The Chinese economy is now showing signs of stabilising along the new normal of 6.5- 6.7 per cent growth. According to a report by Bloomberg, services industries paced the expansion for the first nine months of the year, expanding 7.6 per cent. This sets the stage for the policies aimed at containing the property market boom and credit growth. The economy is steadily shifting towards consumer spending with retail sales gains outpacing the rise in industrial production. <1>
China contributed a third of the total GDP growth in 2015 and so whether it is growing fast, or undergoing a slowdown because it impacts on the world economy as no other one does. China has declared its intention of moving its economy from one based on investment and exports, to one relying on consumption.
Further, China has also made it clear that in the coming years it intends to occupy a higher and higher position in the global value chains and become, like the US, Europe or Japan, a producer of high-end components and products. The process is now underway and is being watched with great interest around the world because it has implications for the entire global economy.
However, China has several fundamental challenges to overcome. Among these is a desire to maintain a relatively high growth rate, notwithstanding the enormous debt --255 per cent of the GDP — which weighs down the economy. Then, its consumption must grow fast enough to offset the decline in heavy industry. In essence, as a Financial Times Special Report put it, the Chinese economy must rebalance through reform, or it faces stagnation, or, worse, crisis.<2>
Signs of structural change
But beyond the macro picture, there are smaller signs of the structural shifts and new trends in the Chinese economy. An article in the Wall Street Journal indicates how Chinese are increasingly taking control of a larger proportion of the world’s supply chain. In the past, China was often one element in a supply chain where higher value and high tech items came from other suppliers, say, from Germany, Taiwan or Japan. Now many of those items are also being sourced from Chinese companies.<3>
As a result of this, China is importing less, though the actual figures are camouflaged behind figures reflecting the decline in global trade due to the economic downturn. Bio tech, aerospace and other high tech related exports to China fell 5 per cent in the first nine months of the year as compared to the same period last year. The value of components and materials for use in other products fell some 15 per cent in 2015 and it has dropped another 14 per cent in the first 9 months of this year. Citing IMF statistics, the report suggests that the proportion of foreign-made inputs in Chinese exports has been shrinking by an average of 1.6 percentage points a year over the past decade.
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The Chinese government is working systematically to build up high-end capabilities and intends to raise the domestic content of core components and key materials to 40 percent by 2020 and 70 per cent by 2025. This goes along with higher R&D expenditures of some $ 213 billion in 2015, equivalent to 2.1 per cent of the GDP. <4>
Concerns in the advanced countries
While Chinese companies, flush with funds, have provided capital for western enterprises, the new trend seems to focus on high-tech companies.
In the beginning of 2016, China National Chemical Corp (ChemCHina) made a $43 billion offer for the Swiss company Syngenta which supplies one fifth of the world’s pesticides and a large proportion of seeds. In August, this take over was approved by a US Congressional Committee.
In July 2016, Zhongwang, a state supported enterprise, bought Aleris, a US company specialising in making rolled aluminium products for the aerospace and automotive industries. China is, of course, the largest producer of aluminium in the world. But the US acquisition takes it into a different league in making aluminium products.
Earlier in 2016, Kuka, a German company specialising in making robots for automobile plants, was bought by a Chinese bidder, Midea Group, China’s largest home appliance maker. The Kuka case was a particular shock to the Germans siunce it was the embodiment of the country’s industrial prowess. As a global leader in factory automation, it helps build fuselages for the US F-35 fighter.
Other takeovers by China inlude China National Chemical Corp $ 1 billion takeover of KraussMaffei Group, a leading equipment maker that processes plastics and rubber, and Beijing Enterprises Holdings Ltd $1.59 bn take over of EEW Energy from Waste, an operator of high-tech waste incinderation plants that produce electricity and steam for industrial use.
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However, of late, western countries are resisting Chinese moves, primarily because they say that China’s own conduct on the score of providing an even playing field is suspect. More recently, Aixtron a German company with a long history of making the advanced tools required for making very sophisticated semiconductors generated controversy. The Aixtron case pointed to possible collusion involving the Chinese government. In 2015, the German company’s share prices tumbled when a Chinese buyer San’an Optronics cancelled a large order at the last minute. Because of this situation, the company went up for sale and a Chinese investment group, Fujian Grand Chip offered to buy it in May this 2016. Mercator Institute of Chinese Studies which tracked the issue found that San’an and Fujian had a common principal investor in Liu Zhendong. Further, there was a great deal of funding for both companies from Chinese government which has set aside funds to encourage a Chinese semiconductor industry, these funds are now being distributed through local and national investment funds, rather than through State Owned Enterprises. Eventually the the Aixtron deal collapsed after the US vetoed it. <5>
In June 2016, German Chancellor Angela Merkel expessed her frustration with the situation where China buys high tech expertise in the western open market and then uses the acquired knowhow to make huge profits in China’s protected markets as well as build state-owned national champions to take on German firms around the world.<6>
Chinese companies have been active in the US as well, though the US keeps a much more wary eye on them. The Big Three of China—Baidu, Alibaba and Tencent—have sharply upped their investments in the Silicon Valley startups since 2014, the total investment is now around $6 billion put into some 180 startups. <7>
In January 2016, pressure from the Committee on Foreign Investment in the US (CIFUS) shot down a $2.8 billion Philips NV was planning to get in selling its LED business to a Chinese venture-capital firm. Likewise in February 2016, Fairchild Semiconductor International turned down a bid from China Resources Microelectronics Ltd and Hua Capital management because it did not get a CIFUS approval. In the same month, Beijing-based Unisplendour Corp withdrew from a deal to by a 15 per cent stake worth $3.78 billion in Western Digital Corp because CIFUS said it would investigate the transaction. <8>
A report of the US President’s Council of Advisors on Science and Technology issued in January 2017 notes that China is making a “concerted push” to reshape the semiconductor market in its favour “using industrial policies backed by over one hundred billion dollars in government directed funds.” The report says that China does have many semiconductor foundries, “but all are at least one-hand-a-half generations behind the state of the art in volume production.” Further, China does not have any domestically owned memory companies producing at a commercial volume. So, the path China has adopted is “acquisition of global players (or divisions of them) in the bUNited States, Europe or Japan.
China uses various tactics ranging from subsidies to forcing domestic customers to buy only from Chinese semi-conductor suppliers, forcing transfer of technology in exchange for access to the Chinese market, and finally, the theft of intellectual property. <9>
Analysis
Acquiring technology for national development is a trait common to all developing countries. China, however, has made its acquisition into a fine art. The technology acquired from the Soviet Union in the 1950s served it well till its opening to the world in the 1980s. Thereafter it sought several strategic acquisitions such as that of a passenger air liner through the abortive MD-80 deal, the German mag-lev railway technology, high-speed railway technology from Germany, France and Japan. With the collapse of the Soviet Union, the Chinese also acquired a range of military technologies from Russia and Ukraine and reverse engineered them successfully.
Buying and selling companies in an open market environment is an essential part of the market economy. Firms benefit from investment and are able to expand and seek new markets. But China keeps foreign companies at an arms length in a range of sectors and skews the competition against them through opaque rules. Further, state-owned enterprises are often subsidised and do not compete fairly with their global counterparts. As it is, Chinese companies have a bad reputation for reverse engineering and stealing technology.
But the current thrust is different. This time around, China is aiming to be the world leader in a range of areas such as renewable energy, artificial intelligence, electric automobiles, pharmaceuticals, biotechnology and high speed railways.
The Chinese plans are long-range. The Chinese are aiming at becoming leaders in the field of digitising manufacturing and linking consumers to the factories via the Internet. They focus on their 6 high tech zones which they intend to expand. Each cluster provides an eco -system that can be effectively exploited by Chinese companies. Beginning with 6, China now has some 146 high-tech industrial clusters which contributes 12 per cent to its GDP. <10>Among the prominent zones are Beijing’s Haidian, Shanghai’s Zhangjiang, Shenzen’s Nanshan, Wuhan’s East Lake, and Xi’an’s High Tech Industries Zone.
Implications for India
The big takeovers affect India as well since many of them have Indian subsidiaries and there are many with whom Indian companies must do business with because they are world leaders in their respective areas.
In some areas, China sees India as a competitor such as software and pharmaceuticals. This is one reason for the early focus on Bangalore where Huawei set up a major office and research centre some years ago. IN the pharma sector, China resents the fact that India imports raw material from China and exports finished products to the world. One of the focus areas of the Chinese industry is to occupy this space as well.
As China shifts low cost production abroad, there are opportunities for India to take up some of them. If India does not do it, other countries will. Further, China’s infrastructure over-capacity, too, can be used in India to construct roads and railways, power plants and electrical grids.
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Manoj Joshi is a Distinguished Fellow at the ORF. He has been a journalist specialising on national and international politics and is a commentator and ...
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