Political Interference

Chinese meddling alarms EU firms

84744631 Merkel Xi Airbus DPA
What did we get ourselves into? Angela Merkel looks on as Airbus CEO Tom Enders signs a Chinese plane order. Source: DPA

When Chinese President Xi Jinping was elevated to the same status as state founder Mao Zedong last month, the Communist Party congress wrote his name and ideas into its constitution. One of those ideas has involved expanding the party’s economic powers — and that is increasingly affecting European and German companies.

Now, some business leaders are sounding the alarm at attempts by the political party to exert influence on the decisions of joint venture companies in China. “The strengthening of the Communist Party in all areas has a direct impact on foreign companies in China,” Dieter Kempf, president of the BDI Federation of German Industries, told Handelsblatt.

Mr. Kempf said firms were alarmed by the party’s push for more influence over day-to-day decisions and warned that in doing so it was endangering efforts to bring innovation, production and jobs to China. “It must be left to international investors to have the last say in business and investment decisions — not the party,” he said.

“I think it’s astonishing and wrong how little China appreciates the prosperity-creating principle of openness.”

Dieter Kempf, BDI

Exerting political influence was always a possibility: Under Chinese law, companies can be required to set up party cells consisting of functionaries who are usually on the firms’ payrolls and who report to the party leadership. But ever more often, foreign firms say that those officials are demanding a say in decision-making.

Companies are starting to feel pressure but few of them are daring to speak out. When asked to comment, European plane maker Airbus said the regional government of the northeastern province of Heilongjiang had told the company to set up a party cell in a local plant. Airbus runs a components-making joint venture in the region’s capital Harbin with a state-owned company.

But Airbus stressed this was nothing new. Another assembly plant in China has had a party cell with around 100 members for almost 10 years. “They mainly have an advisory role and they’re usually a good support in communicating with employees,” said an Airbus spokesman.

Privately, industry insiders are considerably more frank. They said that in the aircraft industry in particular, the Chinese government was bent on strengthening state-owned Cormac, which is on a mission to catch up with Boeing and Airbus one day.

China wants to become the world’s largest plane market by 2024 and is investing billions in new airports and planes. It wants the fleets of its state airlines to include Cormac planes and has repeatedly been putting Airbus under pressure, the insiders said. Chinese officials have been threatening to cut back their orders for Airbus planes and the party cells are being used as an additional way to exert influence, said two people familiar with Airbus. The company declined to comment.

It’s true that every state pursues an industrial policy. But China’s Communist Party is directly intervening in the running of international private sector companies. That’s different.

“This is about anchoring the party more strongly in society and the economy,” said Jost Wübbeke, an expert at the Berlin-based Mercator Institute for China Studies. “Private sector firms have become an important power factor that has a major impact on economic development. As the old instruments of economic planning are on the wane, the leadership is looking for new ways to exert influence.”

One international company was at the receiving end of this interference. The management wanted to lay off workers because its business was sluggish. “But the party blocked the plan,” said one insider. Party officials had pushed the Chinese joint venture partner to prevent the job cuts. “The official wanted to prevent job losses at all costs,” said one industry insider. “”They knew very well that China is so important to the company that it wouldn’t pull out of the country after such an experience.”

But the issue extends far beyond Airbus and the chemicals industry. The European Chamber of Commerce in Beijing, the EU’s main business lobby group in China, has been following the Communist Party’s actions for months. The president of the chamber, Mats Harborn, has in the past refrained from open criticism of China’s leadership in his capacity as head of truck maker Scania’s operations in the country. But he was outspoken in his reaction to the latest developments.

“This development is of great concern to foreign joint venture partners as it significantly changes the governance of the joint venture and undermines the authority of the joint venture board,” he said.

Mr. Harborn cited cases where firms had been urged to incorporate the party organization into the governance structure of the joint venture and give it a decision-making role in all significant matters. That would seem to go against China’s own rules, which declare the venture’s board of directors “the highest authority,” he said. “The European Chamber is not aware of any legal development that provides a basis for changing the corporate governance arrangements in joint ventures in this manner,” he said.

If China is actively considering such a change, Mr. Harborn advised against it. Involving party organizations “would have serious consequences for the independent decision-making ability of these joint venture companies.” Such a shift would make European companies think twice about investing in new partnerships and “in some cases would lead to a reappraisal of commitments to existing ones,” he warned.

China’s intervention comes as resistance is mounting in Europe to the influence of Chinese state-owned companies. The EU Commission wants to increase scrutiny of future takeovers of European companies by Chinese firms.

At the time, China’s foreign ministry responded by accusing the EU of protectionism, but the mounting influence of party officials on European companies in China may serve to strengthen Europe’s resolve. “I think it’s astonishing and wrong how little China appreciates the prosperity-creating principle of openness,” said Mr. Kempf, the head of the BDI.

Stephan Scheuer is head of Handelsblatt’s features desk. David Crossland in Berlin adapted this story for Handelsblatt Global. To contact the author: scheuer@handelsblatt.com

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