Beijing’s investments in Europe: “Germany is strong where China wants to catch up”

Beijing’s investments in Europe
“Germany is strong where China wants to catch up”

08/27/2023, 11:55 am

Chinese companies want to open new plants in the EU. They are far ahead of the European competition in the production of electric cars, says Gregor Sebastian, an expert on industrial policy, in an interview. Sebastian conducts research at the Mercator Institute of China on Chinese direct investments and partnerships in Europe. He stresses that Chinese companies are still lagging behind in other sectors that Beijing considers strategically important. They therefore wanted to learn something from German market leaders.

ntv.de: Instead of relying on company takeovers as in the past, China now prefers to set up subsidiaries or production facilities in Europe. Why is there this shift in strategy?

Gregor Sebastian: The companies that bought up earlier are not necessarily establishing subsidiaries in Europe now. It is more likely that other companies are using this strategy. China used to be heavily dependent on foreign technology, and this is still the case to some extent. At that time, attempts were made in Germany, among other places, to buy companies in order to bring the technology to China. But that has lost its importance. In some sectors, Chinese companies are now world leaders, in electric cars, especially in batteries. You expand to Europe. These are capital-intensive industries. That means that a few 100 million euros are not enough for these investments. There are a handful of Chinese companies investing primarily in the battery sector, but also in information and communication technology in Europe.

Germany is particularly popular when Chinese companies want to expand. Why?

There are three reasons for this. First, Germany is still relatively open to Chinese investment compared to other European countries. In Italy and Great Britain in particular, test procedures for Chinese companies have recently been greatly expanded. Second, Germany is strong where China wants to catch up. It is one of the most important players in Europe in sectors such as mechanical engineering, medical devices and pharmaceuticals. Of the ten sectors that Beijing names in its “Made in China 2025” strategy for the automation and digitization of industry, Germany is a leader in seven or eight in Europe. Thirdly, it is crucial for the opening of new battery plants that they are located close to large car manufacturers, i.e. in France or Germany. They are also built in Hungary because many German manufacturers produce there.

Are Chinese companies now investing less in Europe than they used to?

China relaxed foreign investment rules in 2014, prompting a rapid increase in Chinese global investment, including in Europe. Investments flowed into high-tech companies such as Kuka, but also into football clubs, hotels and real estate, which was a thorn in Beijing’s side. For this reason, the Chinese government has made foreign investments more difficult since 2017. In addition, raising capital is more difficult. For a long time, Chinese state-owned companies in particular had an open money tap. This is no longer the case to the extent that Beijing wants to contain financial risks. There are also investment controls in the USA and Europe. Since 2019, an EU regulation has stipulated that investments from abroad should be checked.

Chinese companies are not subsidized as heavily as they used to be, but there is still a lot of money if they want to gain a foothold in Europe. Does this pose a threat to domestic companies?

New production facilities also bring advantages. Jobs are being created in technology areas where Europe wants to be at the forefront. But if Beijing subsidizes companies investing abroad, this can lead to market distortions in the EU. In the event of a conflict, Beijing can close the plants in Europe, even though important supply chains and technologies are in Chinese hands. The greatest risk, however, is that you will not be able to build up European battery or car manufacturers because the competition is too cheap. European battery companies like Northvolt in Sweden could get into trouble if Chinese competitors invest far more in Europe.

EU Commission President von der Leyen insists on de-risking, when dealing with China the economic risks and dependencies should be reduced. Are the new investment controls you describe also part of this strategy?

The investment review is just one of many instruments in the de-risking strategy, which has yet to be defined in more detail. The EU also wants to do more free trade with other countries. In the procurement market, the European companies should expand their business instead of the Chinese. European companies have problems participating in the public procurement market in China. Especially in the sectors mentioned above, such as medical devices, foreign manufacturers are being pushed out of the market. Conversely, the European procurement market is still open to Chinese companies because they produce particularly cheaply. It is quite possible that this will soon change with the new procurement instrument at EU level.

What impact do the opening of Chinese plants or mines in Europe have on the continent’s heavy dependence on Chinese raw materials?

It would be ideal if European companies opened battery plants or mines here, then profits would also remain in Europe. But it is still better that Chinese companies also invest along the battery supply chain, in mines and refineries in Europe, which would reduce import dependency. In the conflict with Russia, we saw that production facilities can be partially confiscated, and production could potentially continue, even in an extreme case of escalation.

What else can Europe do to reduce dependency?

Part of the solution would be to advance the EU’s Global Gateway initiative and work more closely with third countries, because Europe doesn’t have huge lithium deposits, for example. If one wants to increase the production of green technologies, the EU also needs cooperation with third countries. Projects of the Global Gateway Initiative are currently only starting up very slowly. Chinese companies such as BYD or CATL, on the other hand, are already spending a lot of money to cooperate with Bolivia or Chile and give them prospects for development. Beijing then no longer just mines raw materials, but allows the countries to become part of the supply chain, for example through the further processing of raw materials. The EU is also trying to do this in part, but could do a lot more here.

Lea Verstl spoke to Gregor Sebastian