The aim of this EM Talks was to discuss how current developments in China and the programs followed by the Chinese government are affecting European multinational companies doing business in and with China. China’s Covid-19 containment policy, the US-China trade war and the “dual circulation” program have marked effects on global supply chains and the demand for European products and services. The pandemic related lockdowns of Chinese ports and factories have been denting domestic growth and disrupted global supply chains. The trade war between the USA and China has turned into a more comprehensive conflict affecting technology and financial markets. An intensified decoupling of the Chinese and US markets would leave European firms “stuck-in-the-middle”. An actively pursued decoupling by the Chinese government, i.e. a strategy of reducing its dependence on foreign technology and facilitating the domestic – and later global - dominance of indigenous firms, would have dramatic consequences for the rest of the world. What are the strategic challenges for European multinationals resulting from these developments? How do they respond?

Panelists:

• Doris Naisbitt, Director of the Naisbitt China Institute

• Alexander G. Welzl, President of China Data Analysis & Research Hub

• Arnold Schuh, Director of the Competence Center for Emerging Markets & CEE at WU

Moderator: Manfred Reichl, MR Advisory and Investments GmbH

The panel began with introductory statements of the panelist. Arnold Schuh presented the findings of a study he did together with Daniela Huber on the impact of the US-China trade conflict and Covid-19 pandemic on relocations of global supply chains (GSC) out of China.

What did they find out?

• There is no wave of relocations of foreign multinationals out of China. Less than 20% of US and 15% of European firms moved partly or fully out in the 2019-2021 period.

• These were mainly partial relocations – only certain processes were moved out of China

• Vietnam and Southeast Asia are the main destinations for relocations

• Reshoring is not the preferred choice among those that moved. Only 11% of German firms and 4% of US firms moved back home.

Foreign MNCs use four strategies to respond to these external shocks:

• Localization – meaning “manufacture in China for China”

• Geographic diversification:

  • “China + 1”, i.e. the continuation of operations in China and the parallel building-up of a supply base in another country

  • Broader diversification of GSC beyond one country

• Decoupling, i.e. The separation of GSC by final markets, meaning different GSC for US/EU and for China

• Reshoring and nearshoring.

While reshoring or at least nearshoring is called for by governments in EU and US, Western multinationals seem unconvinced and show a low propensity to move production back home.

Most of the foreign firms are in a “wait-and-see”-stance. Before the relocate, they want to have a better understanding of the developments and the potential impact. The big problem is that it is difficult to find an efficient alternative destination. The advantages of China regarding production capacity, cost efficiency, size and quality of workforce, financial support by the government and well-developed infrastructure are hard to match.

Doris Naisbitt, Director of the Naisbitt China Institute, columnist, author and co-author of bestselling books such as “China´s Megatrends” and “The China Model” described China’s long-term strategic planning in developing the country and what role foreign multinationals shall play in this framework. Creating a business-friendly environment particularly for direct foreign investment and established enterprises is on top of the agenda - not just of the central government but of regional governments and city heads too.

Chengdu, the capital of Sichuan, presents itself as very service oriented. The major installed quarterly meetings with all major companies. Every problem put on the table must either be solved immediately, or, if that’s not possible, a solution must be presented within 24 hours. As foreign enterprises were burdened by taxing spare parts to repair or upgrade machines, the administration solved the problem by an agreement that those parts are exempted from taxing. Education, as the backbone of a qualified workforce, ranks high in the interest of China. Local governments are supporting vocational trainings of staff and career starters. Comprehensive support packages are given to direct foreign investors who are establishing branches or headquarters in less developed parts of China. Naisbitt described the Chinese approach as “framing the forest but letting the trees grow”. Finally, she pointed at the necessity to distinguish between an “ inside out” and "outside in" perspective – both leading to a better understanding of China and its business opportunities.

Alexander G. Welzl, the President and co-founder of the think-tank China Data Analysis & Research Hub (CDA), stressed the necessity to foster an evidence-based dialogue between Europe (the West) and China. Identifying differences is relatively easy. Building bridges however is hard - and it seems to get harder almost every year. Without these bridges of cool-headed dialogue and peaceful problem-solving it will be very tough to meet the challenges of the coming time. In order to transform our fossil fuels driven economies towards circular economies a huge global effort is needed. At CDA they have coined the term of “geo-innovation” for it. This concept addresses the cooperation between national innovation systems of sovereign (European) nations with China (and other countries). Innovation and knowledge-intensive high-tech companies in particular and multinationals in general are at the core of this innovation-driven transformation process. Mutual learning is a basic building block of this process what also includes learning from China. Welzl underlined China’s innovation performance with a few figures: for instance, in 2020 40% of GDP was generated by activities related to Big Data and Artificial Intelligence. In the e-commerce sector with sales of $2.3 trillion and in mobile payment systems with more than 600 million users China is far ahead of any other country.

Then Martin, Selena and Miguel, students of the Master in International Management/CEMS’s course “China and its impact on the world economy” run by Dr. Manfred Reichl, presented selected findings of their work. They showed that the economic weakness as China experienced it in the mid of last century was rather an exception in history. At different times, China was called the Middle Kingdom, implying its superior role as the centre of civilisation or even the world. Today China’s economic and political ascent signals that – in its own understanding - it is on its way back to its historic leading position. Foreign multinationals are facing an uneven playing field in China, where the government is openly supporting local firms to become not only leaders in their industries on the Chinese market but also globally. State-owned enterprises still play a major role domestically but in the Belt and Road initiative too. In the “dual circulation” program, China promotes independence and self-reliance in key industries and sees foreign firms active in China as rather instrumental in achieving this goal.

As so often, the presentations and following discussion showed that it is difficult to come to easy conclusions regarding the developments in China and their impacts on foreign direct investors. While the huge market is luring, access to the market comes at a cost, namely the sharing of technology and expertise. Given the extraordinary entrepreneurial spirit, the government’s directedness and commitment to long-term goals and programs, the innovativeness of Chinese businesses in key areas and their speed in implementing new product ideas, Chinese firms have become formidable competitors of European firms in just three decades what is impressive. Seen from the “inside-out” perspective there is lot what Europe can learn from Chinese ways of doing business.