8
Simultaneous Sessions

The second session was organized into four breakout sessions, each with presentations and discussions describing the development of Chinese and Indian innovation capacity in a broad sector of the economy or set of related industries – information technology and communications, transport equipment (automobiles and aircraft), pharmaceuticals and biotechnology, and energy. The sessions were intended to highlight and compare key microeconomic trends rather than thoroughly analyze each sector.

INFORMATION TECHNOLOGY AND COMMUNICATIONS

At the outset of the IT session, Ashish Arora of Carnegie Mellon University made two main points about the global software sector. First, the United States still dominates the software industry in a unique way; second, South Korea, Israel, and Japan represent a group of comparably sized second tier producers. In his view, the main story is the “utter dominance” by the United States, with Israel leading the group of “underdog” countries. The United States continues to hold this dominance because it is home to a key population of highly sophisticated software users (Table 3).

In China, 90 percent of total software sales are to the domestic market, a market pulled along by the country’s economic boom rather than leading it. Nevertheless, the technological competence among Chinese firms probably exceeds that of Indian firms. Indian firms are moving into higher value-added software development, Arora said, but not necessarily advancing technology. “Human capital is the key,” he emphasized (Table 4).

Roy Singham of ThoughtWorks, Inc., had a different perspective on the shifting locus of IT innovation. “We’re at the beginning of a 150-year shift in power to Asia.” The shift will not be drastic, he speculated. The European Union will remain a significant part of the picture for some time, as will Brazil and Argentina. Still, he suggested, a new “tricycle of innovation” will hinge on the centers of Stockholm, Beijing, and Bangalore.

The emphasis on human capital and value for social capital, Singham said, explains Scandinavia’s lead in global IT competitiveness per capita. A value on collaboration, not just competitiveness, can spur global innovation. In this new environment, agility of innovation and fast solutions for new business models will command a premium. He posited that there are two revolutions taking place--one on the process side of enterprise and a second on the product side. In terms of process, he expects to see a less hierarchical approach than he observed on a recent tour of Indian software companies, which reflected the assembly line model from the industrial revolution. Arora responded that the factory model remains workable in how it addresses the high turnover of employees and ensures a company can consistently deliver its product. Is the factory approach a cause of staff turnover or an effect of it? Singham replied that ThoughtWorks has a low 5 percent attrition rate among its staff in India, in large part because it values its employees.

A generation ago the Asian diaspora tended to settle in the United States and elsewhere overseas, but now they are likely to return to their home countries. That change will have a profound effect, according to Singham, who questioned, “How did the United States, which was home of open intellectual debate, lose that advantage?”



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8 Simultaneous Sessions Roy Singham of ThoughtWorks, Inc., had a The second session was organized into four different perspective on the shifting locus of IT breakout sessions, each with presentations and innovation. “We’re at the beginning of a 150- discussions describing the development of year shift in power to Asia.” The shift will not Chinese and Indian innovation capacity in a be drastic, he speculated. The European Union broad sector of the economy or set of related will remain a significant part of the picture for industries – information technology and some time, as will Brazil and Argentina. Still, communications, transport equipment he suggested, a new “tricycle of innovation” will (automobiles and aircraft), pharmaceuticals and hinge on the centers of Stockholm, Beijing, and biotechnology, and energy. The sessions were Bangalore. intended to highlight and compare key The emphasis on human capital and value microeconomic trends rather than thoroughly for social capital, Singham said, explains analyze each sector. Scandinavia’s lead in global IT competitiveness per capita. A value on collaboration, not just competitiveness, can spur global innovation. In INFORMATION TECHNOLOGY AND this new environment, agility of innovation and COMMUNICATIONS fast solutions for new business models will command a premium. He posited that there are At the outset of the IT session, Ashish Arora two revolutions taking place--one on the process of Carnegie Mellon University made two main side of enterprise and a second on the product points about the global software sector. First, side. In terms of process, he expects to see a the United States still dominates the software less hierarchical approach than he observed on a industry in a unique way; second, South Korea, recent tour of Indian software companies, which Israel, and Japan represent a group of reflected the assembly line model from the comparably sized second tier producers. In his industrial revolution. Arora responded that the view, the main story is the “utter dominance” by factory model remains workable in how it the United States, with Israel leading the group addresses the high turnover of employees and of “underdog” countries. The United States ensures a company can consistently deliver its continues to hold this dominance because it is product. Is the factory approach a cause of staff home to a key population of highly sophisticated turnover or an effect of it? Singham replied that software users (Table 3). ThoughtWorks has a low 5 percent attrition rate In China, 90 percent of total software sales among its staff in India, in large part because it are to the domestic market, a market pulled values its employees. along by the country’s economic boom rather A generation ago the Asian diaspora tended to than leading it. Nevertheless, the technological settle in the United States and elsewhere overseas, competence among Chinese firms probably but now they are likely to return to their home exceeds that of Indian firms. Indian firms are countries. That change will have a profound moving into higher value-added software effect, according to Singham, who questioned, development, Arora said, but not necessarily “How did the United States, which was home of advancing technology. “Human capital is the open intellectual debate, lose that advantage?” key,” he emphasized (Table 4). 33

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34 THE DRAGON AND THE ELEPHANT TABLE 3 The International SW Industry (2002) Countries Sales ($B) Empl (‘000) Sales/Empl Sales/GDP Brazil * 7.7 160 ** 45.5 ** 1.50% China 13.3 190 ** 37.6 1.1 India 12.5 250 50 2.5 Ireland (MNE) 12.3 15.3 803.9 11 Ireland (Dom) 1.6 12.6 127 1.3 Israel * 4.1 15 273.3 3.7 US 200 1024 195.3 2 Japan ** 85 534 159.2 2 Germany * 39.8 300 132.7 2.2 Argentina ** 1.35 15 89.3 0.5 SOURCE: Adapted from Arora, A. & Alfonso Gambardella, 2005. "The Globalization of the Software Industry: Perspectives and Opportunities for Developed and Developing Countries," in: Innovation Policy and the Economy, Volume 5, pages 1-32 National Bureau of Economic Research, Inc. *=2001; **=2000 TABLE 4 The Software (SW) Industry in India ($B USD) F Y 2004 FY 2005 FY 2006 FY 2007 IT Services 10.4 13.5 17.8 23.5 -Exports 7.3 10.0 13.3 18.0 -Domestic 3.1 3.5 4.5 5.5 ITES-BPO 3.4 5.2 7.2 9.5 -Exports 3.1 4.6 6.3 8.4 -Domestic 0.3 0.6 0.9 1.1 Eng, R&D Serv and Products 2.9 3.9 5.3 6.5 -Exports 2.5 3.1 4.0 4.9 -Domestic 0.4 0.8 1.3 1.6 Total Software and Services Revenues 16.7 22.6 30.3 39.5 SW Exports 12.9 17.7 23.6 31.3 Hardware 5.0 5.9 7.0 8.5 Total IT Industry (including Hardware) 21.6 28.4 37.4 48.0 SOURCE: Adapted from Indian IT-BPO Industry Factsheet (2008) NASSCOM China, compared to 15 million in India. Frictions in labor markets are different from Personal computer shipments that year to China the frictions that exist within capital markets. were 28 million; to India, 7.7 million. In Singham posited that talent is less transportable understanding these markets we will see where than capital—a point that was debated. Arora different products are likely to emerge. maintained that capital and talent can both Multinational corporations are struggling with move; the sticky part, in his opinion, is this shift, while it creates opportunities for local proximity to users. firms in both countries. Jason Dedrick of the University of By building on their domestic market base, California, Irvine, spoke on IT market local firms can launch into the global market, as opportunities in China and India (Table 5). He Haier and Huawei in China have done. The amplified a theme noted by others—innovation Chinese government’s strategy of developing is most intense in sectors where users are domestic technology and dictating standards may nearby. This means that the greatest potential be a miscalculation, insofar as it is hard for any for innovation exists in sectors where Chinese firm to keep teams moving ahead on both the and Indian markets are growing rapidly. By domestic standard and the international format. 2006 there were 415 million cell phone users in

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SIMULTANEOUS SESSIONS 35 Yallavalli reiterated that with time-to-market Table 5 Emerging Market Opportunities shrinking for innovations and with customers wanting to be part of value creation, it is not as China India necessary to climb the technological ladder as it Installed PC base, 54 million 15 M is to move toward customer satisfaction and the 2005 PC shipments, 2006 28 M 7.5 M value chain. “Innovation is the only means to Domestic software $3.9 B $1.4 B sustain customer loyalty in a flattening world,” market he said. Domestic IT services $6.2 B $3.7 B Lee Ting of of Lenovo observed, “True market innovation occurs [mainly] at headquarters.” In Cell phones in use, 415 M 150 M Lenovo’s case, they aimed to keep innovation 2006 hubs intact in a larger system. For example, the Cell phone shipments, 130 M 75 M* ThinkPad design process is still driven from its 2006 former IBM base in Raleigh, North Carolina, SOURCE: Dedrick, *new subscribers although Lenovo is based in Taiwan. Domestic firms in China are well situated to innovate for Indian firms are gaining in scale and scope, the domestic market and get ahead of MNCs. with implications for U.S. enterprise. One PayPal, for example, shut down its Chinese implication for U.S. workers is that there will be operation because it did not adapt to the Chinese greater needs for project management, cross- payment preferences. There is not only a need technology skills, business and industry for innovation based on technology but also for knowledge, as well as cross-cultural innovative new business models. management. Dedrick characterized this as a Patrick Canavan of Motorola, the session need for “T-shaped people,” with the vertical moderator, told how in Motorola’s experience base of the T representing technical depth and the company’s innovation in China came, in one the top horizontal bar representing broad instance, from a disappointed company management familiarity. executive who engaged local technical expertise Balaji Yallavalli of Infosys Technologies, to find a market sensitive solution. Cycles of Ltd., illustrated how the “world is flattening” by staff departures among competitors affect the describing his own situation—managing a dynamics of innovation. company based in India, working from Plano, On the question of whether formal education Texas, and New York. The structural shift in would play a large role in the shift ahead, demographics is strengthening the position of Singham noted that 10 percent of ThoughtWorks developing countries. At the same time, employees do not have bachelor’s degrees, just technological applications are “being pushed out as some leaders of the U.S. software industry of companies” and into the hands of their lack them. “Software is a weird world,” he said, customers, in various ways ranging from air where innovation is correlated more with passengers who print their own boarding passes, creativity than with education. Creativity is to greater user involvement in software more crucial in designing new software than in development. His observations about shifts in engineering a new hardware chip, for example, the dominant modes of thinking resonated with and is the quality on which ThoughtWorks other participants in the IT session. Technology places a premium. Singham insisted that the can help predict the future turns in a sector and company has a global cap on the number of identify ways to weather those changes. engineers it hires. “We believe they stifle Yallavalli described Infosys as “a company that creativity,” he said provocatively. can scale ideas quickly,” not an R&D-based Alongside growing creativity, there is a company, but one based on innovation to meet growing acceptance of risk in China and India, business model needs. He cited a recent news linked to their demographic changes. There are article suggesting that outsourcing was also structural differences in risk-taking in sufficiently successful that India was now different societies. Bankruptcy in Japan, for exporting jobs abroad. example, can spell disaster; in Silicon Valley it

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36 THE DRAGON AND THE ELEPHANT largely nonexistent in India at the moment, but is far easier to recover from bankruptcy. The the government aspires to develop one. latter encourages innovators. Warren Harris, the chief executive officer of Asked about what activities may shift to the design services firm INCAT, offered the Asia, the panel made several suggestions. State- complementary observation that the automotive owned enterprises and their international and aerospace industries are moving from partnerships will shift the dynamic, Canavan outsourcing to globalizing innovation. That is, noted. For example, China Mobile’s stake in the where innovation in these industries has been Pakistan market and China’s investment in limited mostly to companies in the developed Africa would help China grow its influence in countries, it is now being spread much more the global market. Others felt the shift would broadly around the globe. Access to qualified depend less on government policies and more on personnel is a key driver in this globalization of technological innovation coming out of Indian innovation, he said. firms and business-model innovations in China. A principal theme of the session was the By 2020, one predicted, India’s largest firms growing sophistication of engineering services will be capitalizing on the domestic market in India and China. “If anyone has the notion there. that the variety and types of engineering services Martin Kenney pursued the question of being outsourced to India are at the lower end of different types of creativity, in particular at the value-added chain, they are seriously out of Infosys. Yallavalli acknowledged tensions date,” according to Pete Engardio, BusinessWeek between fostering an open and creative senior writer, who described some of the design environment on the company campus and the work he observed on recent visits to a number of expectations of stakeholders to find a serious, service firms in India. Companies there are no-nonsense approach. Among their clients, he working on a variety of sophisticated projects in noted a kind of double standard; they want the aviation and automotive sectors, he said, employees to be creative but not at the expense from fuselage design and avionics to passenger of the existing corporate structure. car platforms, and this work is being done in India not only by the multinationals but also by Indian-owned and domestically headquartered TRANSPORT EQUIPMENT companies. This development, in Engardio’s view, is a This session focused primarily on cars, function of the disintegration of vertical trucks, and civilian and military aircraft as these integration in global manufacturing, the are expected to be areas of major domestic emphasis on modular production and much market growth and manufacturing capacity shorter production cycles, the importance of expansion in both China and India. embedded software in many products, and the In the part of the session devoted to aviation, effects of various government policies, such as Thomas Pickering from Boeing discussed that those that require a significant domestic company’s operations and plans in both India contribution in manufactured items. The and China. In particular he noted that the movement of design services to places like India opening of Indian defense procurement will and China has in large part been a function of mean greater opportunities in that country for cost, he said, but increasingly it is also being western companies such as Boeing and Martin done in pursuit of talent. In short-run economic Marietta. It promised to become a major terms, the most important topic discussed in the market. session was the rapid growth of both the Chinese Rishikesha Krishnan of the Indian Institute and Indian markets for passenger vehicles and of Management in Bangalore reported that the the efforts of domestic producers in both Indian government is thinking about what it will countries to ensure that they have the capacity to take to move from its current engineering design meet that demand. capabilities in aviation and aerospace to the Paul McCarthy, PriceWaterhouseCoopers development of a domestic production capacity consultant on the automotive industries in both in those areas. Such a production capacity is

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SIMULTANEOUS SESSIONS 37 multinational car manufacturer has a presence in India and China, gave an overview of market China, Zhao said, but these companies mainly trends in both countries. Between 2006 and conduct only component innovation in China 2011, China’s production is projected to increase and keep their architectural innovation at home. by nearly 50 percent, while India’s production is It is the architectural innovation—changing the expected to jump by nearly 110 percent in the overall layout of the vehicle, including power same period. Although Chinese production train development—that is the core competency capacity is still more than three times as large as of automakers, and the multinationals generally India’s—7 million versus just over 2 million try to protect their core competencies by doing vehicles per year – expansion is occurring at this architectural innovation at home. comparable rates. In the past, multinationals have accounted McCarthy characterized innovation in the for almost all the cars sold in China, McCarthy two industries in different dimensions. One noted, but that is rapidly changing. In 2007, cars pattern is domestic companies’ adoption of made by domestic manufacturers accounted for Western and Japanese innovations by copying, an estimated 32 percent of the domestic car licensing, or entering into joint ventures. He market, up from just 11 percent in 2004. The illustrated Chinese and Indian innovation, in its Chinese auto makers are competing on the low most primitive form, with a series photographs end, and, as a result, are far less profitable than of pairs of vehicles—for example, a 2007 pickup the multinational auto makers selling cars in truck made by the Chinese company Chamco China. Furthermore, the R&D expenditures of and a 2004 Toyota Tundra. They appeared Chinese automotive companies are still very low nearly identical. compared to producers in developed countries— Purchasing rights to designs and 0.63 percent versus 3 to 5 percent in western components, on the other hand, offers an companies. “Even though we are seeing more opportunity for learning by domestic companies and more market and design innovation, as well as business opportunities for foreign technical innovation still remains weak,” intellectual property holders. There are a McCarthy said. “Chinese companies need to number of examples, including Cummins’ develop their R&D capability in core licensing of its diesel engine technology to technologies, such as engine, transmission, and Dongfeng of China and Tata of India. chassis.” Multinationals’ R&D activity in China or The Chinese government is encouraging the India constitutes a second type of innovation automotive industry to develop its own common to other industries. “Every major indigenous innovation, and China’s 11th Five- multinational automaker has at least one Year Plan explicitly singles out automotive research facility in either India or China,” innovation and development for advancement. McCarthy observed, the result as in other cases The government’s objectives outlined in the plan of lower costs and skilled labor availability. include upgrading local R&D capabilities, The third category consists of local creating more environmentally friendly and companies developing innovations independent energy-efficient vehicles, building indigenous of MNCs. One example is Tata’s recently brands, and speeding up industry consolidation. announced development of an extremely low- As for prospects that Chinese manufacturers will cost automobile for mass markets with wide become major suppliers in other markets, the income disparities. This may drive a low-cost development of brand identification is perhaps automobile revolution among international as even more critical than technological innovation. well as Chinese and Indian manufacturers. Chinese auto makers are handicapped in this Other session participants focused primarily regard not only by a history of poor quality but on the development of the Chinese passenger also by characteristics of the domestic market. automobile market, which Zheng Jane Zhao of In particular, brand name recognition has little the University of Kansas Business School economic value in China. projected will continue to grow at the current Furthermore, Zhao said, the Chinese robust rate for about 15 more years, becoming a automotive industry is hampered by its huge factor in the global market. Every major

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38 THE DRAGON AND THE ELEPHANT Recently, Cooney said, a number of fragmentation, with many smaller companies multinational pharmaceutical and biotech competing for market share. “Most car makers corporations have been outsourcing work to are not producing at economic scale,” she said, China and India. This work represents several “and 121 out of 128 car brands produce less than different points in the value chain. A number of 0.1 million units each year. There are too many multinationals have R&D efforts in the two players in each segment, and yet new entrants countries, for example, and many of them are are still entering.” Thus the government is developing partnerships with indigenous pushing for consolidation, and the MNCs may companies, particularly in India, to work on be helping the process. Volkswagen, for early-stage discovery and other research. There example, has consolidated production planning are also a large number of multinationals doing and purchasing processes between its two manufacturing in the two countries. India has Chinese joint venture partners. It is likely that the largest number of FDA-approved consolidation will be pronounced trend in the manufacturing facilities outside the United industry in the next few years, Zhao suggested. States, while China is somewhat less advanced Over the past decade, Morgenthaler noted, with respect to best manufacturing practices. Chinese auto makers have generally relied on Both countries also serve as the site for alliances with multinationals for much of their much clinical trial work, Cooney said; and quite innovation, but this is being questioned because recently China has surpassed India as the site of the alliances limit the Chinese companies’ the largest number of trials outside of the ability to control their own destiny and brand developed countries. Vincent Ling, vice identity. Thus they are now tending to learn by president of molecular biology at Dragonfly outsourcing and acquisitions rather than by Sciences, documented the shift in locus of alliances. clinical trials with Food and Drug Meanwhile, according to McCarthy, Chinese Administration data. In 1997, 85 percent of all firms are aspiring to move up the ladder from safety and efficacy clinical drug trials were copier to joint venture partner, to semi- and then performed in the United States, 10 percent in fully independent innovator. The best known Europe, and only 5 percent in the rest of the automaker, Chery, he judged to be somewhere world. By 2005, the United States accounted for between phase two and phase three, with only 66 percent of clinical trials, Europe 13 government-supported ambitions to achieve percent, and the ROW more than 20 percent. phase four in the next few years. Several factors are driving this offshoring, Cooney said, including the lower cost of building manufacturing facilities in India and PHARMACEUTICALS AND China compared with the United States, as well BIOTECHNOLOGY as lower labor costs, although the latter are increasing rapidly. Multinational corporations Charles Cooney of the Massachusetts are also attracted by the large markets in the two Institute of Technology, who chaired the countries and, on the clinical side, by the breakout session on pharmaceuticals and extremely large patient populations. biotechnology, used the concept of value chain Intellectual property regimes are another to frame a discussion of the role of China and determinant of how the biopharma sector has India in the biopharma sector. A therapeutic evolved in China and India, according to product goes through a series of steps in its Cooney. For example, Indian patent law for development—discovery, formulation, clinical many years allowed only pharmaceutical trials, regulatory approval, manufacturing, and process, not product, patents. As a result, Indian distribution. Each of those steps may offer companies have highly developed process opportunities for an emerging economy to technologies and strength in manufacturing and participate. Which steps in this value chain are selling generic drugs. In Cooney’s opinion, the most likely areas that China and India will Indian and Chinese companies will soon make major contributions in the next decade or dominate the generic sector. two?

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SIMULTANEOUS SESSIONS 39 little guidance about what was expected. Ling described the corporate experience of Chinese workers are willing to work hard and Dragonfly Sciences in performing a range of comply with instructions, yet they are reluctant specialized and customized activities. to participate in problem-solving discussions or Dragonfly performs discovery biology, serves as to offer new ideas and opinions. an overflow laboratory for large pharmaceutical One of the keys to Dragonfly’s outsourcing companies, and acts as an implementation lab has been maintaining what Ling called for virtual biotech companies that need research “granularity,” where data are regularly performed. Because of the high cost of these communicated from Shanghai to the U.S. office. services in the United States, Dragonfly set up Because the biological experiments they perform its main operations in China, with a small are generally messy and often produce headquarters staff in the United States. unanticipated results, the experiments need to be Currently, the Shanghai laboratory employs 20 overseen by an experienced manager with a full-time workers while the U.S. headquarters constant eye on the data being produced. office has three. Furthermore, Dragonfly’s MNC clients often The imperative for the pharmaceutical lack confidence in the integrity of the research industry, according to Ling, is to manage the results. They required that the Shanghai escalating cost of drug development, testing and workers upload data daily for review by the U.S. approval and/or increase the success rate in the staff. testing phase. “You have outsourcing simply Another disadvantage of working in China is because the cost has to be managed,” he said. the cost of reagents and the difficulty in getting “As more small and mid-tier pharmaceutical them quickly. “They may have all the companies strive to become clinical equipment,” Ling opined, “but you cannot organizations, the high cost and low success necessarily get the materials.” In spite of these rates of human studies will create significant disadvantages and inconveniences, Ling challenges for that sector and lead them to adopt concluded, the lower cost of labor outweighs all outsourcing and other clinical practices that big other factors. Ling expects this advantage to pharma is using to control costs and manage persist at least for the next decade. risks.” Surprisingly, another part of the value chain Speaking of Dragonfly’s specific experience that may offer opportunities for innovators in in outsourcing to China, Ling summarized a China and India is the discovery of new number of advantages and disadvantages. A pharmaceuticals. Kuan Wang from the National major advantage is the cost of scientific labor in Institutes of Health spoke about the possibility Shanghai, which is one-fourth to one-seventh the of using knowledge from the traditional cost in the United States. On the other hand, the medicines of China and India to develop new Chinese biotechnology industry is very young treatments. There have been many success and most scientists are newly minted Ph.D.s or stories involving the traditional herb medicines have less than three years of experience. as sources of drug discovery, Wang said. GL- Chinese bioscientists tend to have good learning 331 is an anticancer drug in Phase II trials, for skills but most of them perform well below the example, and PA-334 is in preclinical studies for level of their peers in the United States and use as an inhibitor of HIV reverse transcriptase. Western Europe. U.S.-trained biomedical A more familiar example is curcumin, the active scientists generally want to remain in the United substance in the spice turmeric. Cell and animal States to conduct research. Regulation of studies have indicated that it has anti-tumor, biomedical research and product development is anti-inflammatory, and anti-pain properties and less onerous in China than in the United States, that it may be useful against neurodegenerative according to Ling; but it also tends to be more diseases such as Alzheimer’s. In its natural form arbitrary and unpredictable. Dragonfly’s its effectiveness is limited because of poor Shanghai laboratory was set up to comply with solubility in water and poor bioavailability, but U.S. as well as Chinese regulations. encapsulating it in nanoparticles has been shown Nevertheless, Chinese inspectors often provided

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40 THE DRAGON AND THE ELEPHANT developing countries that they need to worry to increase its bioavailability, and data suggest more about climate change. There is a suspicion that curcumin in this form inhibits pancreatic that the arguments for reducing greenhouse cancer cell lines. gases are really an attempt to slow down growth China has a number of ongoing efforts to in China and India as they become serious push the development of traditional medicine, economic competitors of the United States, Wang said, but there are a number of challenges Europe, and Japan. A new approach is needed if facing that development. Foremost is the lack of China and India are to work with the developed western-style placebo-controlled studies countries on climate change. establishing the efficacy of these traditional The first step out of the impasse, according treatments. A great deal of research must be to Ahuja, will be for the developed countries to done to explore the clinical pharmacology and transform their emissions goals into firm pharmacodynamics of these traditional commitments, as articulated by the Global medicines; and studies are needed on how these Leadership for Climate Action, which medicines behave when combined with western recommended that developed countries should medicine, including the possibility of adverse commit to reducing their emissions by 30 interactions. Intellectual property rights will percent between 2013 and 2020, while the also be tricky to establish and disputes difficult rapidly industrializing countries, such as India to resolve. Traditional medicines themselves and China, should reduce their energy intensity cannot be patented, but derivatives can be, so by a similar amount. Energy intensity is the research will be needed both to identify the ratio of a country’s energy consumption to its effective ingredients in traditional medicines and gross domestic product (GDP), so it measures to work from those ingredients to discover how much energy a country uses to produce a compounds that can be patented. Finally, there certain economic output. is no large international market for traditional Reducing energy intensity by this amount in medicine from India and China. Nonetheless, if China and India will require a variety of these challenges can be overcome, traditional innovations but is feasible, Ahuja said. Over the medicine can provide a platform from which past several decades, for instance, the average China and India could become innovators in the energy intensity of all countries around the pharmaceutical and biotechnology worlds. world has been declining by 1.25 percent per year. In India, energy intensity has declined by about half over the past 30 years. ENERGY Trevor Houser, a director at China Strategic Advisory, discussed Chinese energy use and The energy session’s first speaker, Dilip Chinese energy R&D (Figure 11). He noted that Ahuja of the National Institute for Advanced in 1980 the entire Chinese energy sector was Studies in Bangalore, India, described China’s controlled by the government; without any profit and India’s role in the link between energy and motive at work, investment was based purely on climate change. Because more than two-thirds government plans. Since then much of the of anthropogenic greenhouse gases are energy- energy sector has been turned over to private related, Ahuja said, the need to reduce carbon corporations, resulting in large gains in emissions from power generation is clear. And efficiency. China’s energy intensity today is because the greatest growth in power demand only one-third of what it was in 1978. On the over the next several decades is projected to other hand, the private operators of energy come from China and India, innovations in the companies have no incentives to limit emissions. production, distribution, and use of energy in The demand for energy in China is these two countries will play a major role in increasing at a phenomenal rate, Houser noted. determining how well the world responds to the Currently China has about 680 gigawatts of threat of global warming. installed generating capacity, much of it added On the other hand, many in China and India very recently. About 100 gigawatts was brought are skeptical about the motivations of those in on line two years ago and another 100 gigawatts the developed countries who tell those in the

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SIMULTANEOUS SESSIONS 41 $700 Government Enterprise $653 $589 $600 $512 $494 $500 $417 $400 $309 $300 $200 $83 $100 $21 $17 $15 $10 $2 $0 Coal Mining Generation Transmission Equipment Oil & Gas Refining FIGURE 11 Chinese spending on energy R&D ($ millions, 2004) SOURCE: Houser diversify their power generating capacity last year. It is projected that by 2020, China will somewhat. For example, China will add about have installed another 1000 to 1300 gigawatts of 40 gigawatts of nuclear power over the next 15 capacity. To put that in perspective, the total to 20 years, making the country the largest current generating capacity of the United States nuclear power market in the world; but nuclear is now about 900 gigawatts. power will account for only 3 to 4 percent of the “When you have power demand growing total installed capacity in 2020. Initially, the that fast, it creates challenges for innovation nuclear technology will be supplied by because you are trying to throw whatever you Westinghouse, which will build several nuclear have on the grid as quickly as possible,” Houser plants and then transfer the technology to local observed. Large-scale blackouts in 2004 and companies that will build that next thirty plants. 2005 pushed China to add power as quickly as Hydroelectric power is the major hope for possible, with very little investment in R&D and meeting China’s goal of supplying 15 percent of reliance instead on the technology most familiar its energy demand with renewable sources by to Chinese energy companies—pulverized coal. 2020, Houser said. The plan is to have 240 The Chinese power industry has become very gigawatts of hydro power by then, but that is the adept at building coal-fired power plants in a equivalent of building a new Three Gorges Dam period of shortage, taking about six months from every two years, which may not be politically start to finish. Last year, coal accounted for 90 feasible. Natural gas will be used to a certain of the 100 gigawatts added by Chinese power extent in power generation, but it is needed for producers, with hydro and wind accounting for other purposes, such as feedstock in chemical the remainder. plants and for household uses. Thus coal will The future will look very similar, Houser continue to be the source of a large majority of said, although Chinese companies are trying to

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42 THE DRAGON AND THE ELEPHANT installations, and emission standards are being the country’s power for the foreseeable future. prescribed for nitrogen oxides. Because China will account for so much of The Chinese Ministry of Science and the world’s new power generation capacity over Technology is supporting R&D efforts in a the next couple of decades, according to Houser, number of coal technologies, including the innovation choices made in China will be circulation fluidized boiler (CFB) plants, which crucial not just for that country but also for the are high efficiency and low polluting; rest of the world. He suggested that it is ultrasupercritical pulverized coal power crucially important to get the incentives for generation technology, which is also high cleaner technologies right in China because the efficiency but has back-end clean-up to keep country’s huge market and position as a global emissions at a minimum; integrated gasification manufacturing base for energy technology. If combined cycle plants, which can be almost as China builds a large amount of capacity with clean as plants burning natural gas; and coal wind power, for example, world prices for that gasification and liquification technologies. technology will drop significantly. But the same Some of these technologies have already been is true of dirtier technologies such as pulverized put to work in China, Zhao said. In April 2005 coal. Costs will go down, encouraging increased China opened a 300-megawatt CFB plant made worldwide use. with imported technology and equipment; and in Lifeng Zhao of Harvard’s John F. Kennedy June 2006 it started up a 300-megawatt CFB School of Government spoke on prospects for plant that was made domestically. More than clean coal technologies under development in ten other 300-megawatt CFB plants are currently China. Agreeing with Houser that coal will under construction. Other innovative coal dominate China’s energy needs for the next few technologies being explored in China are direct decades, she said that as a result, China is hydrogen production from coal and focusing a great deal of attention on clean coal simultaneous carbon dioxide control and technologies. removal of gaseous pollutants during coal A number of agencies in China are funding a combustion. variety of approaches to clean coal technology, Finally, Zhao noted, even though China is Zhao said. A great deal of attention is being going to be heavily dependent on coal for the paid to increasing efficiency, for instance, and to foreseeable future, there is still room for various pollution control technologies. New innovation in other sectors—nuclear, wind, and coal-fired plants are being equipped with flue solar cell technology, among others—and other gas desulfurization (FGD) units, and existing countries should be thinking of China as a plants will need to be retrofitted with the FGD market for innovative technologies in these units to meet standards on emissions of sulfur areas. dioxide. New plants are also setting aside space for future flue gas denitrification equipment