Chinese interference

Do not go gently into that good fight

China to have most robots in world by 2017
Sparks flying between the Chinese government and the German government. Source: DPA /Picture Alliance

Most Germans still think of cheap clothing, plastic toys and electronics when they see the label “Made in China.” But that is outdated. Many textile manufacturers left China for Southeast Asia long ago, while Chinese industry is investing billions in state-of-the-art production facilities, digital business models and artificial intelligence.

German companies are enjoying booming Chinese business. With a trade volume of €170 billion ($200 billion), China overtook the United States and France last year as Germany’s most important trading partner. There is a similarly dynamic trend in direct investment, with Chinese investments in Germany rising by more than 2,000 percent in 2016.

Conversely, Germany is by far the largest European investor in China. While investment from the European Union, the United States and Japan is declining, investment from Germany is increasing. The German economy is the ideal partner for the “upgrade” to a higher level of value creation being sought by Chinese industry.

 

Instead of relying on the invisible hand of the market, China depends on the strong hand of the party.

Not least because of the pioneering technological role we play as a result of Industry 4.0 (“smart factories”), our companies are regarded as China’s most important technology suppliers. After a slump last year, many German companies are optimistic, their order books full. The gigantic Chinese market with its increasingly affluent population still promises substantial returns.

But there is a catch: The more advanced Chinese industry becomes, thanks to German know-how and technology transfers that are not always voluntary, the faster the partnership becomes a competitive environment. Not that the German economy is afraid of a little competition. On the contrary, international competition has made us strong, and is the prerequisite for efficiency and innovation. But we need the right political framework to make sure competition stays fair and the market works.

Many market observers believe that conditions in China seem to be getting worse rather than better. The 19th Congress of the Communist Party of China did not suggest more market-oriented reforms are to come. Instead of relying on the invisible hand of the market, China depends on the strong hand of the party. And the party continues to expand its influence in the economy, most recently by establishing more party cells.

This development has not only affected Chinese companies, but now also applies to foreign companies. The party propaganda openly demands more, say, in corporate decisions and that companies be “patriotically” oriented. This could lead to new conflicts of interest, especially for joint ventures with foreign minority interests. Growing restrictions in cyberspace are another problem.

15 China is the Second Largest Investor in Germany-01

The new cybersecurity law has been in force since June 2017, but the many implementing provisions are vague and unsettling for many companies. Only one thing seems clear: The digital exchange of data will be subject, more than ever before, to the political priority of stability and control. Companies fear that outsiders could gain access to confidential information, know-how and business secrets. This is certainly not conducive to bilateral cooperation in relation to Industry 4.0.

And then there is the recent announcement by Chinese ministries to block all encrypted connections via foreign servers that are not “state-licensed.” Proliferating control of cyberspace would diminish China’s appeal as a business location. Setting up an encrypted dedicated line is so costly that small and medium-sized companies, in particular, could reconsider their involvement in China.

In addition, there are a growing number of cases of more “classic,” centrally controlled interventions. At the beginning of the year, China shocked foreign companies with tighter controls on capital movement, which hampered the return of profits to Germany. After that, exporters were alarmed by the planned introduction of a new food certification program.

The program, a complex system of control and documentation for the importation of even such low-risk products such as cookies and pasta, has now been postponed by two years. Still, the plan, which threatens the market share of foreign food producers, is far from being off the table. The introduction of an ambitious quota system for electric vehicles was also postponed, and yet it continues to cause anxiety in the automotive industry. Automakers are concerned, for example, that they will only be allowed to use batteries from Chinese manufacturers, which are still plagued by quality issues.

Automakers are concerned, for example, that they will only be allowed to use batteries from Chinese manufacturers.

Manufacturers of medical devices are the group most recently affected by the changes in Chinese policy. The Chinese ministry of health has asked companies to disclose manufacturing costs and other sensitive data, enabling it to depress prices in its direct negotiations with individual companies. Depending on the outcome, this could prompt some to withdraw from the Chinese market, which is largely dominated by foreign companies. Such interventions are on the increase, although Chinese leadership is constantly promising to open markets further, treat foreign companies equally and remove market barriers. However, there is little evidence of this in actual business practice, which is why companies have no illusions.

And they don’t even have time for that. While foreign companies struggle with the everyday pinpricks of doing business in China, Chinese competitors are constantly becoming more innovative and productive. The government promotes innovation both rhetorically and through massive financial injections rumored to be in the hundreds of billions of euros. With its Made in China 2025 initiative, China aims to transform companies in 10 key industries, such as electromobility, medical technology and industrial robotics, into technology and market leaders. At the same time, many companies, especially private ones, have already made impressive advances on their way up the supply chain.

This is particularly true in areas that are crucial for the future, such as IT and the digital economy. Huawei, for example, which originally specialized in networks, has gained enormous global market share in the smartphone industry in just a few years and is now pushing ahead with the new, ultra-fast 5G mobile communications standard.

The three major Chinese Internet companies, Baidu, Alibaba and Tencent, which have been able to expand with essentially no foreign competition, are the new heavyweights of Chinese industry. Tencent claims that its WeChat app, which can also be used to buy movie tickets, take out small loans and use for cashless payment anywhere, has 932 million users. For the company, this is an invaluable treasure trove of customer data that it uses to advance new business models, networked driving and the application of artificial intelligence.

Chinese industry also benefits from its technology- and internet-savvy customers and the rapidly expanding education system. Of the companies known as unicorns – the roughly 200 start-ups whose value exceeds $1 billion – only four are German while China already accounts for almost a quarter of the total. One of them is Sensetime, founded in the Pearl River Delta in 2014, which competes with Google and Facebook in the field of artificial intelligence. With more than 400 partners and customers, the company has developed a platform to use facial-, object- or voice-recognition software for industrial applications. German companies not only face unequal competitive conditions in the Chinese market, but also an increasingly innovative Chinese industry that is gradually shifting its focus toward world markets.

Germany and Europe would do well to quickly open their eyes to the real conditions in – and ambitions of – Chinese industry, and adapt to the challenges. Mutual economic integration will presumably continue to increase over the next few years, albeit in a more and more difficult environment. Together with European and other partners, we will still have to vehemently fight for fair competition in the Chinese market. Economic exchange is ultimately the backbone of our bilateral relations. At the same time, companies should be prepared to face tougher competition. Innovation is not only the key to China’s continued growth, but also to the lasting strength of our own economy. The meaning of “Made in China” is changing rapidly, and our image of China should not lag behind.

To contact the author: gastautor@handelsblatt.com

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