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27.11.2018

HOW TO DEAL WITH CHINA?

China is not only a huge market for European companies, but also a major competitor. The EU now wants to establish tighter control of Chinese investments in Europe - a step that is sparking controversial debates within the industry community.

By Oliver Wack and Holger Kunze

The mechanical engineering industry does business with pretty much every corner of the world - but few countries are as controversially discussed as China. Some mainly see its economic potential and the resulting opportunities for European companies. Others regard the country as a threat, fearing that in the long run, Western states might fall behind a China that increasingly dominates the global economy.

The fact is that China is not just another partner. Its companies do not operate in a free market, but in a socialist market economy with the state as a major player. Instead of open competition, political agendas are the driving force of the Chinese economy, such as the "Made in China 2025" strategy or the "Belt and Road" initiative. As a consequence, European companies not only face difficulties when entering the Chinese market, but are also challenged by unfair competition from China at home in the EU as well as in other markets.

The European Commission, the European Parliament and the EU member states now want to strengthen controls on foreign investments. A compromise on a European investment control mechanism was reached on 21 November.

One argument of the EU in favor of this step is the unclear origin of the Chinese funds. "We need to look at what kind of capital is being used in this competition. Is it money from the state?" said Marco Chirullo, Deputy Head of Unit for Trade Relations with the Far East at the European Commission’s Directorate General for Trade, during an event organized by VDMA in September. "China is playing an unfair game on the world markets," analyzed Chirullo, who consequently argued for a more detailed investigation of investments from China.

Follow the money

As China’s influence in Europe grows, its relationship with the European industry is also changing. For example, between 2000 and 2017, overall foreign direct investments from Germany to China reached around 100 billion euros, while investments from China to Germany amounted to 20 billion euros during the same period. However, in 2016, annual Chinese investments in Germany exceeded German investments in China for the first time. Against this background, a China on the rise alarms European politicians. In particular, recent acquisitions of European technology companies – also from the mechanical engineering industry - by Chinese investors are sparking growing concern about an alleged sell-out of European expertise.

Today, there are already 13 EU countries that have screening mechanisms for foreign investments in place, for example the Foreign Trade and Payments Ordinance (AWV) in Germany. Its goal is to prevent acquisitions that would put national security or public order at risk. For instance, this might be the case with respect to companies belonging to the defense industry or that provide critical infrastructure such as electricity or telecommunications. The EU is now proposing an additional and broader European system that would create the legal basis for the Commission to screen foreign direct investments and issue "non-binding opinions" to the respective states in which it recommends either blocking or allowing an acquisition.

The Commission is supported in this view by large parts of the European Parliament. "In fact, all large Chinese companies are included in the state plan Made in China 2025," said the Member of European Parliament Reinhard Bütikofer (Greens) at the Mechanical Engineering Summit (Maschinenbaugipfel) in Berlin in October. He criticized China’s policy of protecting their own market while enjoying access to Europe and other parts of the world at the same time: "China is only moving forward by millimeters in the negotiations for an investment agreement [with the EU]. How long do we want to remain naive?"

Mechanical engineering industry in focus

However, this issue is not as simple as it may seem - and simply controlling Chinese investments might not solve the complex dilemma of dealing with a main partner and competitor at the same time. Many industrial representatives are rather skeptical towards greater interference by the state. They fear that it will ultimately be politicians who dictate what entrepreneurs are allowed to do with their companies and thereby their own property. Moreover, it is doubtful whether politicians and state officials are capable of recognizing which industries and technologies are worth protecting against influence from abroad.

One argument against tighter controls is that investments are a generally good thing. So far, Chinese investors have proved to be interested in long-term partnerships to the benefit of European companies. "My experience with China, and the experience of the recently acquired engineering companies, is positive," says for example Rainer Hundsdörfer, CEO of Heidelberger Druckmaschinen AG and chairman of VDMA’s Foreign Trade committee.

Indeed, foreign investors already hold a stake of 20 percent or more in approximately 800 German mechanical engineering companies, a figure which includes all countries and not only China.

A second point is that new protectionist measures are not necessarily a good approach for an industry that is dependent on open world markets. In the first nine months of 2018, China was the biggest export market for German mechanical engineering companies with an export volume of 14.2 billion euros. 11,4 percent growth rate Concerning machinery imports, China is also number one both with respect to Germany and the EU.

How to deal with China

Companies that deal with Chinese business partners already have to take the factor of politics into account - and will have to do so even more in the future. Just recently, VDMA has issued an in-depth study on challenges and strategies for mechanical engineering companies concerning China, which is exclusively available for VDMA members.

On a political level, VDMA has repeatedly argued that the EU should push forward negotiations for an investment agreement with China that would create a level playing field for investors from both sides. The special context of China being an economy with a huge political component must surely be taken into account. "The EU faces the challenge of developing a common China agenda," says Karl Haeusgen, VDMA’s Vice President. "I am optimistic that we will succeed."

Further information

VDMA Foreign Trade   |   VDMA European Office

 

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Contact
Oliver Wack, VDMA Foreign Trade.
Holger Kunze, VDMA European Office.