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Tensions in relations

The ongoing US-China trade war and other disputes have worsened the relations between China and the developed nations.

TEXT: Jan Hökerberg
PHOTO: iStock
15 MARCH, 2019

When China launched its industrial modernisation programme “Made in China 2025” (MIC2025) in 2015, with the aim of becoming a dominant player in 10 strategic industries, it caused uncertainty among foreign multinational companies, which feared that the Beijing government’s plan was to shut them out from the Chinese market and make them less important globally.

According to a business confidence survey by the European Chamber of Commerce in China in June last year, a slim majority of European firms in China think that foreign-invested companies are treated unfairly, and almost two-thirds think that there is a lack of reciprocity between the access to China’s markets that they get and the access Chinese companies get to Europe.

The European Union (EU) is China’s biggest trading partner, averaging more than €1 billion per day. China is also the EU’s second-largest trading partner after the US.

MIC2025 was seen as a problem, with 43 per cent of companies surveyed saying they had seen increased discrimination under the plan. While the chamber said “visible progress” had been made around the issue of intellectual property (IP), 51 per cent of the firms said enforcement of IP in China was still inadequate.

China’s intention with the MIC2025 programme is to break its reliance on foreign technology and move the country up the value chain after having been regarded as “the world’s factory” for more than a decade.

Other countries have similar industrial development programmes in place such as Germany’s “Industrie 4.0”, Japan’s “Connected Industries” and “Made in Sweden 2030”. But what makes MIC2025 different is that China, according to an unofficial document, has numerous targets for Chinese companies to seize domestic and global market share, such as having Chinese new-energy vehicles take up 90 per cent of the domestic market by 2025 or that Chinese robot manufacturers take half of the domestic market in 2020 and 70 per cent in 2025.

In 2018, MIC2025 became a catalyst for direct confrontation between the US and China, triggering a trade war and worsening relations between the world’s two largest economies.

US President Donald Trump has labelled MIC2025 as a threat to US economic growth and an example of China’s allegedly unfair trade practices.

Even if President Trump is wrong in almost everything he says and does, he has a point when he accuses China of protectionism and thefts of technology and intellectual property.”

Ulf Ohrling, Ohrling Advisory

Even if the plan can be regarded as an ambitious blueprint for transforming China into an advanced manufacturing economy, some observers have seen a change of attitude in China lately against foreigners.

“The attitude to foreigners in China has changed over the past decade,” says consultant and lawyer Ulf Ohrling, who served as the chairman of SwedCham Hong Kong between 2011 and 2017. “China has become more nationalistic while their economy has become larger. Before, China could only offer a cheap labour force. Now, when they have capital and knowledge, they don’t need foreign companies as much as before. This change has been rapid.”

“Even if President Trump is wrong in almost everything he says and does, he has a point when he accuses China of protectionism and thefts of technology and intellectual property. If China want their companies to play on a global level playing field, it must be prepared to provide the same to foreign companies in China. Reciprocity is as important as free trade,” Ohrling adds.

Mats Harborn, who was the chairman of SwedCham China between 2005 and 2013, points out: “China has never before been more integrated into the world than it is today, since it plays a leading role in the world economy and in the global supply chain.”

He thinks that China’s relations with the West are in general better than before, but that the Chinese are sometimes “clumsy” in their relations.

“This creates confusion and conflicts when they cannot live up to the importance they have actually achieved in the world,” says Harborn, who is the president of the EU Chamber of Commerce in China and executive director of Scania China’s Strategic Office.

“China wants to have a seat at the table but they are lacking self-esteem so they sometimes act like a teenager who is on their way to maturity. In a way, China may always have acted like that before but then it didn’t matter so much since China was not as important as it is now in the global economy,” Harborn adds.

When the Italian luxury fashion brand Dolce & Gabbana made a video of a Chinese woman eating a hamburger with chopsticks or when the British high-end brand Burberry posted a Lunar New Year greeting by publishing “creepy” family portraits that some Chinese users likened to Asian horror movies, many Chinese saw this as foreign brands offending Chinese culture.

Chinese consumers are today so well-informed and with the power of social media they can react immediately, often with a nationalistic undertone.

For foreign-owned companies it has therefore become more and more important to know how to crack the China code.

“Foreign-owned companies need to learn what can be done and what to avoid when marketing their products in China. They have to hire professional local advisers, but at the same time they can’t compromise their core values. It’s a difficult balance act,” says Harborn.

“Chinese products have, over the past five or 10 years, become so much better and more competitive, often with very high quality and attractive prices, and Chinese companies deserve full credit for having achieved such progress,” Harborn adds.

The big risk now is that foreign-invested companies will slow down their China strategies which would be a real mistake.”

Mats Harborn, European Union Chamber of Commerce in China

10

The number of strategic emerging industries in which China aspire to become globally competitive by 2025.

An example of worsening relations between the US and China is the case of the telecommunications giant Huawei Technologies, which also affects the relations between China and European nations.

The US have been investigating Huawei since 2007, having voiced concerns that Huawei’s equipment could contain “backdoors” to Beijing for espionage. In 2012, the US House Intelligence Committee released a report alleging that Huawei and another Chinese telecom equipment maker, ZTE Corporation, posed a threat to US national security and that their products could be used by Beijing to spy and steal data. Huawei has repeatedly denied these allegations.

In December, the firm’s chief financial officer (CFO), Sabrina Meng Wanzhou was arrested in Vancouver and could later this year face trials in US courts. Meng is the daughter of Huawei’s founder Ren Zhengfei.

On 28 January, the US Justice Department filed nearly two dozen charges, ranging from bank fraud to stealing trade secrets, against Huawei.

“Huawei has for some time, because of security reasons, been prevented to work with the leading telecom operators in the US, Australia and New Zealand for the development of 5G. Some European countries are also worried and are thinking about restrictions. On the other hand, other operators say that they have not experienced any bugging or espionage of any kind. For them, Huawei remains an important supplier,” says Bengt Nordström, chief executive officer at Northstream, a telecom industry analysis firm based in Stockholm which he founded in 1998. Before that, he worked as a chief technology officer at the operator SmarTone in Hong Kong and also at Ericsson in Sweden.

“The most likely scenario for the Huawei case,” says Nordström, “is that there will be some restrictions against the company in US-allied countries, which would result in reduced market shares in those countries. China’s countermove could be to reduce foreign telecom suppliers’ market share in China.”

If the US-Huawei conflict continues to escalate, it could put a spanner in the wheel for the whole telecom ecosystem and lead to higher costs that the consumers have to pay.”

Bengt Nordström, Northstream

It could, however, become a more complex issue than that.

Some 20 years ago, Huawei was not a player in the global arena. In 2011, the company was as big as Ericsson and today they are four to five times bigger than Ericsson and the most powerful telecom supplier in the world. Huawei is also China’s biggest industrial success. The Chinese are very proud of Huawei.

“The worrying scenario is whether the conflict will escalate. If Huawei’s CFO, who is the founder’s daughter is taken to court in the US, it is difficult to forecast what China would do, but there would definitely be some kind of countermoves. Such actions could involve anything, they don’t necessarily have to be related to telecoms,” says Nordström

Huawei has built a strong presence in European markets and has been working with its European counterparts, such as Ericsson and Nokia, on the development of 5G networks for several years. The fifth generation of telecommunication networks are expected to be at least 20 times faster than the most advanced networks today.

Whereas existing networks connect people to people, the next generation will connect a vast network of sensors, robots and autonomous vehicles through sophisticated artificial intelligence.

In 2015, China and EU signed an agreement on 5G cooperation, such as to conduct joint research and promote standardisation. Just recently, the EU began a two-year programme with China to develop 5G under the 2015 agreement.

Huawei has been successful in many European markets both with handsets and network equipment.

“If the US-Huawei conflict escalates, it could put a spanner in the wheel for the entire telecom ecosystem and lead to higher costs that the consumers have to pay,” says Nordström who doesn’t think it would benefit Huawei’s network equipment competitors Ericsson and Nokia.

“Most people don’t understand how dependent everyone is of each other in such an ecosystem. Ericsson has R&D in China, Huawei has R&D in Sweden, iPhones are manufactured in China, and so on. Suppliers of components are often the same players. What characterises the mobile ecosystem is that there is extremely tough competition in every link of the value chain. If things were to change and lead to disruptions it would be very sensitive for every player involved,” Nordström says.

When Huawei became a big player in the telecom sector it led to an increase in R&D and to tougher competition. This has benefited both the end-users and the operators.

Everyone has not survived. Motorola, Nortel, Alcatel and Philips don’t exist today as independent mobile network companies. Nokia, which dominated the handset market 13-14 years ago, is a much smaller player today.

The Chinese firm ZTE Corporation is another example. In April 2018, the US government put a trade ban on ZTE, which meant that the company was no longer able to acquire products like Qualcomm processors or Android software from the US. Then in July, the US said it would allow ZTE to once again obtain critical parts and software.

“However, the harm was already done,” says Nordström. “My conclusion is that ZTE now cannot come back as a global telecom networks supplier.”

Whatever will be the outcome of the US-China trade war and the US-Huawei dispute, it is clear that conflicts of these kinds easily can affect the entire global economy.

“To succeed with ‘Made in China 2025’, China needs access to the ecosystem. Everything that happens within this industry anticipates global scale of the business. The risk with these types of conflicts is that they will not be rational and there could be a backlash throughout the entire industry over a period of time,” says Nordström.

Harborn believes that China’s ambitions to become more independent of US technology will increase.

“China has now realised that it has been over-optimistic in its belief of how far they can go on their own. The only way forward is to integrate more in the trade chain. They are looking for the absolute best suppliers they can find,” he says.

“The big risk now is that foreign-invested companies will slow down their China strategies which would be a real mistake. China is at the forefront when it comes to innovation and if European companies are to survive long-term we need to be more active in China than we are today. We need to be present and try to influence new regulations,” says Harborn.

Industries targeted in Made in China 2025

The Made in China 2025 plan, released in 2015, identified 10 industries in which China aspired to become globally competitive by 2025 and globally dominant during this century. Those industries are:
• Next-generation information technology, including 5G networks and cybersecurity
• High-end numerical control tools and robotics
• Aerospace
• High-end shipping
• Advanced railway equipment
• New-energy vehicles
• Electric power equipment
• Agricultural machinery
• New materials, such as those used in screens and solar cells
• Biotechnology and high-performance medical devices

There is also a separate development strategy for AI, published in 2017, according to which China aims to become the world’s primary AI innovation centre by 2030.