Over the centuries, the most prosperous cities have been those which mastered technology, made good use of their people and possessed excellent trade routes by land, sea and, more recently, air. It would seem, then, that several cities in or near China have the potential to lift the ancient empire once again into an era of economic and political power.


Nicky Lu, CEO of Taiwan-based Etron Technology, said as much during a panel session on technology at the recent Wharton China Business Forum. In the 18th century, Lu noted, Paris was the indispensable city for world commerce. In the 19th century, it was London. In the 20th century: New York. “In the 21st century, you cannot ignore Shanghai or Taipei.”


Nor, for that matter, can you ignore the synergistic relationship between their respective countries, China and Taiwan. For all the ink that has been spilled chronicling the strained relations between the two nations, experts on the panel said that when it comes to manufacturing, the two opposites exhibit an extraordinary degree of interdependence.


In democratic Taiwan, a well-developed free enterprise system allows the formation of innovative technology companies. They, in turn, exploit greater land availability and lower operating costs in China, mostly in the form of less expensive labor, the speakers suggested. Companies that use this model range from well known Taiwan-based computer maker Acer to less-well known computer chip maker VIA Technologies.


In all of 2006, the Taiwanese government approved $7.64 billion in investments by Taiwanese companies into Chinese projects, according to Taiwan’s Ministry of Economic Affairs Investment Commission. That was a 27% increase over the previous year.


Increasing R&D

The Chinese government isn’t oblivious, either, to the political benefits that accrue from investing in technology. Indeed, the government has decreed a 15-year “Medium- to Long-Term Plan for the Development of Science and Technology.” Among its declared purposes: to reduce China’s dependence on foreign technologies. To do that, it calls for an increase in the portion of GDP spent on research and development – currently about 1.4% — to as much as 2.5% by 2020.


Last year, for the first time, China outspent Japan in R&D, making it second only to the United States, according to the Organization for Economic Co-Operation and Development. OECD predicted last year that through 2006, China would have spent the equivalent of $136 billion on R&D, compared to Japan’s $130 billion and $330 billion for the United States.


Cong Cao, senior research associate with the State University of New York and the University of Oregon, co-authored a detailed report on China’s desire to march into modernity, looking specifically at the 15-year plan. While the plan’s development was initially a collaboration of diverse stakeholders, including technologists, academics and politicians, Cao noted that ultimately it was bureaucrats who spelled out the priorities of the program.


The proverbial glass, Cao said, is simultaneously “half full” and “half empty,” given the potential and the significant challenges the country faces, such as widespread rural poverty. China will also have to come to terms with the paradoxical interests of “the planning economy versus the invisible hand of the market,” Cao noted. After all, much of China’s double-digit annual growth over the years is owed not to central planning, but to foreign investment that includes both ideas and capital.


Yet-Ming Chiang, founder of A123 Systems based in Watertown, Mass., said China presents two big opportunities for his lithium-ion battery firm: first as a place to manufacture its wares inexpensively, and second, as a potentially massive market. A123’s highly engineered batteries are used in DeWalt cordless power tools, among other applications. According to the firm, they are five times as powerful as the batteries they replace, and deliver twice the instant power output of corded, plug-in tools.


Chiang, however, has his sights set beyond the market for construction workers: “I want to talk about the future of vehicle technology.” The firm is working on battery systems that allow the mass production of plug-in hybrid electric vehicles that would get more than 100 miles per gallon in hybrid gas-electric mode, and have a 40-mile range running on electric batteries only. The vast majority of car trips – work commutes and local errands – are less than 40 miles round-trip, meaning drivers of such a plug-in hybrid could go weeks without visiting a gas station.


That in turn could result in fewer tailpipe emissions and significant air-quality impact as people of the world’s developing nations are increasingly gaining enough wealth to own cars.


Reverse ‘Brain Drain’

As for manufacturing the batteries, Chiang said his team’s actual experience dispelled some concerns the firm had based on China’s notorious penchant for pollution: The country’s rapid economic expansion, after all, has come at a price to the environment. Chiang and his team had heard that that “there wasn’t a lot of concern for safety and not a lot of concern over pollution,” but, he said, in A123’s particular instance, “that wasn’t the case.” (The state Environmental Protection Agency in Beijing has threatened to close down scores of industrial plants in response to growing pollution concerns).


To get started, Chiang said, “We actually promoted reverse ‘brain drain’” by sending two key employees to China to set up a manufacturing operation.


And yet many of China’s tech successes have been grown right at home. The country has aggressively incubated research and commercial enterprises at thousands of “science and technology parks.”


One indigenous firm, China TechFaith Wireless, was formed only in 2002 but by 2005 had a listing on the Nasdaq stock exchange. Bucking the convention of designed-in-Taiwan-built-in-China, the Beijing-based company designs cellular phone software and handsets for a growing roster of Chinese and international mobile phone companies – both manufacturers and carriers. In 2006, it recorded an $8.8 million loss, which the company partially chalked up to logistics and procurement problems, on revenues of $80.8 million.

Panelist and company president Gilbert Lee said the firm offers speed and flexibility to fit different phone software into a given handset, depending on a customer’s need in a specific market. “There are so many different systems,” Lee said, adding that 90% of the firm’s 2,400 workers are engineers. “OEM or carriers, they have to find the highest quality and the cheapest engineers,” he noted.