Transfer of Technology across National Boundaries
EUROPEAN APANESE HEMICAL INDUSTRIES
Specific example shows how in tern a tional technology transfer demands new licensing techniques involving international relationships of user-to-contractor-to-user RAYMOND J. KENARD, Jr., R. FOWLER
t is generally considered that the transition of man to a somewhat civilized man occurred when our predecessors passed from a hunting society to an agrarian society about 7000 to 8000 years ago. During the past millenia, society has a t various times risen to great heights. Each time the rise has featured a civilization with an advanced ability or understanding in one or more areas such as civil engineering, agronomy, warmaking, art, music, or religious tolerance. At no time was any form of manufacturing technology the salient feature of the then dominant civilization. T h e unique feature of today’s civilization that differentiates it from earlier civilizations is the manufacturing technologies which result in the low-cost production of high-quality goods in large quantities.
I from a savage
History of Transfer of Technology across Borders
T h e first evidence of the emergence of nianufacturing technology in the present era occurred in England in the middle and late 1800’s. T h e period has so rightly been named “The Industrial Revolution.” T h e goods produced in England were primarily used to satisfy the home market with the surpluses being exported in exchange for raw materials, At the turn of the century, manufacturing technology in England had become well established in the hands of many small producers, and a series of mergers and agglomeration of interests took place. For instance, in 1890, 50 soda ash producers using the Leblanc process merged to form United Alkali in Great Britain. Even so, United Alkali was still only second in size to the Brunner Mond group using the Solvay process. I n 1926, these companies merged with others to form Imperial Chemical Industries. I n Germany, a series of
mergers took place starting in 1904 which eventually led to the formation of I. G. Farbenindustrie in 1925. I n a similar manner, Kuhlman in France, Montecatini in Italy, and the Solvay interests in Belgium became the dominant pervasive influence in their countries. I n the United States a t about the same time in history, Du Pont, Union Carbide, and Allied Chemical became dominant, each with its own particular sphere or spheres of interest; Union Carbide and Allied Chemical both resulted from the merger of a number of companies. This agglomeration process led to the control of chemical process technology by a few major companies who were not averse to using technology as the basis for the formation of cartels in which cross-licensing and market agreements excluded the entry of new interests. I n the 1940’s, the U S . Government brought antitrust suits alleging price-fixing in 12 separate chemical and pharmaceutical fields, and at the conclusion of World War 11, broke up the I. G. Farben trust. T h e system of the transfer of technology across national boundaries as we know it today, therefore, dates back only to about 1950. While there were not the multiple sources of know-how then that there are today, nevertheless, process technology could be purchased without entering into cartel arrangements. Today, the saIe of process technology is a highly cornpetitive business. No longer does the prospective licensee have to worry about finding a process; now he has to worry about such items as which process is most economic, which best fits his unique needs, or which licensor can provide the best continuing R&D effort so that he as a licensee can modify or update his facility to remain competitive. No country has a monopoly on brains, consequently there are multiple sources of know-how. A U.S. manuVOL. 6 2
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facturer may not choose to license his process to another U.S. manufacturer because of the potentially adverse effect on his own market position. Usually, the potential licensee can turn to a number of alternate non-U.S. sources and license equally good technology for his proposed U.S. plant. Because of the size of it5 economy, the U.S. spends more on R & D than the combined spandings of Western Europe. However, some countries are more expert than others in particular fields with the result that the amounts of R & D expenditure are not necessarily reflected in a technological balancc of payments. As a n example of this, as shown in Table I, the U.K. enjoys a n excellent position in the development of chemical processes. Her technological “balance of payments” with the U.S.A. is positive. Receipts in 1966 were $1 5.2 million, expenditures were $13.8 million; thus, a positive balance of $1.4 million. Germany, on the other hand, despite the fame of her chemical achievements, and probably because of her long-term dependence, even into the postwar years, on coal as a raw material, has a negative “balance of payments” with the U.S. Receipts in 1963 (the latest year for which data are available) were $19.3 million, expenditures were $33.8 million; thus, giving her a negative balance of $14.5 million. Figures as shown in Table I1 are even more revealing in terms of total technology transferred to and from all countries as differentiated from that pertaining to the chemical industry relative to the U. S.only. Germany and the U.K. have approximately the same GNP. Both engaged in approximately the same total dollar value of technological transactions, and yet in 1966, the U.K. had a positive balance of $29 million whereas Germany had a negative balance of $124 million. T h e total value of technological transactions for the U.K. and Germany, of the order of $280 million each, demonstrates that very substantial sums of money flow across national boundaries in the licensing of technology. I t should be recognized that these data are probably only indicative of the orders of magnitude involved and do not cover many transactions wherein royalties are included in the plant cost and are never identified as a separate item. Furthermore, much technology is exchanged for equity interests in joint venture companies,
TABLE I. PAYMENTS FOR TRANSFER OF TECHNOLOGY-BALANCE W I T H UNITED STATES FOR CHEMICAL PROCESSESajb !Millions of Dollars
Receipts
Exfiendz ture
Balance
West Germany, 1963
19.3
33.8
-14.5
Great Britain, 1066
15.2
13 8
$1.4
“European Advanced Technology” by C. Layton. I/. K . Board of Trade Journal, August 23, 1968. a
b
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or traded for other important technology, know-how, or patent rights. International Polyethylene Production
T h e production and use of low-density pol) ethylene produced by the high-pressure process afford a n interesting example of inajor process technology crossing nunierous national boundaries. T h e preciq of J . C. Swallows’ account (2) of the early commercial development of this product is as follows : “IC1 patents for polyethylene were issued in U.K. and U.S.A. towards the end of 1936. A small plant was brought into operation in September 1939 to meet estimated requirernents for the insulation of submarine telephone cables. At about this time, a similar need also arose in respect to flexible high frequency cables for radar equipment, and so a larger unit was erected by IC1 in Cheshire. I n 1941, information on polycthylene manufacture and the use of material in radar equipment was communicated to the U.S. and D u Pont erected a plant in West Virginia principally to meet U.S. Navy requirements. Union Carbide also installed a plant for the same purpose. Thus, between 1939 and 1945, the material was principally produced for high frequency applications in radar cables and ancillary equipment for wartime uses, while the other uses which have come to the forefront today were scarcely investigated a t all. “In the period following 1945 polyethylene was developed as a plastics material in its own right. T h e two most important developments were the large-scale manufacture of film and its incursion into the moulding industry. I t thus now finds large tonnage applications in mouldings, film, and cable coverings. “One of the results of the Anti-Trust Judgment in the U.S.A4. Courts against ICI’s and Du Pont’s cross-licensing arrangements was the licensing of the IC1 master patents ( I , 3, 4 ) to several important American companies. As soon as wartime restrictions ended, Union Carbide, under a commercial license from ICI, extended their manufacturing facilities making the material available in quantity and thus significantly contributing to the new and unsuspected large tonnage uses mentioned above.” T h e high-pressure process originally used by IC1 employed autoclave reactors, whereas the processes developed by D u Pont and Union Carbide employed tubular reactors. Other investigations on a tubular reactor process had been undertaken by German industry during the war years, and BASF continued developments in the postwar period which, with similar developments by companies such a s Monsanto, Agfa/SD, and SNPA, led to another series of licensed high-pressure polyethy h e proces From the original in\,cntion by IC1 and the irriportailt later development work carrizd out in the U.S.A. and Europe, many cheniical inanilfacturers are now producing high-pressure polyethylene. I n some caws, the process is licensed froiri a major producer who initially himself obtained information under license froin 1CI or
TABLE It.
EUROPEAN COUNTRIES BALANCE OF ALL ROYALTIES AND SIMILARTRANSACTI0NS“-c Millions of Dollars Receipts
West Germany 1964
Expenditures
Total transactions
Balance
Gross national product
66
1’74
- 108
240
103,000
1965
80
195
-115
275
112,000
- 124
278
119,620
-5
217
93, 000
1966
77
201
Britain 1964
106
111
1965
126
121
+5
247
99,000
1966
157
128
+29
285
105,060
a “The Overall Level & Structure of R&D efforts in O.E.C.D. Member Countries.” 1966 and August 1968. c Deutsche Bundesbank Report, February 1967.
one of the other major companies engaged in the work during its early stages of development. I n a number of cases, cross-licensing arrangements are complex, where, for example, the new licensee has significant improvements to offer to others and to employ gimself. Companies now producing polyethylene by the highprcssure process include ICI, Du Pont, DOW,US1 (National Distillers), Union Carbide, Dart (Rexall), SNPA, Ethylene Plastique, BASF, Eastman Kodak, Showa Denko, Mitsubishi Petrochemical, Mitsui Polychemicals, Ube Kosan, Asahi, Monsanto, and Dutch State Mines. This list is far from complete but clearly indicates the tremendous growth in the application of this technology which has occurred since the original work was undertaken. Methods of Process Licensing
Because of the proliferation of process know-how in the last decade, process licensing has become a competitive business function justifying the establishment of an organization skilled in licensing efforts required to handle the outward flow, or sale, of technology and the inward flow, or purchase, of technology. I n fact, the newness of the concept of competitive licensing activities is such that inany of the largest chemical process licensing firms are still in the painful process of evolving an optimal organization. The options are vast and some companies are trying diflercnt techniqucs for different processes they offer to try to determine, through experience, the best method. These options range from a direct license from the AUTHORS R. J . Kenard, Jr., and R. Fowler are with the Power-Gas Cor!. of America, 90 Park Ave., hrew York, N.Y. 70016. M r . Kenard is President and Mr. Fowler i.r Divisional Director of the Research and Development Division, Teesside, England. T h i s paper was one delivered as part of the SymFosium on Novel Processes and Technology of the European and Japanese Chemical Industry, presented before the 758th National A C S Meeting, N e w York, N . Y., September 7-72, 7969.
b
U.K. Board of Trade Journal, December
process owner to the user to giving an engineering contractor an exclusive promotional license. I n the first case the owner has to mount the total worldwide sales effort and find within his organization sufficient engineering time to work u p design manuals, service the sales effort with proposals, and do the design for the plant sold. There is considerable cost, both direct and overhead, associated with this scheme and it minimizes the profit return on the licensing effort. I n the case of the other extreme, where a n engineering contractor is given an exclusive promotional license, the contractor may be required to send his engineers into the licensor’s plant to develop such items as the design manuals. Because the contractor’s business is developing opportunities for his engineering and construction forces, his effort is usually part of his normal business development overhead costs. One major U.S. chemical company has built up a licensing group consisting of nine executives in the head ofice and three executives permanently residing in overseas countries. This company has found that in a number of cases, it has been unable to support the licensing executives with an adequate engineering effort and has had to turn to engineering contractors for help. Another approach is that which has been adopted by a major division of a very large U.K. chemical company. While this corporation has been engaged in some licensing for many years, it was realized about 8 to 10 years ago that the potential licensing revenue in certain areas could be very great. To make the most of this situation, a special licensing group was set up. From previous experience it had been realized that the most effective use of resources could be obtained by employing engineering companies to promote the sale of technology together with complete plants. For many processes, therefore, longterm associations were made with a number of engineering companies. T h e general policy was to employ the minimum number of engineering contractors able to adequately cover the territory. This resulted in what was, for the engineering companies concerned, semiexclusive licensing positions. The small number of VOL. 6 2
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executives in the licensing group are responsible for arranging license agreements with the engineering companies, for coordinating the preparation within the company of the required technical information, and for providing technical and in some cases, commercial support to their licensees. Providing continual technical liaison service for their user licensees has, in some cases, taken the form of roundtable conferences in which all the licensees discussed together their operating problems and developments. The engineering companies have been supported by the sales promotion activity of this group which previously had undertaken some publicity and promotional tours in major market areas. The results of this type of licensing operation have been extremely successful and it is believed that the royalty income derived from the relatively modest operating costs of the licensing group probably represents one of the largest returns for a given investment within the corporation. There are three principal techniques for handling licensing : user-to-user, contractor-to-user, and user-tocontractor-to-user. Historically, the first two techniques have been employed most. User-to-user licensing has been used particularly when the technology was unique and sophisticated and only a limited licensing effort was envisaged. This also has been especially true where the products concerned are highly marketoriented as, for example, is the case with most polymers. T h e multiple grades of product and the need for continuing product application research have led to a preference for user-to-user licensing. Contractor-to-user licensing, on the other hand, has found widest application when dealing with the production of basic commodity tonnage chemicals such as ammonia, phenol, methanol, and fertilizers. This situation is, however, changing because of the increasingly competitive licensing efforts of many producers, and contractors are playing an increasingly important role in licensing even that type of technology which in the past has been made available only via userto-user contacts. A number of companies have been faced with the problem that to build a complete technical staff, capable of servicing the licensiiig operations to which they aspire, would detract from their prime corporate purpose. Their technology may be extremely good but is an underemployed asset without some licensing activity. This dilemma is increasingly being resolved by licensing through a major international contractor with worldwide operations who is particularly strong in territories which fall outside the licmsor’s major market areas. Transferring technology from a licensor to a licensee within the same country can be difficult, but when the transfer is made across national boundaries, a whole range of further problems may- arise. T h e problems likely to be encountered can be classified into three groups : 1. Technological problems relating to the acquisition, interpretation, and optimization of the licensed 60
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process for such items as the conditions of feedstock, labor, local standards, and safety regulations which relate to the new licensee’s location 2. Practical problems of governmental control, language barriers, local procurement, climatic conditions, and the like; also those associated with travel (which may be frequent and oftcn a t short notice) 3. Commercial problems including finance, royalty payments, guarantees, start-up assistance, and operator training
Case History Outlined
Many of these problems appear in the following brief case history of an instance where process technology was transferred in conjunction with the building of a complete plant. The case under consideration is that of a petrochemical plant which Power-Gas is supplying to an Eastern European country. The process technology employed is that of a major chemical company. Probably the most serious factor which led to problems for all the parties concerned was the time scale which the client wished imposed upon the project. When it is realized that preliminary negotiations for credit began in 1962, preliminary tender information was supplied in 1963, the main contract between PGC and the Eastern European purchasing authority was signed in Kovember 1964, and the final plant commissioning was scheduled for the end of 1969, it becomes apparent that this schedule could not be without difficulties. By U. S. standards, the precontract negotiations were very protracted. The problems included very stringent commercial conditions, the requirement of providing very extensive technical documentation, and frequent discussion in London and Eastern Europe involving all the parties-the licensor, the contractor (Power-Gas), the Eastern European purchasing authority, their technical consultants, and personnel from the proposed plant site. Because the contractor had considerable experience in supplying process plants in Eastern European countries, he was able to set u p an experienced task force qualified to deal with local design and safety codes, the immense volume of technical documentation, and the extenuated time scale involved in all aspects of the project. U.K. credit was arranged by the London bankers, Lazards, with the support and cooperation of the U.K. government departments--i.e., Board of Trade and Exports Credit Guarantee Department (ECGD). Two grades of feedstock were specified in the contract document: one similar to that used by the process licensor, the other of rather lower quality. Since the licensor lacked adequate experience with the lower quality feedstock, the licensor’s process guarantees and penalties were negotiated on the basis of the grade with which he had experience. I n the middle of 1965, however, the Eastern European purchasing authority requested the licensor to do a thorough evaluation of the lower grade feedstock and to present further appropriate performance
guarantees. Because design engineering was virtually complete, this was therefore done on the basis of retaining the original plant design. Subsequently, it thus became necessary to negotiate fbrther performance penalties, and it was not until January 1968 that Power-Gas, acting on behalf of the licensor, reached eventual agreement on these with the customer. T h e very detailed contract negotiated in such cases and the extensive credit facilities have the effect of enforcing very inflexible control so that what in other circumstances would be considered minor changes, now represented major problems. For example, early in 1965, it became clear that a change would have to be made from U . K . to a West European supply of the three main compressors required for the plant because of delivery problems. Because the contract had necessarily been very specific about financial sources and what items were to be purchased where, this basically simple supply source change became a significant operation requiring approval from several authorities before final agreement. As it turned out later, a deferred construction program meant that, for practical purposes, no change need have been made a t all. A major effort was required to comply with the metric system documentation requirements covering drawings, specifications, isometrics, operating instructions, and other technical data a t different stages of the contract. All drawing texts were required both in English and the language of the buyer’s country and other important sections of the text also had to be translated. By September 1965, however, the preliminary design of the project had been accepted which included a scale model of the complete plant which was airfreighted to the site. I n 1966, four Eastern European inspectors were employed in the U . K . checking subcontract equipment items prior to packing and shipment to site. I t was indicative of their thoroughness that the inspection authorities, for reasons of their own, did not accept Power-Gas’s first choice of packers and shippers ; alternate arrangements had therefore to be made. The buyer’s inspection duties included obtaining practical guidance on plant rnaintenance and repair a t the licensor’s plant, and such facilities were satisfactorily arranged. Six Eastern European engineers arrived in the contractors’ ofices in 1966 to settle final details of civil and structural design and plant layout. Another incident of inspectors obeying the “letter” rather than the “spirit” of a contract arose in connection with certain stainless steel material which would normally have been accepted by a Western client but because it fell just outside the detailed specifications, it was not accepted by the buyer’s inspectors. Sometimes extended technical discussion tended to delay shipment with the risk o€attracting delivery penalties. Other problems which arose in connection with the supply of raw materials concerned the supply of certain low-temperature carbon steel, which necessitated bulk purchase by the main contactor with issue to those subcontractors concerncd. Another was that the price of copper had almost doubled between 1963 and 1965/66
when substantial quantities were required for the fabrication of certain equipment items. Additional technological information on plant improvements made since the signing of, and as agreed in, the contract was transmitted to the buyers--e.g., principally computer operation-which had been investigated by the licensors. Some plant layout rectifications were agreed upon, and a section of the model was airfreighted from the site back to the U.K., modified, and returned to the buyer. I t was 1968 before the contractor’s supervisory erection staff were required to arrive on site; arrangements were also made for specialist subcontractors’ staff to be on site for the installation of such equipment as the main compressors. Site progress tended to be rather slow, partly as a result of weather conditions, but by the end of 1968, erection was 50y0 complete with a n estimated time of completion toward the end of 1969. T h e inspectors who had been associated with the U.K. end of the contract finally left Power-Gas in September 1968, with all relevant docurnentation having been completed to their satisfaction before they did so. T h e main contract provided training for operators in three groups of four plus one interpreter, each group spending two months a t the licensor’s plant. Training was a t first scheduled for 1967 but this was postponed as the licensor was engaged in commissioning a new plant of his own. T h e first group of operating engineers, therefore, arrived for such training in May 1968 and left in July. Further commissioning discussions and operator training continued throughout the year. Site problems of one kind or. another arise in most projects. T h e background of this one, involving as it does long distances, with transportation, communication, and other practical problems, means that it generally takes longer to resolve such problems than when technology and plant are less distant from their source. This brief case history should not be viewed as a catalog of problems and should not discourage chemical producers from licensing. I t is cited to show some of the ways in which a n engineering contractor can help to facilitate the transfer of technology, and it highlights the importance of having previous experience in the same or similar circumstances. In conclusion, it is clear that process licensing involving the transfer of technology is big business; it is growing both in volume and in competitiveness. T h e uniqueness of the technology is, generally speaking, becoming less and less the determining factor for success and is, in part, being supplanted by effective sales effort and the ability to deal with the practical, commercial, and technological problems associated with the transfer of technology across national boundaries. REF ER ENCES (1) British Patent 471,590 (1736). (2) Swallow, J. C., “Polyethylene,” A. Renfrew and P. Morgan, Eds., London Iliffe, 1760. (3) U.S. Patent 2, 153,553 (1936). (4) U.S. Patent 2, 188,465 (1936).
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