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Misaligned Expectations

by Mable-Ann Chang

October 20, 2020

Jörg WuttkeJörg Wuttke, President of the European Union Chamber of Commerce in China, discusses how European companies are faring

The EU Chamber of Commerce in China, currently led by President Jörg Wuttke, was founded in 2000 by 51 member companies with a shared goal of establishing a common voice for European businesses operating in the country. It has now expanded to over 1,700 members with chapters active in nine cities across the country. The Advisory Council of the Chamber includes the CEOs and presidents of some of the largest EU companies with investments in China.

Wuttke has also been the Chief Representative of German multinational chemical company BASF in Beijing since 1997. In May 2019, he was elected for a third term as the President of the European Union Chamber of Commerce in China. Since 2019, he has been Vice Chairman of the CPCIF International Cooperation Committee, a group representing multinational companies in China’s Chemical Association. From 2011 to 2019, he served as Chairman of the Business and Industry Advisory Committee to the OECD’s China Task Force.

In this interview, Wuttke looks at the state of China-EU relations and how COVID-19 has impacted on European businesses operating in the country.

How would you rate the state of China-EU relations?

On the economic side of the relationship, China sells products worth about €1.1 billion ($1.3 billion) to the EU every day. We are their largest market and the biggest customers of Chinese products. The EU sells about €500 million of products a day back to China, with China being the EU’s second largest market after the United States. On the streets of Beijing and Shanghai, one can see many European cars and luxury European brands. When it comes to trade, it seems like we quite like each other’s products.

Of course, Europe would like to partake in more trade with China, but companies are experiencing many market access problems. We are addressing these issues in the European Chamber, so the potential for things to get better is still there. Economically, the openness of China can be improved, but the real problem lies on the political side of things.

What prospects are there for resolutions on issues that exist?

The real issue lies in a lack of understanding of the other side’s position. China still believes that it only has to worry about economic relations with Europe and doesn’t realize how the mood is shifting in the political realm.

On the other hand, Europe is struggling to understand that China has some economic red lines involving state-owned enterprises (SOE). China’s stance on SOEs is something that Europe and the US want them to change, but they’re not willing to, as SOEs are one of the power tools of the Communist Party. Reaching a middle ground in that regard is going to be  difficult. Communication channels between China and Europe are few and limited, and there is also media on both sides distorting the picture. Chinese media often depicts the image of Europe sinking and China rising, while on the EU side, the media depicts China as intimidating and controlling.

We at the European Chamber are trying to bring facts to the table because we want to make people aware of what the real EU-China situation is—even if it may be uncomfortable. I am not full of optimism. The Russians have a proverb that describes this sort of situation: “An optimist is just a badly informed pessimist.”

How have EU businesses in China been faring pre- and post-virus?

EU businesses were doing quite well before COVID-19, but now we are facing significant problems, particularly in the service and tourism sectors, which have essentially fallen to their knees. In manufacturing, however, we’re doing surprisingly well, especially in the chemicals sector, which is up even in comparison to 2019.

European businesses have proven to be fast at responding to the needs of China, such as for masks and personal protective equipment in January and February. Then after Europe started running out of equipment at a later stage, we all went into overdrive to buy those products here in China to send back home. My company alone bought 150 million masks to be shipped to Germany earlier this year.

I believe we are doing much better than our peers elsewhere in the world, as China’s economy was the first to recover from the coronavirus. European companies here are therefore now relying to a large extent on the profitability of their operations in China.

In light of the announced adjustments to foreign business regulations in China, do you see any of those changes impacting EU companies?

Small steps in a huge market might mean that in some areas you actually gain some business traction but, in many ways, it is more of a cosmetic change. Beijing always relaxes rules when business is basically already fully in the hands of Chinese companies, so there is no way that we can compete.

We always only get permission to step onto the platform once the train has left the station, and at the entrance of the train station there is always a celebration, as if the occurrence is a massive benefit for European companies. I always say: I would really like to step onto the platform and see a train waiting for me.

Made in China 2025 [a government policy to develop the country’s manufacturing sector] is no longer referred to by Chinese media, but it appears to still be very much in place. What is the EU view on Made in China 2025 and what do you see as the impact of its implementations?

The chamber launched a study in March 2017 on the potential impact of Made in China 2025, which was actually viewed among Chinese decision makers as a warning on overcapacity. Made in China 2025 was perceived to be a threat on technology globally. It was because some people realized that it could cause negative perceptions for China itself that it disappeared.

Beijing has learned that if they protect China’s massive market, provide subsidies and indicate that there is no foreign competition—excluding us—that it will lead to overcapacity. Presently we believe it means that China, in pursuit of technology gains, will adopt a different tactic to achieve the goal, particular because of the tech war with the US. It is likely that they will put even more money behind it, but technology gain issues are still present, now more than ever.

To what extent are the interests of the EU and US aligned in terms of addressing the question of economic relations with China?

The communication interests of the American Chamber of Commerce in China and the European Chamber are aligned. We engage with each other on a deep level. But when it comes to the US and the EU government members, there is virtually no alignment, which makes things difficult. The US has unleashed a trade war of sorts with Europe, so there’s no love lost. But I can see some green shoots of hope where the US has realized that to take on China, they need allies. So far, the US has managed to disengage itself around the world, such as from the Trans-Pacific Partnership. However, there are some people now realizing that if you want to get things done, you must stick together.

It’s going to take Biden to reconnect the dots, but up until this moment, there is practically zero alignment between the US and Europe.

Do you view decoupling as a real possibility? And what kind of scenarios do you see in this reconfiguration of the world?

Decoupling is always seen as deglobalization, which I believe is wrong. Decoupling is something that will happen in some areas, but the world is too intertwined to create two islands of happiness. There are still many areas in between where we can see decoupling on trade, such as in the form of tariffs. We could also see decoupling occurring on the technology front, which has different standards, export controls and screenings. That will get more and more pronounced in the US, but I can see this also happening in the EU. Then, of course, the ultimate decoupling question mark is in finance. That is where we must see to what extent the US is willing to leverage on the fact that the dollar is the global currency and how much they essentially want to punish China. We have seen how this can be done with Russia. Decoupling on the financial front would really be the nuclear option.

Everything is possible at this stage. The European Chamber will be releasing a study in December on what a decoupling between China and the US would mean for European businesses.

Supply chain dependence on China has been highlighted by the virus and even more so by the political strains that exist now. To what extent should supply chains move [out of China], and to what extent can they move?

Supply chain dependency has now primarily been labelled a security issue, meaning it deals with items such as health care equipment and pharmaceuticals. European leaders are rightfully saying that we should be producing these kinds of items closer to home. It’s not wise to be 60% dependent on antibiotics coming out of China. But then the question European leaders must ask themselves is whether insurance companies and consumers are willing to pay more. That leads me to the fact that moving supply chains out of China is virtually impossible.

Moving out is tricky when there is a global recession and you’re short on cash. The problem that companies face now is that they actually have too many factories on their hands. To diversify would mean adding another factory into the mix, which includes the elements of cost complexity and challenges to resources. Nobody is going to do this. Moving will mainly be in security-related areas, where governments are driving and eventually paying for the move. Companies in other sectors are not diversifying, they would rather close factories.

Every survey we’ve done recently has shown that around 10% of companies are considering moving out of China. What’s interesting about that is how in 2011, 22% said that they’re considering moving out. It’s now less than it used to be.

During the early decades of globalization, manufacturing in the EU and the US fundamentally closed and was moved to China. What would be your view on this? Did it go too far? Are we looking at a revival of manufacturing in Europe?

Moving manufacturing home would be difficult because China is still seen as a growth story for decades to come. China’s gross domestic product per capita is around $10,000, which is only 60% that of the US and 21% of Germany’s. China still has a lot of growing and catching up to do.

According to my company’s assessment, China will represent 30% of global growth over the next 10 years. That is as much as the growth of all OECD countries combined. You simply cannot avoid China. As the saying goes: “If you refuse to sit at the table with China then you will be on the menu.” People must realize that China’s growth story—given the size and backwardness of this economy—is not over yet.

There needs to be a wake-up call. For us to move to China was an obvious choice, but we need manufacturing in Europe as well. We cannot leave all production up to others as manufacturing drives services and innovation. A country cannot rely solely on services. The hope that I have is that China’s success story will eventually put some pressure on Europe to introduce reform, to increase science in schools and access to high-tech equipment and software. Europe really must get its act together to compete. Too much complacency is not good.

Overall, what do you see as the future of European businesses in China? Where are we likely to be in five to 10 years’ time?

In five to 10 years from now, businesses will become more China focused, China bound and China dependent. If China stands for 30% of global growth, in chemicals it’s even as high as 60%, it’s ultimately going to be a China story. If we disregard this, then we’re going to be in real trouble.

All sectors will see European businesses shrink in percentage of market share but grow in actual business. With China getting bigger, even if we have a smaller portion of the pie, we will still see the volume of our business increase. Again, we must be in China to compete with Chinese companies. If we wait for them to come to global markets, it will be too late.

How many members does the chamber have now compared to three years ago? And what would be your expectation on the future trend?

Our membership has plateaued. We have almost the same number of members now as we did three years ago. But even though we haven’t grown in numbers, our members’ business has grown.

One constraint is market access problems, as some companies that want to come over here are sometimes not permitted to do so. Another is that very often the localization of top management in European companies leads to the fact that Chinese nationals are not really convinced that a chamber is a good thing to join. They see it as a waste of money and don’t believe in the lobbying power that we have. Therefore, there has been a tangible culture shift and a challenge.

Over the next few years, we will likely grow slightly but not much more. We will definitely face challenges now because of the incredible restrictions we’re facing due to COVID-19. Our residents can’t come back to China, which is in stark contrast to Chinese residents in the EU who can travel freely. Anglo-Saxon schools in China still have 50-60% of their staff members stuck abroad, companies’ employees are still outside of China and it has also affected companies’ recruitment. I don’t see this issue being resolved this year.

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