Thrills - and some spills Go back »

2010-12-06 | All chapters

Thrills - and some spills
China Daily European Weekly, 1st December 2010

The volume of trade between China and the European Union has increased more than five-fold from $69 billion (50.8 billion euros) in 2000 to $364 billion in 2009.

Last year's figure was, in fact, dampened by the economic crisis - in 2008, it actually stood at $425 billion - a more than sixfold increase on eight years before.

Although the world's attention is often on the trade relationship between the United States and the protracted row over the value of the yuan, the EU is China's largest trading partner, biggest export market and largest source of technology imports, according to China's Ministry of Commerce.

Wuttke, who has been with BASF for 13 years and who was president of the European Chamber of Commerce in China from 2007 until earlier this year, has seen the impact of China's growth on his own company. It had revenues of 4.1 billion euros in 2009 and employs 7,000 at 38 factories.

"What we are seeing is China moving back to the position it used to occupy, producing a third or a fourth of the world's GDP. The last 200 years were just an abnormality," he says.

With any such sudden ascendancy or re-assertion of economic status issues are bound to arise.

While trade between Europe and China has grown over the last 10 years, particularly since China's accession to the World Trade Organization (WTO) in 2001, the relationship has been marred by a few nagging issues.

China accuses the EU of protectionism since it will not give it Market Economy Status (MES) like it has to many other developing nations.

As a result, China's exports to the EU often fall foul of anti-dumping measures since their price is often calculated as being below their production cost.

This is because without MES, China's actual production costs are not taken into account. Instead, they are calculated on a basis of comparing them to what they would be in other countries.

Unfortunately for China, direct comparisons have often been with countries where unit labor costs are much higher with even the US sometimes being used. Beijing complains the system is hopelessly rigged against it.

On the other hand, many companies from the EU believe they are being denied full access to China's market, particularly in service industries such as banking and financial services.

They also believe they are faced with ever increasing regulation and red tape, which they claim is putting a brake on trade and investment.

Jacques de Boisseson, the current president of the European Chamber, which celebrated its 10th anniversary at a conference in Beijing earlier this month, does not believe there is currently a level playing field.

"We have a number of areas which are closed for foreign investment, such as telecom services and insurance; and with car manufacturing you can only operate in a 50/50 joint venture," he says.

"Geely (the China car manufacturer) has just bought Volvo. You wouldn't have been able to have Volvo buying Geely because it would have had to enter into a joint venture."

The chamber, which has grown from 51 founding members in 2000 to 1,500 with seven offices around the country, produces a document on doing business in China which have grown to several hundred pages because of increasing regulations.

"The rules and regulations are not always fully adapted to consider foreign investment. There is often not enough consultation," de Boisseson adds.

"There is an issue also that some laws are taken and applied retrospectively, sometimes one or two years. Laws are also implemented differently in China according to the particular province and this creates business uncertainty."

But Wu Changqi, professor of strategic management at the Guanghua School of Management at Peking University, rejects the chamber's view that regulation is excessively applied in China and says the European Union itself is seen as being only regulatory.

"All countries apply rules and regulations and there is nothing wrong with that. If a company has a particular problem with a specific regulation they can raise it with the World Trade Organization. There is a mechanism in place for doing just this. I do not believe China is an excessive regulator," he says.

Jing Hua, managing editor of the International Financing magazine, published by the China Council for the Promotion of International Trade, insists China is meeting its obligations as a member of the WTO.

"China is doing everything in accordance with what it agreed with the WTO. Markets in many sectors are gradually opening up. This applies also to financial services which, despite all the criticism, is becoming more open to foreign entrants. This will all take time. I think the gradual approach is working," she says.

The value of the yuan, which has been problematic for China's relations with the US, is less of an issue for European companies invested and operating in China.

De Boisseson at the European Chamber said it is not a priority for his members.

"It is very much a second order issue for us. Our members are those companies that are invested in China and serve the Chinese market from China. Ninety to 95 percent of their activity is here in China," he adds.

Ernst Behrens, a former chief executive officer of Siemens China and also former chief executive officer of EADS, the parent company of Airbus, in China, says he understands China's attempts to see industrial sectors nurtured.

"We have restrictions in Europe and there are also restrictions in the United States. If you go back 20 years, the German telecommunications company (Deutsche Telekom) would buy no equipment other than from Siemens or SEL (Standard Elektrik Lorenz). The German train company was 100 percent government-owned and it would never buy a train other than a Siemens train," he says.

"We have to take into consideration that China has to look after itself and go at its own pace of development."

Behrens, president of the European Chamber from 2002 to 2004 just after the country's accession to the World Trade Organization, says he has had a number of talks with senior figures about China's technology gap.

"I have had many discussions with government officials and State-owned enterprises and they have said to me that they need technology from Western companies because they are so far behind," he says.

"They have said they will allow us access to certain markets and would cooperate with us for some time but they added one day they would become competitors. I think that is absolutely natural," he says.

Getting access to technology is not all about China persuading foreign multinationals to invest in China: A growing trend is for Chinese companies to set up their own research and development bases in places like Germany and hire the best brains locally.

Eric Thun, lecturer in Chinese business studies at the Said Business School at Oxford University, says Europe is often more attractive than the United States for this type of investment.

"Europe tends to be a better match in what Chinese firms are focusing on. They are interested in capital-intensive manufacturing processes and countries like Germany are world leaders in this area," he says.

"You see a number of Chinese companies setting up research and development facilities in Germany because they want to be in industrial clusters where they have access to highly skilled labor, research institutes and training facilities."

When it comes to investing in research and development facilities in China by European companies, the elephant in the room remains intellectual property protection.

Despite government efforts, counterfeiting is a feature of the Chinese economy and many companies are nervous of the risk of having their intellectual property exposed to the risk of being copied.

Current European Chamber president de Boisseson believes the problem can only get better over time.

"It can't really get worse because it is starting from a very low point. Our concern that it is not getting significantly better and that is the point we make to our Chinese interlocutors," he says.

"There are many good words about IP protection but the reality is quite different from those words. Our members on the ground say the law is good but the way it is applied in a particular province is not always that good."

Acquisition trail

Chinese companies are increasingly becoming acquisitive in Europe. Apart from Geely buying Volvo, Shanghai industrial conglomerate Fosun acquired a 7.1 percent stake in French holiday resort operator Club Med in June and there was recent speculation that Bright Food, also of Shanghai, was to buy the United Kingdom biscuit giant United Biscuits, although interest in the deal now seems to have waned.

According to China's Ministry of Commerce, 5.8 percent of Chinese overseas direct investment in 2007, the last year for which figures are available, was directed at Europe, behind Asia on 62.6 percent, Latin America 18.5 percent and Africa 5.9 percent but ahead of North America on 4.3 percent.

Wuttke at BASF says Europe is much more open to Chinese investment than many other parts of the world, particularly the US.

"I am not aware of any European rejection of Chinese investment. I think Europe has been very open to Chinese companies, even though it hasn't always been reciprocated."

Andre Loesekrug-Pietri, chief executive officer of private equity concern A Capital Asia, which has offices in Beijing and Shanghai, says many European companies are actively seeking a Chinese investor to gain access to the market.

"Having a Chinese investor could give them some sort of assurance they have a strong ally in what is a highly competitive but also perceived as a more and more difficult market," he says.

The failure by the EU to award China Market Economy Status is still seen as a barrier for some Chinese companies exporting to Europe.

"Why does the European Union deny China Market Economy Status?" asks Wu at Guanghua School of Management.

"By what measure? Perhaps they would like to tell us. China quite clearly is a market economy."

He says China is often accused of dumping goods in export markets but it was largely selling goods at market prices just like its competitors.

"The fact there may be different cost structures, lower labor costs and land prices really should not be brought into question when companies are simply charging market prices for goods. Ultimately, it is the price of the goods which matter."

Jing at International Financing magazine says the issue boiled down to trust.

"Of course, it is unfair for the EU to deny this because the trade relationship should at a basic level be based on trust and both sides need to acknowledge each other as equals," she says.

The level of competition in China and the entrenchment of State-owned enterprises, huge beneficiaries of China's 4.2 trillion yuan (465 billion euros) economic stimulus package in a number of sectors, has led to a view that it might be already too late to enter the China market.

Edward Tse, chairman of global management consultants Booz & Co in China, based in Hong Kong, says there has been a recent nervousness among foreign companies.

"I think there has been a lot of talk in the international businesses community about how businesses feel about China now," he says.

Serge Janssens de Vaerebeke, who was president of the EU Chamber from 2004 to 2007 and who was also its Belgian state representative, says succeeding in China does take a certain amount of nerve.

"If you want to succeed in the China market, you have to be present, invest and show you have confidence. If you just come and hesitate you will not be successful," he says.

"I don't think it is ever too late if you have a good product but you have to play it right. Sometimes it is good to have a good Chinese partner."

De Boisseson, who has been in China for five years and is also chief representative of the French oil company Total, says Chinese companies are becoming increasingly self sufficient and need less foreign help.

Total, which has been in China since the late 1970s, has a number of joint venture arrangements with China's leading energy companies including Sinopec, PetroChina and CNOOC.

"In our business, Chinese companies are able to do 90 percent of what they need. We are competing to work with them on the last 10 percent where we can bring added technology and build partnerships," he says.

He says the Chinese also see such arrangements with European multinationals as a way of accessing other international markets such as in Africa and South America.

"It can be a way to get access to other markets and sometimes Chinese companies are willing to use our experience in other markets to get a foothold there," he adds.

De Vaerebeke, who has been in China for 12 years, insists you cannot downplay the impact that China has had over the past 10 years on European businesses.

"Some companies, particularly in sectors like the automotive industry, survived the financial crisis because of the importance of the Chinese market, " he says.

He also says China is already shaping the leadership of many European companies and will increasingly do so in the future.

"European companies now send their top people to China and certainly if you want to get to the top in Europe, you are beginning to need some years in China on your CV, " he says.

Wuttke says there is too much focus on Chinese companies getting ensnared by anti-dumping legislation in Europe and disquiet about the "huge juggernaut entering the worlds stage".

"Europeans love Chinese products or they wouldn't buy 250 billion euros of them every year. China lowers inflation in Europe. People emphasize trade barriers but less than 2 percent of trade is subject to anti-dumping," he adds.

De Boisseson believes protectionism is in neither China nor the EU's interest.

"It is something we have to fight against. I was in Spain recently and they were telling me at the ministry of trade how large Spanish companies feared losing their protection when Spain entered the EU in the mid-1980s. The same companies are now in their element," he says.

He says the business relationship between the EU and China was essentially a two-way game.

"I have a strong conviction that allowing greater trade and investment on both sides will be beneficial to all," he adds.