Chinese firms tapping into potential of EU market

- Last updated on GMT

Related tags: China, European union

China is becoming more than just a low-cost manufacturing
destination; its firms are locating in Germany as a means of
gaining access to the EU market and tapping into technical
know-how, writes Anthony Fletcher.

In just two years, China has jumped ahead of France, Britain, and Italy to become the second largest buyer of German machinery, after the US. This suggests that the picture often painted of a low-cost, low-regulated Chinese manufacturing sector ripe for foreign investment and an expensive, inefficient German sector needs to be revised.

In fact, an article in BusinessWeek​ magazine suggests there is a current miniboom in Chinese investment in Germany. In Hamburg alone, according to the journal, 42 Chinese companies set up shop last year, bringing the total in the city to 360, and in the state of North Rhine-Westphalia, which includes the city of Düsseldorf, there are at present 100 Chinese companies.

And a small but growing number are manufacturers seeking access to the European market. The technical expertise of German workers appears to be a major factor, along with the infrastructure and quality of life.

This is surprising, given that China enjoys super-low-cost production, compliant workers and is going through an incredible manufacturing boom. Global steel prices have shot up, partly due to the fact that the world's shipping sector is busy ferrying raw materials to feed China's insatiable demand for production. The impression is that China is THE place to be a manufacturer.

Germany on the other hand has unemployment touching 5 million, a costly social welfare system and some powerful unions. Nonetheless, some Chinese manufacturers see benefits in being situated within the European market, closer to customers that increasingly demand quick service.

Above all though, the BusinessWeek article suggests that the Chinese are interested in acquiring German patents and engineering expertise. China's Shenyang Machine Tool Group for example recently bought Schiess, a 140-year-old maker of heavy-duty lathes and boring machines based in the East German town of Aschersleben. Schiess will market Shenyang's smaller machines to Europe, and Shenyang will be able to draw on Schiess' expertise to produce large equipment for the Asian market.

This suggests that China's position in global manufacturing is a little more complicated than simply as an importer of raw materials and an exporter of finished products. With its billion-plus population and break-neck economic growth, the country is often seen as a reservoir of untapped potential for foreign companies looking for new markets.

But a recent survey from independent research service China Economic Quarterly​(CEQ), which looked at the performance of US companies in China, paints a picture of a market characterised not just by untapped potential, but by cut-throat competition and incredibly challenging conditions.

For example, the survey calculates that total China earnings for US companies rose from $1.9bn in 1999 to $4.4bn in 2003. When royalties and licensing fees are taken into consideration, profits stand at $8.2bn. But this figure compares unfavourably with the $7.1bn that US companies made in Australia - population 19 million - in the same year, and $8.9bn in Taiwan and South Korea, which have a combined market of 70 million people.

This is a point that Dr Benoit Rossignol, an expert in foreign investment in the Chinese food and retail market, raised when he spoke to last year.

"We have seen Fortune 500 companies losing lots of money in PRC by over-investing too quickly, too early and companies with less than $500 000 of investment being very successful within three to four years because they knew where to position themselves, and make the best use of their money,"​ he said.

According to the CEQ report, China's significance, for now, can be found in the fact that it is " the biggest cog in the machine of global manufacturing for export."​ But the level of investment in Germany's manufacturing sector would suggest that China is already moving from being just a cog to being an active player in global manufacturing, looking for opportunities to increase both know-how and market penetration. The impression of the country as merely an importer of raw materials and an exporter of finished products must therefore be reconsidered.

Related topics: Processing & Packaging

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