Can French companies grab opportunity as China is set to open up further to EU?
By Wu Gang
Discussions over opportunities and challenges the ground-breaking China-EU Comprehensive Investment Agreement might bring has been going on since the two sides finished the seven-year negotiations of the deal towards the end of 2020. While critics remain skeptical of China's sincerity in opening up its market, business people, especially those who have been investing in China for years, are excited for the greater accesses they may enjoy in the huge market.
In a webinar held in February by China Europe International Business School (CEIBS), the Paris Region Chamber of Commerce and Industry and Bpifrance, government officials, scholars and business representatives from China and France shared their views over the significance and impacts the deal may have on both sides. Many were thrilled that China is expected to further open up areas that French enterprises have an edge in, such as automobiles, cloud services and healthcare. Some reminded the business investors to also reflect on their past lessons, as German companies appear to be more successful than their French counterparts in certain markets in China. There is also doubt over China's possible withdrawal from the global trade and supply chains following desperate attempts by the U.S. to "decouple" from the world's second largest economy over the past year. Others assured that the major step China and EU have made this time have demonstrated the two sides' determination to thaw any "decoupling" attempts.
Participants of the webinar included Chinese Ambassador to France Lu Shaye, EU Ambassador to China Nicolas Chapuis, former WTO Director-General and CEIBS Distinguished Professor Pascal Lamy, CEIBS Vice President and Dean Ding Yuan, Paris Region Chamber of Commerce and Industry Chairman Didier Kling and Bpifrance President Nicolas Dufourcq. The webinar was hosted by Xu Bo, special advisor for International Affairs for the Dean's Office at CEIBS.
The following are excerpts of the online discussion, edited for clarity and length.
Xu: After seven years of negotiations, the China-EU Comprehensive Investment Agreement finally reached a principled consensus on December 30, 2020. Could you briefly share your views on this?
Chapuis: The current China-EU Comprehensive Investment Agreement reached in principle represents major progress, which is mainly reflected in the following three aspects:
First, a fairer and more competitive market environment for EU companies in the Chinese market. Now there is a new agreement between China and the EU which satisfies the demands of EU companies for fair competition.
Second, the opening up of the investment field. Three of the areas open to the agreement are breakthroughs: the first is electric vehicles, the second is cloud services, and the third is private hospitals. In these areas, EU companies have considerable technological advantages.
Third, the sustainable development provisions. This is something China has never signed with any economy. There are two aspects to sustainable development. The first is environmental and climate issues, notably a commitment to fully implement the Paris accord. The second is related to labor standards.
Of course, the China-EU Comprehensive Investment Agreement cannot solve all problems. This agreement has also received a lot of criticism in Europe, but European companies, especially EU companies in China, welcome it. The agreement provides European investors with more confidence to operate and expand the market and obtain greater economic returns. The conclusion of the agreement also shows that in the current world full of turbulence and change, there is no better way to deal than a dialogue.
Ding: Before this agreement was concluded, Chinese enterprises already had new choices for FDI (foreign direct investment). This is especially true against the background of a potential decoupling between America and China, which triggered a lot of dissonant and disparaging rhetoric from Europe, making Chinese investors very disconcerted. The conclusion of this agreement has reassured them. This will help Chinese enterprises develop overseas and open the gates for them to invest in Europe.
What kind of business opportunities will this create for French enterprises entering China? This will depend on the evolution of the Chinese economy. What has happened to the Chinese economy in the past 20 years, and what will happen 20 years from now? In 2018 the total consumption in China has exceeded that of America and the Chinese service sector has been growing at a pace that is twice or three times faster than the manufacturing sector. Taking into account the speed of development of China's domestic consumption market and the speed of growth of the Chinese service sector, I think French enterprises do indeed have a chance to realize their transformational growth in China.
I know that French enterprises also believe in state intervention and hope that governments can do something for them. This is often not the case, however, as we can see from how German enterprises in China, mostly small- and medium-sized enterprises, have been developing the Chinese market on their own without any support from the German government for the past 20 or 30 years. Therefore, we still emphasize that enterprises should rely on their own strengths to tap into vast uncharted zones of the Chinese market by making use of local teams. This is an area in which I think French enterprises still have much to learn.
Dufourcq: Before we come to evaluating the agreement, please allow me to paraphrase the points of views from French entrepreneurs I know. They all think that it is an important agreement, but that it is still a baby step. Of course, the formation of this agreement is a very good beginning and it signifies that we have taken the right step in right direction.
Just now, Professor Ding noted a comparison between French and German companies and I think it is necessary to make a clarification. There are more than 2,600 companies which have received investment from France in the Chinese market, and more than 2,100 which have received investment from Germany, with 500,000 jobs being provided by the former and 550,000 jobs provided by the latter. As such, they are almost equal in terms of their market presence and therefore we cannot conclude that Germany is a country of entrepreneurial spirit and that France lacks it. At least, judging from the number of French and German enterprises on the Chinese market, French are as entrepreneurial as Germans, and they do not simply sit and wait for the government to intervene.
However, as investments from French enterprises are not as value-added as those of German ones, the automobile and manufacturing equipment industries have taken full advantage of the economic boom in China. It is precisely because of this reason that the market share of German enterprises is almost three times that of French enterprises, and this is precisely because the French have missed the rise of the automobile industry in China, which was a great pity.
Xu: Where do you see new opportunities for French enterprises to invest in China? French enterprises have been unsatisfied with their low market penetration in China. Now, the agreement has given a major concession to EU enterprises in terms of market access. Can you tell French enterprises that, since you are on an equal footing with Chinese enterprises, it is now your turn?
Lu: It is true that I have noticed that in Europe and France people like to talk about being on an equal footing with Chinese companies. The conclusion of this agreement has been described by some as a geopolitical victory for China. I think it is not only a geopolitical victory for China but also one for the EU. The concessions made by China in this agreement were not made because European companies needed to be on equal footing. This was a voluntary choice made by China itself, for the purpose of opening up and for European and Chinese entrepreneurs to make more proactive investments in each other's markets.
Xu: In China's financial market, the share of foreign capital is only 6 percent. Do you think that this China-EU investment agreement will create a historic opportunity for French enterprises entering Chinese market?
Ding: A fundamental consensus has been reached by our panelists here that this agreement has created a very good climate for European and French enterprises to operate in China. We are encouraged to see so many areas opening up in which French enterprises are very competitive. But we have to ask ourselves why we did not do well enough in other previously opened sectors where French enterprises are equally competitive. There are many openings in the Chinese market waiting for French enterprises to invest, such as elderly care, medical services and public health, in which French companies have a comparative advantage. However, the opening of Chinese markets is for all enterprises, not just for French ones. For example, French enterprises do well in medical services and public health, but Japanese and Korean enterprises are also excellent in these areas. Meanwhile, French enterprises must understand that the Chinese market is not what it used to be. The market is now full of competition and they must find a good way to enter it. The best way is to try even if it means making mistakes. By correcting these mistakes, these enterprises can make friends in the Chinese market.
Xu: How do you view the chances for cooperation mentioned in this agreement in the areas of medical services and education, including vocational education?
Kling: French enterprises used to worry that their technologies might be stolen by their Chinese rivals. But, with this agreement, we can see so many economic areas being opened up, which is an indication of China's confidence in the quality of its economy. It is no coincidence that China is able to do this, because it is already the country with the largest number of patents. The fact that it has made such progress in the area of technological transfer signals a breakthrough for the Chinese market. As a result, if European and French companies go to China today, they no longer boast the advantages they used to because Chinese enterprises are already on the same starting line with them. We need to bear this in mind. This is how we have introduced the Chinese market to our member companies. China is not a technological laggard at all. If you are going to invest in China, you must do market research in advance and know where you have a competitive advantage and why you are needed in China.
Xu: One of the sectors opened for investment as agreed upon in this agreement is the automotive sector. In 2020, the total output of electric vehicles was 1.2 million, out of which 120,000 were produced by Tesla, accounting for 10 percent of the market share. Then, there are the automotive brands from Germany and China, but we rarely see any French manufacturers. What do you think are the areas of competitive advantage for French enterprises?
Dufourcq: This is a very sharp question. Indeed, we have to make some distinctions in our comparison of the German and French automotive industries. In the automotive sector, we rarely hear about the existence of Renault or Peugeot in the Chinese market. French car manufacturers have fall significantly behind Tesla and German brands such as Mercedes Benz and BMW. However, all these manufacturers, including Chinese brands BYD and Geely, have their electronic parts supplied by Valeo, the French company. Valeo has over 35 factories in China. As well, there is a French semiconductor manufacturer called STMicroelectronics which is very influential in the area of electric vehicles and I'm one of its board vice chairmen. It provides electronic parts for German automobile manufacturers in China, for Tesla and for electric vehicles in China. Neither of these enterprises are vehicle manufacturers and people do not know much about them. But they are indeed very active in this field, and we create huge value in this area. So, judging from this perspective, France is indeed very competitive in the electric vehicle sector.
Another question that has been troubling French enterprises is the decoupling between China and America. If our Chinese entrepreneurial friends have come to feel that the Chinese market is powerful enough to support its own economy, and no longer needs anyone else, this would indeed be important for French enterprises because these French multinationals have always believed in free trade and have relied heavily on overseas markets. The agreement reached on December 30 serves to refute the decoupling trend, conveys a wish for more cooperation between our entrepreneurs, and is a silver lining in the gloom of decoupling.
In general, decoupling is a terrible reaction to history, but we know that this should not be ascribed to China and China should not be held accountable. It has been imposed upon China by the United States and its extraterritoriality, and we firmly oppose it. Due to American extraterritoriality, STMicroelectronics cannot supply Huawei and the resulting economic loss in revenue opportunities has been almost 1 billion euros ($1.19 billion). That is not a small number!
Lu: I would like to talk about the decoupling issue. Just now we have talked much about it and I'd like to say that decoupling is not what China hoped for and it has been forced on China by the United States. The CPC has now proposed a new guideline for dual circulation with the domestic circulation as the mainstay and domestic and international circulations would mutually reinforce each other. The purpose is to enlarge and enhance the domestic market through great domestic circulation and generate greater demand for foreign products by boosting domestic demand. Therefore, dual circulation itself is a significant boost to international cooperation and is a process by which the domestic and international markets can complement and reinforce each other.
Lamy: I think Mr. Dufourcq is quite right in talking about the need for France and the EU to jointly oppose American extraterritoriality in trade and investment since American extraterritoriality has jeopardized the interests of French enterprises. The three sister institutes of Jacques Delors Institute will jointly issue a work report, in which we will raise a number of proposals to EU leaders. We think that American extraterritoriality has significantly harmed the interests of European enterprises and we have noticed that the Chinese government has just implemented legislative measures to counter the extraterritoriality of America, which is similar to our suggestions to the EU. We think that EU should take more proactive actions in this regard, including when dealing with the new Biden administration.
Ding: Decoupling is a very serious issue, and China's role in the international supply chain cannot be easily changed. In China, there are also some public figures calling for sanctions on certain countries and for cutting the supply chains of certain products from certain countries. If so, it would set a very dangerous precedent and some global enterprises would feel that, in the event of minor changes, their R&D chains, industrial chains and developmental chains would be unsafe. Therefore, only if China maintains the unobstructed flow of the world industrial chain and ensures the free flow of supply chains can the market attraction of China persist.