making the right decision from a business point of view, but it might not be the right decision for the country. We’ve been passive (as a country) in deciding how to deal with China’s aggressive industrial policies."

The real problem is the U.S. government or, rather, its absence from the discussion. China is conditioning access to its markets on technology and production transfer. There is no back pressure from the U.S. government. The CEOs are in a situation in which if they don’t accede to China’s pressures, they’ll lose the business and they get no help from Washington in dealing with the pressures. So the rational thing to do under the circumstances is to play China’s game. What is desperately needed is an American game in response. Washington needs to change the circumstances, level the playing field, give GE and Immelt a new set of incentives. The White House has to articulate an American economic interest, and that is not the same thing as the interest of GE or of any other particular company or set of companies.

So why focus so much on Immelt, you may ask. Well, it’s true that in most respects he is acting no differently from any other global CEO and, let me make clear, no differently from how he should as the head of a global enterprise like GE. But there is one respect in which he is quite different. He is the chairman of the President’s Commission on Jobs and Competitiveness and as such is the chief outside economic advisor to the president. He should be thinking of the American interest as well as the GE interest. He should recognize that the costs to the American economy and the American worker can’t be "on" him, and he should be telling the president to change the game.