China Direct

Watching China in Europe with Noah Barkin - June 2023

 

 

To view the latest June 2023 insights from Noah Barkin of the EU-CHINA relationship please visit GMFUS here.

To sign up to this excellent newsletter kindly click here.

Our thanks to the German Marshall Fund US for kindly sharing this information.

MERICS - Chinese Inward Investment Trends into Europe - A Report

Berlin, May 9, 2023. Battery investments are now the mainstay of Chinese investment in Europe, showing that the region has become a key part of China’s global electric vehicle (EV) expansion. 

This is one of the key findings from a report published today by the Mercator Institute for China Studies (MERICS) and Rhodium Group on the latest trends in China's foreign direct investment (FDI) footprint on the EU-27 and UK.
According to the authors, there has been a substantial shift in the nature of Chinese investment in Europe: driven by EV battery factories, greenfield investment now dominates Chinese investment activities in the region, reaching EUR 4.5 billion and 57 percent of China’s total FDI in Europe in 2022. 

Chinese greenfield projects, in which parent companies create subsidiaries in foreign countries and build operations from scratch, overtook mergers & acquisitions (M&A) in Europe for the first time since 2008. The latter fell to EUR 3.4 billion in 2022, the lowest level since 2011.

The increase in greenfield investment was driven mainly by a few large-scale projects, almost exclusively concentrated in the automotive sector as Chinese battery giants – including CATL, Envision AESC and SVOLT – invested in building plants in Germany, Hungary, the UK and France.

These four countries were also the main recipients of Chinese investment in Europe in the past year, accounting for 88 percent of China’s total FDI. All four not only received major greenfield investments, but also most of the year’s M&A activity. 

Overall, Chinese investment in the EU and the United Kingdom continues to decline, dropping to a decade low of just EUR 7.9 billion in 2022, down 22 percent compared to the year before. This takes Chinese investment back to its 2013 level. As in 2021, consumer products and automotive remained the two top sectors, accounting for three quarters of total Chinese investment in Europe.  

Ongoing and new greenfield investments will put a floor under aggregate investment amounts, and Chinese firms are considering further expansion in Europe in segments of EV value chains, including vehicle production. Yet these will not be enough to create a long-lasting rebound in overall Chinese FDI in Europe, as the experts from MERICS and the Rhodium Group write. 

You can read the report “EV battery investments cushion drop to decade low: Chinese FDI in Europe – 2022 update” by Agatha Kratz, Max J. Zenglein, Mark Witzke and Gregor Sebastian online here.

Best regards,
Claudia Wessling, Director Communications and Publications MERICS 

Our sincere thanks to Claudia Wessling and the team at MERICS for providing this report.

China's innovation ecosystem and the localisation dilemma - EUCCC / MERICS Report

Executive Summary

Members of the European Union Chamber of Commerce in China (European Chamber) have provided unique insights into China’s innovation ecosystem for this report. A late 2022 survey of 107 European companies— backed up by extensive follow-up interviews—portrays a complex environment that necessitates a wide range of localisation strategies to be deployed depending on the industry each company is in and the contribution they can make to China’s strategic goals, as well as their size.

Periodic adjustments to these strategies are also required in order to both better align with China’s increasing innovation capacity and manage emerging political factors that are undermining long-term business confidence. There are several positive market factors steering a large share of European companies towards deeper localisation, including the size of the Chinese market (61%), strong demand (47%) and the fast pace of commercialisation of
research and development (R&D) results (39%).

These factors have created an extremely dynamic environment that incentivises onshoring of R&D operations in order for companies to be closer to their customers so they can tailor innovation to their needs more effectively and, in some cases, even export R&D results to the rest of the world. At the same time, a number of regulatory factors are having both a positive and negative influence on R&D strategies, with some incentivising companies to localise and others forcing companies to put strict limitations on their R&D operations.

Policy-related factors reported as having had a negative influence on R&D strategies include China’s weak intellectual property rights (IPR) protection system (34%), an unlevel playing field for foreign companies (32%) and limited or non-existent government support (24%). However, of those that could access R&D-related government support, policies reported as having had a positive impact include tax incentives (46%), access to related subsidies (35%), and those related to attainment of high- and new-technology enterprise (HNTE) status (32%).

Further complicating the picture is the Chinese Government’s ongoing advancement of its technological self-reliance campaign, aimed at creating completely localised supply chains insulated from external shocks, while expanding the country’s access to foreign technology. This is resulting in increased pressure for certain companies to localise technology and onshore R&D into China.

While demands to do so are coming primarily from state-owned enterprise (SOE) and government customers, private business partners are increasingly exerting their own influence. One of the core requirements for investing in R&D is a predictable and reliable business environment. While business confidence was deeply eroded by China’s stringent zero-COVID policy and the subsequent lockdowns and travel restrictions, many European companies are optimistic and expect this to be restored over time.

However, the impact that geopolitics is having on the stability of China’s business environment is only expected to worsen. Nearly half of respondents reported negative impacts on R&D strategies resulting from Russia’s invasion of Ukraine, and many interviewees said the role that corporate risk assessments are now playing in strategy-making is unprecedented.

A potential escalation of Russia’s war in Ukraine or further frictions in the Taiwan Strait are scenarios that businesses are taking into account, and the potential risks they pose do not support a case for increasing R&D investments in China. These factors, among others, pose a dilemma for European companies. The rewards of localising technology and R&D into China are considerable, but so are the potential hazards.

The broad spectrum of strategies being employed by European companies are bookended by two opposing views: as one company noted, it is essential to do R&D in the China market to make the most of the innovation ecosystem and compete for market share with domestic rivals; another posed that since China’s system favours local competitors and because technology leakage risks are high, it makes more sense to secure and increase their share in other markets outside China; their logic being that there they only have to compete with their Chinese counterparts, and not the Chinese Government as well.

To access the full report please click here.

Our sincere thanks to both MERICS and the EUCCC for kindly sharing this report.

Watching China in Europe with Noah Barkin - April 2023

 

To view the latest April 2023 insights from Noah Barkin of the EU-CHINA relationship please visit GMFUS here.

To sign up to this excellent newsletter kindly click here.

Our thanks to the German Marshall Fund US for kindly sharing this information.

Controlling the innovation chain - China's strategy to become a science and tech superpower - MERICS

Controlling the innovation chain

China’s strategy to become a science & technology superpower

Key findings

• Inspired by the idea of the innovation chain, Beijing is accelerating its efforts to optimize and align every step of the innovation process. Several support programs are currently undergoing reform, comprising a degree of recentralization, realignment towards strategic needs (technological self-sufficiency in particular), and a shift in focus towards commercialization over other R&D outputs.
• China sees improving its capacity in basic research as part of global tech competition. New policies are incentivising researchers to transfer technology, link up with industry, and focus on national priority areas.
• As part of a shift from quantity to quality, Beijing has reduced the number of project-based funding programs and dramatically slowed the approval of new laboratories and development zones. This reverses decades of decentralization, local experimentation, and greater autonomy of research and business communities, which grew from the principle that markets are better at allocating resources than governments.
• China’s innovation system is increasingly hierarchical, resulting in a greater degree of central coordination and control. Centrally supported “national labs” have the highest ranking. Below them are “key labs” at various levels, such as “state key labs” and “provincial key labs”. Similar hierarchies exist for projects and zones.
• The Chinese Communist Party (CCP) continues to define the goals of scientific research in ever narrower national terms. This is causing tension with the principles of openness and international collaboration that govern much of the (basic) research carried out in Europe.
• This trend will impact the work of heads of university and corporate research and development (R&D) labs and of science and technology policy decision makers in Europe.
• China continues to be an attractive innovation partner and will likely remain so for some time. However, successful collaboration will require European companies, researchers, and other innovation players to navigate the shifting priorities of China’s project-based funding programs, laboratory systems, and development zones.
• European actors that engage with China’s innovation ecosystem should be aware that their Chinese partners are under growing pressure to contribute to China’s pursuit of technological self-sufficiency and other major strategic goals.

To access all the findings and download the report please click here.

Our thanks to MERICS for kindly sharing this report.

Watching China in Europe with Noah Barkin - Feb 2023

 

To view the latest February 2023 insights from Noah Barkin of the EU-CHINA relationship please visit GMFUS here .

To sign up to this excellent newsletter kindly click here.

Our thanks to the German Marshall Fund US for kindly sharing this information.

EU-China Opinion Pool: Calibrating interdependence with China

One of the EU’s most heated current debates about China concerns the question of how to reduce risks arising from interdependencies with the country. Over the last years, Beijing has demonstrated its readiness to make use of economic coercion. And the Covid-19 pandemic and looming geopolitical crisis over Taiwan has made Europe acutely aware of supply-chain risks. Business leaders and politicians in Europe are now discussing options to ensure competitiveness and economic resilience.

MERICS Analyst Grzegorz Stec has asked experts for their opinions on how the EU should proceed as it attempts to calibrate interdependence with China.

For a comprehensive assessment from the EUCCC, BusinessEurope, BDI, GEI and Merics please click on the link below:

“Calibrating interdependence with China - how should the EU proceed? (4 min read)

With our sincere thanks to the team at Merics for sharing this latest EU-China opinion poll.

Merics China Forecast 2023

Merics' survey of 880 China watchers suggests the country’s course is most unpredictable – except that it will continue to stand by Moscow and accept EU-China

relations fraying.

Unbridled power in the hands of Xi Jinping, underlying pressures economic and social, and unpredictable policies in any number of fields – the level of

uncertainty about China in the year ahead has never been higher than in this fourth edition of our MERICS China Forecast. MERICS solicited the views of 880

China experts and non-expert members of the public with an interest in the country. Their responses don’t make for optimistic reading. 

Last year’s events in China at least still ranged from the surprising to the certain. In October, Xi secured his expected third term as general secretary and packed the Chinese Communist Party’s (CCP) Politburo with loyalists. But then in November, nationwide protests against draconian Covid-19 lockdowns caught the political establishment on the back foot. And it, in turn, in December surprised everyone by abruptly ending many of its zero-covid measures. At the start of 2023, the China watchers we surveyed consider the ongoing dynamics of Covid-19, the geopolitical environment and a looming global recession as the top three challenges the country in the (still almost) 12 months ahead. They are seen as additional risks to China’s economic and technological development, with the potential to put greater pressure on Chinese society. Given this, our respondents consider Covid-19 measures, economic stress and social inequality the most likely triggers of renewed public dissent. To access the MERICS 2023 FORECAST please click here.

Our sincere thanks to MERICS for sharing the Forecast.

EU-China Opinion Pool: EU-China relations after the Party Congress

EU-China Opinion Pool: EU-China relations after the Party Congress

The 20th National Congress of the Chinese Communist Party (hereinafter: the Party Congress) signaled a continuation of Xi Jinping’s leadership, emboldening commitment to party policies now in full compliance with Xi Jinping thought. Having had some time to pore over the finer details of Xi’s work report, selected experts take a look at its implications for EU-China relations.

In this round of MERICS’ EU-China opinion pool, compiled by MERICS Analyst Grzegorz Stec, we have asked a number of experts: 

What does the outcome of the Party Congress mean for the EU and EU-China relations?

To read the EU-China Opinion pool please click here.

Our sincere thanks to the team at MERICS for sharing this information.

 

 

The Chosen Few: A fresh look at European FDI into China - Rhodium Group

After decades in which China felt like a one way bet for European firms, market conditions have become far more challenging due to restrictive COVID-19 policies, slowing economic growth and rising geopolitical tensions. Against this increasingly uncertain backdrop, we have taken a close look at European (EU+UK) FDI in China to assess the current state of investment on the ground, and shed light on how it has evolved over the past decade. Our key finding is that European investment has grown much more concentrated, both in terms of the companies that are investing there, the countries they come from, and the sectors in which they operate. While a handful of large firms, many of them German, continue to pour money into their China operations, many other firms with a presence in China are withholding new investment. At the same time, virtually no new European firms have chosen to enter the Chinese market in recent years. And acquisitions of Chinese firms have stalled, with greenfield investments increasingly dominating the FDI landscape.

Our findings point to a widening gap in how European firms perceive the balance of risks and opportunities in the Chinese market. They also suggest that a more nuanced perspective on the issue of European corporate dependencies is needed. From a direct investment point of view, it is wrong to talk about a broad-based dependence of European, or even German, companies on the Chinese market. As policymakers in Berlin and other European capitals consider measures to reduce economic dependence on China, they would be wise to take the growing concentration of corporate risks into account.

To read the full Rhodium Group research note please click here.

Our sincere thanks to the team at Rhodium Group for kindly sharing this information.