with Dirk Moens, Secretary General, European Union Chamber of Commerce in China
The EU and China have interesting trade dynamics. The total trade balance is well in China’s favor: in 2010, China exported approximately 281.9Bn EUR worth of goods to the EU, more than doubling EU good exports to China. However, the EU’s inward investment into China is approximately five times as large as China’s inward investment into the EU. In 2010, the EU’s service exports to China were also approximately 20% higher than China’s service exports westward. What does this say about the nature of trade between these two regions?
You correctly noted the overall trade imbalance between the EU and China. This imbalance has been present for quite some time, and there are certainly significantly more exports from China to Europe, rather than the other way around. On the other hand, one must recognize that a trade balance reflects demand: quite obviously, there is considerable demand for Chinese products in Europe. As such, we at the European Union Chamber of Commerce in China (European Chamber) do not see the total trade imbalance as a focal issue or challenge. According to trends in the European media, it would seem that the people of Europe would agree with this sentiment.
You also mentioned that the imbalance is present not only in terms of traded goods, but also in terms of Foreign Direct Investment (FDI). There are notable differences in those streams of capital. Total trade in services, which is the only one of these three streams of capital for which Europe holds a trade surplus, is much smaller than total trade in goods—and there is a reason for that. We believe that China still has much to do to open its economy and industries. Therefore, the export of services from the EU to China is ongoing, and has a slight positive balance for EU companies; nonetheless, compared to the opportunity that, in theory, exists in China, the volume of services trade remains very small.
In terms of FDI, it is again true that Europe exports capital to this nation at a rate approaching five times the volume of Chinese FDI into Europe; however, in absolute terms, the volume is relatively small.
I have two comments on the dynamics present in these trade flows. First of all, they do not capture the reality—for the simple reason that much of the flows travel through third countries, such as Hong Kong or the Cayman Islands, etc. (the typical safe havens of capital). Therefore, it is very difficult to map out the full picture of FDI. Still, it is clear that there is significantly more capital entering China, rather than leaving it.
I have mentioned that the overall FDI volume is very small, and, indeed, China represents only a minute fraction of the total FDI leaving Europe. Although we cannot be sure of the real number, the statistic you referred to, which cites a volume of approximately 5Bn EUR worth of FDI entering China from EU members, represents perhaps two or three percent of total FDI flow leaving Europe. At the European Chamber we view this as a major opportunity, because given a nation with the size and growth momentum of China, there should be significantly more investment entering the region from Europe.
To summarize, we do not believe that the absolute trade imbalance is our main priority, because it is subject to market mechanisms and reflects a reality in supply and demand. I want to stress, instead, that there is significant opportunity to develop and evolve the trade and investment flows—at the European Chamber this is our chief concern.
Indeed, the total volumes of trade in terms of FDI and services entering China seem quite slight. Let us then examine the barriers. In your latest Business Confidence survey, the majority of the more than 600 respondents reported growth in both revenue and profit. On the other hand, respondents say that government protectionist policies have, in some cases, grown even more stringent. Forty-three percent of European companies, according to the survey, perceive the Chinese regulatory environment to have become more unfair toward foreign companies during the past two years. There seems to be an idea of “Yes, China is attractive for investment, but…” Is there a way to resolve this impasse?
I would first like to emphasize that our member companies, across the board, say that they believe China’s growth will continue: perhaps growth will not always be in the double digits, and there will be hiccups and variances—especially those caused by the global environment—but, across all industries, enterprises are convinced that there are major prospects in China.
Companies have also flagged that profits have returned to pre-crisis levels, and perhaps more. This does not mean that profits in China completely outstrip profits in the rest of the world—that is an exaggeration often proliferated by the Chinese press and to some degree, the international media as well. Moreover, most profits are reinvested in the country at this stage, and there is very little repatriation of capital. This reality is normal for a developing economy. But these are caveats: in all, EU businesses have done quite well in China in recent times. They see profits going in the right direction, and they see growth opportunities both for today and tomorrow.
Our members also see the strategic importance of China in their portfolios increasing. Some major companies in certain industries have recently told me, “We must be successful in China.” Failure is no longer an option, and the matter is about the sustainability of their companies. They have invested, they have transferred technology, and they need to find a way. Otherwise, they will be under much pressure within their industry—including from that applied by rising Chinese players—and they will suffer.
On the other hand, organizations believe that Chinese operations are not getting any easier. In fact, they believe that business success was significantly more straightforward in China 10 or 15 years ago. At that time, the door was more open, across all industries, for foreign direct investment. Local officials within the municipalities would have KPIs measuring the amount of FDI that they could bring into their communities.
Why do you believe that China has grown more closed?
I believe that the government drew lessons from these last 15 years. They realized that, to continue with relatively low-value products, based mainly on cheap labor, is probably not going to get them very far—especially now that exports are under pressure. They also realized that they paid a huge price for operating in this mode—in terms of the environment, for instance.
At the same time, Chinese companies have increased in capabilities, in spheres where European and Western companies used to have an edge: for instance, marketing and sales. This increase in Chinese domestic sophistication, and the threat of Chinese competition, is clearly expressed in our Business Confidence Survey. The competitive gap—if it still exists—is getting smaller and smaller, and Chinese companies are clearly catching up. There is also a strong willingness from the Chinese government to support its ‘national champions,’ and its large state-owned enterprises. All of this has contributed to a tougher environment for foreign players.
We also see difficulties in resources: be it scarcity of cost, utilities, raw materials, or people. To speak to the latter, while during the crisis, there was less pressure on wage and management turnover, today we again find ourselves in a battle for good talent. Domestic companies are now realizing that if they want to go to the next level, they need to have the best people—and they have increasingly started looking outside of China. One sees moves that large international companies cannot follow: multinationals are faced with worldwide reward systems, etc., and they wish not to follow some packages offered by Chinese firms. Chinese companies, offer what it takes to get the right talent. This is another factor that is making it difficult to do business in China.
But this is all a matter of competition. It is fair enough, and market-related. Competition is healthy. In the end, as long as there is a level playing field (unfortunately, in many cases, there is not), this is a great market—especially in the current global economic environment. It is normal that competition should be on the rise here. EU companies are relatively well positioned to compete, as they are experienced and have been working in mature markets for a long time. The second set of problems faced by international companies—regulatory challenges—is much more difficult to digest. This has to do with either straightforward market barriers, hidden market barriers, or de facto market barriers. All of those are concurrently existent on the market, despite China’s WTO commitments—although I will stress that certain restrictions were agreed upon as China acceded to the WTO in the first place. Hence, we are not necessarily speaking of WTO infractions or noncompliance, but the need to continue to reform.
There also remains a lack of transparency, and difficulties in understanding laws and regulations. There are concerns about intellectual property rights, despite the latest efforts by the government. We at the European Chamber appreciate those efforts, but see that they are simply not enough. In certain cases—specifically, trademarks—IP risks are in fact increasing.
Another area where we see challenges is in government and public procurement (which are separate areas, in China). This is a large chunk of the market, and it is notoriously difficult to penetrate this domain and get access to information regarding the selection criteria of the buyer and insight into the final decision.
We see that opportunity is certainly there. There are two types of competition-related concerns that our companies are perfectly fine with. However, their final concern, regarding the present and future regulatory environment in this country, is rising. You mentioned that 46% of our companies fear that over the next two years, matters will get worse. The size of that figure was a shock for the European Chamber.
To what extent do you see regulators open to working in concert with organizations like the European Chamber to resolve the regulatory issues you have mentioned?
As the European Chamber in China, we have over 10 years of operational history, and we have reached a point where we are taken quite seriously. People read our publications. In Europe, as in China, we are very well connected, and very well heard. Increasingly, in Europe, we try to take unique, industry-driven positions rather than national positions. In this way, we attempt to contribute to a concerted view regarding the challenges for European industries in China.
Having said that, it is very difficult to draw a direct parallel between our work and its results—which is perhaps typical of lobbying. Ours is not a manufacturing operation. Nonetheless, we believe that we have seen some positive outcomes. One of the outcomes that we have contributed to is the decoupling, for instance, of a policy called ‘indigenous innovation’ from government procurement. It is quite a technical issue, but the main idea is that these two spheres were coupled, with indigenous innovation being administratively favored in government procurement projects, and due to our efforts, together with other Chambers and business organizations, they were made separate.
There is evidence that there has been follow-up on this issue in reality—more than simply on paper. I stress this point because in China, it is often the case that the regulatory framework is improving in certain areas—for instance, in IPR, the framework is actually of quite good quality—but implementation is a major issue. This fact perhaps stems from the disparate priorities and targets on local versus national levels. This is a big country!
At the European Chamber, have you found it realistic to champion the interests of more than 1600 members across so many different industries, and across varying nationalities? To what degree can such a diverse group have common interests?
Indeed, not all of them have common interests—but, hence, we divide them into manageable groups. These groupings are mostly industry-related, and vertical. Those members that cannot find their niche in the vertical groups can turn to the horizontal working groups that we also have.
These horizontal groups look into HR, IPR, and legal concerns, amongst others. There are many common interests in those areas, and I am speaking of common interests that go beyond just our EU members. These are common interests for Europeans, other foreign-invested enterprises, and, increasingly, local companies. More and more, we see overlap between our agenda and the agenda of, for instance, China’s private SME players. I believe that this is something to which we need to pay a lot of attention, and see whether we can join forces with those companies and industries that are domestically invested and face similar problems to those faced by our members.
What about the partnership opportunities between foreign and local players? As you have mentioned, China is attempting to climb the value chain, and to become more than a manufacturing powerhouse. For example, in oil and gas, we have heard of partnership paradigms wherein Western players are partnering with China’s state-owned players to enter third markets. Can you shed some light on the partnership schemes you have seem amongst foreigners and locals?
We have seen a number of phases. Traditionally—shall we say, 10, 15, or 20 years ago—partnership with a Chinese player would give a foreign organization quick access to the market. Hence, partnership was the focal entry point. There was a notion that because China is so different, in order to understand the local environment, any foreigner needed a local collaborator. Some of those ventures have done very well; many did not. There have been several reasons for failure, among them the simple fact that a joint venture is never easy, anywhere in the world. Someone once told me that the most successful joint ventures are set up to end, i..e., two companies sign an agreement for a given time period, and they decide when that time period will end and the conditions under which it would be dissolved. These are the most successful JVs, because they delineate clear common interests and a clear business plan. If there are incongruent understandings of what partners want from, and bring to, a venture, then it is often doomed. We have seen much of that in China.
Foreign-invested companies then had the notion that it was perhaps much better for them to stand alone, if they were able to do so. If they stood alone, they had full decision-making power, and there was no risk of divergent views on how to run operations—how to expand, or not to expand or how much to invest.
But is it not quite difficult, in China, to enter doors without a local network?
Today, more and more foreign companies have built up experience—either by having gone through partnerships, or by failing once or twice. They have paid their dues, and learned the market. More and more, foreign companies have insight into the market and are more prepared to stand alone.
But as I have said, there have been phases. Some years ago, a joint venture was often the only feasible way in, and 90% of Western businesses entered into such agreements. Subsequently, there was the stand-alone phase, and foreign players took on the mentality of, “At least we do not have a partner, and if we fail, it is on us; if we succeed, it is on us.”
Finally, today, there is again an increased trend toward partnerships. Chinese companies have themselves evolved, and understand how international companies function. They understand that there is a way to avoid conflict if common interests are better fleshed out at the foundational stages. As you mentioned, Chinese organizations are also looking outside of China, and as much as foreign players had identified the need to have a local partner here, Chinese players see the need for a partner in looking at outside markets. They too have a preference for going it alone, but recognize that perhaps it is better to partner, and join forces with international companies that have experience in developing foreign markets.
There are also still industries in China where partnerships are simply necessary. I mentioned that there are still de facto, and even official, barriers in the Chinese market. I think Oil & Gas is a good example of such an industry. There are still many restrictions on ownership, for example. In this sphere, it does not take much thought to realize that domestic partnership is often essential to even simply be allowed to enter the market.
The issue in Oil & Gas for foreign players is frequently related to how much technology they need to transfer. This is something the European Chamber is quite concerned with. We believe that a company should have access to the market without mandatory technology transfer. We understand that China needs technology, but it should be up to companies to find a way to make their operations viable commercially. It should be worthwhile to bring technology to the market, rather than a mandatory step in gaining market access. This is especially true in an environment where access can change very easily because of regulatory parameters. Companies are quite nervous about that.
I recently attended a seminar at the China-European International Business School, and one of our American colleagues, Jim McGregor from APCO, said that it was all a matter of getting a “fair deal.” I think this expression reflects quite well what companies need. They do not want to be forced into a situation, and have lingering concerns about whether they will be able to compete, both today and in the future.
These concerns are valid because, to be honest, in the last few years I do not see the market opening in the way we have seen it open in the aftermath of WTO accession, and even before that—we must not forget that much of the opening of the market happened well before China became a WTO member. There was huge momentum, and incredible restrictions on industries, in this country. In our opinion, that drive towards openness is markedly slowing, if not even grinding to a halt. We feel that there is a need to go beyond the WTO in finding a rationale to open up. It is not only about the WTO, but about continuing to develop China.
Probably because of the global financial crisis, China has become more cautious. As I have said before, the FDI door is closing in some areas, and remains open in others—for very specific reasons, mostly technology-related. But the barriers that are in place—the ownership restrictions in the car-manufacturing industry, in banking, and in Oil & Gas—are not evolving fast enough.
We believe that there is need for new vision on how much further China wishes to open its doors. At the European Chamber, we believe in competition. It drives innovation, efficiency, and so on. It is in the interest of China to open up.
Europe has recently taken the unprecedented step of openly asking the Chinese for help in saving the Euro and averting the European debt crisis, by actively lobbying for Chinese investment in the European Financial Stability Facility rescue fund. The New York Times has said that Europe is “giving China perhaps its biggest opportunity yet to exercise financial clout in the Western world.” What do you believe to be the implications of this situation on EU-Chinese relations?
I believe it is fair to state that there is a huge problem in Europe. The sovereign debt crisis is very real, and it calls for money. This represents an opportunity for those that have funds to invest. I do not say this because I believe that, in the long term, Europe is a particularly sound market; rather, it is definitely a large market, and for China, it is the largest market for export.
Therefore, I do not see this situation as Europe ‘begging’ China for money. It is a matter of talking to partners, recognizing a real issue, and finding common interests that will facilitate the resolution of the issue via investment. Investment should come not only to keep the markets going, or to continue the flow of trade, but because FDI of this kind can contribute to the development of China. If China invests, it can diversify its own portfolio, which is probably underexposed on Euros. I believe there are enough common interests among China and Europe to find common solutions, in the interests of both.
If China accepts, and gives financial help to Europe, many expect that the EU will have to concede on points such as formally recognizing China as a market economy under global trade rules, or ceasing to criticize China’s currency valuation policies. Could accepting China’s help be a danger for Europe and the West?
I do not believe it is dangerous to negotiate, or to talk. Dialogue is not dangerous. Europe has a direct interest in China; we have spoken at length about the opportunity that China represents. European companies are interested in having access to this market, and for that access to steadily increase.
On the specific issue of market economy status, we are speaking of a long-standing debate. The conditions are well defined, and it is up to specialists to decide whether those conditions are fulfilled, and warrant a change in status. I do not believe that China can buy its way in. Again, dialogue is ongoing, and Europe’s interests are well defined. We have yet to see what China will officially ask for, if anything. But dialogue will bring closure on this point.
What is your final message to the international readers of Oil & Gas Financial Journal?
I honestly believe that China is a big opportunity. However, it is not a market into which an organization can easily venture. One must do their homework, know what their company can bring as a competitive advantage, and what to do to keep that advantage—depending on the industry, this may call for continued innovation, or something else. I know that issues like IPR are troubling at this stage, but there are solutions. There are ways of doing business in China. Given the state of the markets outside of this country, it would be a pity to shy away from such large opportunity.
On behalf of the European Chamber, as a buffer between the industry and the government, if we can help in any way, we will.