The ‘Triple Win’: Beijing’s Blueprint for International Industrial Capacity Cooperation

In his opening remarks at the World Economic Summit in Dalian on September 10, Chinese Premier Li Keqiang suggested the integration of a “new” diplomatic concept—international industrial capacity cooperation (产能合作)—into existing bilateral and multilateral frameworks (Phoenix News, September 10). This concept accompanies important reforms of China’s state owned enterprises (SOEs) meant to improve Chinese companies competitiveness and compatibility with developed markets. As a further sign of this concept’s importance, Chinese leadership has constantly promoted it in recent visits to Europe, Latin America and Asia.

Additionally, in late June, China announced the establishment of its 15th Small Leading Group (SLG) after the 18th National People’s Congress, led by Vice Premier Ma Kai. China’s new high-end manufacturing SLG aims at building up China’s capacity as a technical and innovative manufacturing power by the year 2030 (Global Times, June 24; Xinhua, July 3). These efforts are meant to help Chinese industries move up the “value chain” as the Chinese economy undergoes dramatic shifts.

China is on track to become a net exporter of capital by the end of this year, following a larger shift from exporting low-to-medium-end manufacturing products to exporting high-end manufacturing supply chains and infrastructure development models. This structural transformation is driven by domestic industrial upgrading and economic slowdown, reflected in data from this August, when China’s Purchasing Managers’ Index (PMI) fell to 49.7, the lowest level since August 2012 (Phoenix News, September 1). [1]

Chinese manufacturers suffer from rising labor costs, weak consumption demand and environmental concerns. To resolve this industrial malaise, Beijing has announced a series of policies such as the “Made in China 2025” strategy to improve its high-end industrial manufacturing sector (Xinhua, May 19). This strategy addresses the external and internal components of China’s industries.

Externally, China has accelerated its pace of investment to gain access to mature markets and advanced technology. Rather than relying purely on the export of cheap products, China has moved to export integrated manufacturing supply chains, which span the full range of products, technology, capital and management, to services and standards. Compared to the pure export of products, industrial capacity cooperation includes infrastructure construction, manufacturing equipment production, technology transfer, professional talents and skilled workers trainings as well as operation and maintenance. The industrialization of developing countries will provide cheaper land and labor for Chinese companies to relocate manufacturing bases and establish industrial parks overseas (Xinhua, May 21).

Internally, Beijing pledges to streamline administrative procedures and calls for joint actions of Chinese companies to cooperate in bidding for overseas projects. Moreover, Beijing will provide supportive services, including information sharing, customs, immigration, currencies, taxation, consular and legal protection (State Council, May 16). Industrial associations and public campaigns are also being encouraged to advance China’s industrial interests abroad. According to Gu Dawei, Director of the Department of Foreign Investment within the National Development and Reform Commission (NDRC), international industrial cooperation is a market-based incentive. He has stated that Chinese companies should take the primary responsibility of business decisions, profitability analysis, financial solvency and risk management (Phoenix News, May 20). Through SOE reform, Beijing is shifting from controlling assets to controlling capital. Administrative intervention will be reduced. To increase their profitability and market survivability, professional managers at SOEs will have responsibility for business decisions and be accountable to their stakeholders (China Brief, January 23).

Additionally, Beijing has called for Chinese SOEs and small-to-medium-sized enterprises (SMEs) to work together in building industrial capacity, with industrial associations as coordinators to promote China’s industrial interests in the overseas market. Previously, Beijing has openly criticized the cutthroat competition between Chinese companies abroad, which was one of the primary reasons to consolidate Chinese Northern and Southern Railways (CNR and CSR) (China Brief, April 3). Beijing repeatedly calls for an integrated strategy for Chinese companies to bid together on overseas projects (抱团出海) and develop overseas industrial cluster parks (Xinhua, May 21). Industrial associations will lead on coordinating different companies and providing supportive services in the overseas markets. An example of this joint action is China’s electricity industry. The China Electricity Council (CEC) has suggested setting up a coordination mechanism for overseas investment management in the electricity and related industries. CEC will facilitate formulating an English version of China’s national electricity standards and its integration into international standards, organize international conferences and provide information and trainings (Hexun, August 24).

The Chinese government is also carefully launching branding campaigns for its state owned enterprises, as Chinese SOEs are an important element of China’s national image and soft power projection in overseas markets. Miao Wei, Minister of Industry and Information Technology, emphasized the critical importance of brand building for China’s high-end manufacturing industries in his op-ed in the People’s Daily when the “Made in China 2025” strategy was released early this year (People.com, May 26). Premier Li repeatedly showcased the high-speed train industry as a national “business card” for China. China Railway Rolling Stock Corporation (CRRC) has launched marketing and brand promotion campaigns to showcase China’s high-speed trains in the U.S. market from this September (Xinhua, June 26). Besides public campaigns, Chinese SOEs are shifting to social media to engage younger generations inside and outside China. With the State Council’s support, the State-owned Assets Supervision and Administration Commission (SASAC)–affiliated Central Enterprise Media Alliance (CEMA) recently announced the establishment of an information sharing and technology support platform for Chinese SOEs to produce audio-visual messages such as promotional trailers to reach audiences through mobile phones, computers and TV (Xinhua, July 23). [2]

President Xi Jinping is certain to discuss bilateral cooperation in high-end manufacturing during his upcoming visit to Seattle, Washington, DC, and New York. In anticipation of the visit, Beijing is actively promoting the concept of Sino-American industrial capacity cooperation (People.com, September 5). Recently, China’s newly consolidated CRRC set up its first subsidiary in America, with an initial operations fund of $10 million (Phoenix News, July 14). Following several upcoming high-end manufacturing bilateral contracts and agreements, more Chinese state-owned enterprises are likely to establish subsidiaries, manufacturing bases and research-and-development centers in the United States.

International Industrial Capacity Cooperation

At the Sino-European Business Summit, in Brussels, this June, Premier Li Keqiang encouraged Europe and China to strengthen industrial capacity cooperation and explore market opportunities in third-party countries (Xinhua, July 2). Li mapped out a “triple-win” blueprint for trilateral cooperation that provides developed countries with market opportunities for their advanced technology, developing countries with access to affordable high-end manufacturing equipmen,t and China with the ability to shift from low-end to high-end manufacturing. China can, in this way, serve as a bridge between developed and developing countries in infrastructure development.

Premier Li first proposed this concept during his state visit to Kazakhstan last December, emphasizing sectors such as steel, cement and flat glass that have seen slumping demand within China (China News Online, December 16, 2014). Three months later, China and Kazakhstan signed 33 industrial cooperation contracts with an estimated value of $2.36 billion. Beijing expects a successful example of Chinese-Kazakstani industrial cooperation to stimulate cooperation with other countries (People.com, March 29). Subsequently, industrial capacity cooperation has become China’s diplomatic buzzword throughout Latin America and Asia (People.com, May 29; China Daily, August 1).

China’s Objectives of Industrial Capacity Cooperation

With Developed Countries

Through industrial cooperation in high-end manufacturing, Chinese companies will have better access to acquire advanced technology and management skills in the process of joint bidding for projects in third-party countries. Importantly, “third-party cooperation” does not imply only developing countries. China’s creation of a joint consortium with leading French nuclear companies such as AREVA reduces investors concerns about Chinese nuclear power’s technology safety and stability, which has given Chinese firms the option to enter joint Sino-French bids for civil nuclear power stations in the United Kingdom (People.com, July 1; Reference News, July 3).

Joint ventures provide both the ability and the incentive for Chinese companies to upgrade their products and services to European standards. A successful consortium can serve as a springboard for Chinese companies to obtain access to mature markets with a better brand reputation. Chinese companies are interested in getting access to France’s resources and networks in third-party countries. To finance these investment initiatives, China proposed the establishment of joint funds with the European Union (EU), Belgium and France (Xinhua, July 2). However, the EU has expressed concerns over China’s ever-increasing global market share as direct competition for European companies (China Brief, July 31). Together with diverging Chinese and European views on bilateral investment treaty negotiations, these issues have soured Sino-EU industrial cooperation. The long-term trade prospect of the One Belt One Road (OBOR) Strategy—the Beijing-based Eurasian infrastructure plan—might be more appealing to a debt-laden EU.

With Developing Countries

Industrial cooperation covers both advanced manufacturing sectors such as high-speed trains, telecommunications and aviation, as well as sectors with overcapacity such as steel, cement and flat glass. For developing countries, Beijing promotes Chinese companies’ abilities to provide sufficient industrial materials and project experience at low costs. Using diplomatic visits, Beijing also seeks to lobby interest groups within the host governments to allocate more funding and resources to infrastructure development ­with Chinese firms in the lead of major projects. While developing countries have generally been the highest-profile areas of Chinese investment, developed countries are forming an ever larger portion of Chinese industrial companies’ revenues.

Location Preference: From Periphery to Center?

In fact, recent characterization of China’s industrial capacity cooperation as diplomatic efforts to sell China’s industrial overcapacity to developing countries is a drastic oversimplification. China increasingly invests in high-end manufacturing sectors in Europe and America.

With more profit-driven incentives, Chinese state owned enterprises are looking for low-risk and high-profitability investment projects in the mature markets. Developing countries remain as major investment destinations for Chinese companies. However, political instability and the debt insolvency of these countries generates potential risks for regular operations and sustained revenue. Chinese companies are investing in Europe and North America for access to well-regulated markets, advanced technology, political stability and payment credibility, along with the higher returns these bring.

One of the goals of this overseas investment is that Beijing expects to turn its insolvent SOEs into profitable cash cows. As the domestic economy slows down, Chinese SOEs are expected to increase the profitability of their overseas investments and stimulate domestic growth. Due to political concerns and Intellectual Property Rights disputes, Chinese companies frequently face resistance to entering developed countries’ markets. The Chinese government is, therefore, trying to lower market entry barriers for Chinese companies through intensive negotiations on bilateral investment treaties with United States and the European Union.

China Railway Rolling Stock Corporation pioneered Chinese high-end manufacturing companies’ localization of production in the U.S. market. Earlier this year, China North Railway (now consolidated with China South Railway into CRRC) signed a $430 million contract with Massachusetts Bay Transportation Authority to supply 284 metro vehicles (Xinhua, January 26). With decreasing manufacturing costs in the U.S. market, CRRC has already set up assembly plants, localized manufacturing production and launched marketing campaigns in America.

CRRC is actively working with U.S. partners on co-developing efficiency and environment-friendly solutions. In June’s China-U.S. Strategic and Economic Dialogue, a joint research center for railway technology was announced, to be led by CRRC and Chinese and American Universities (Phoenix News, June 25). At the same time, a similar transport technology research center was established between China and the United Kingdom, also led by CRRC (Xinhua, May 13). In July, U.S.-based Maxwell Technologies signed a long-term strategic partnership with CRRC’s subsidiary to jointly develop new energy solutions of light rail and metro vehicles (International Railway Journal, July 31).

Despite Beijing’s efforts, Chinese SOEs still face tough challenges in overseas markets. Product quality and innovative capacity have proven to be the final determinants for Chinese SOEs’ abilities to compete with international conglomerates. Foreign companies continue to be cautious about technology transfer due to concerns over China’s weak Intellectual Property Rights protection. But as Chinese SOEs relocate their manufacturing bases abroad, some experts express concerns on the social and environmental impacts for local workers and communities. Nonetheless, the ongoing reforms and concerted diplomatic efforts will certainly mean that Chinese industrial companies will continue to move up the value chain and to gain additional market share in developed economies, strengthening China’s economy.

Zhibo Qiu is a political consultant and researcher, focusing on China’s domestic politics, foreign policy and overseas investment. She holds a master’s degree from the University of Cambridge and the Graduate Institute of International and Development Studies.

Notes:

1. A Purchasing Managers’ Index number (PMI) below 50 indicates the contraction of a country’s manufacturing sector.

2. The Central Enterprise Media Alliance (CEMA) is a national industrial association to promote State Owned Enterprises’ (SOEs) branding and reputation, affiliated with the State-owned Assets Supervision and Administration Commission (SASAC).