Eurospeak

The European Union Chamber of Commerce in China recently published its fifth European Business in China position paper, incorporating 20 sections covering topics ranging from cosmetics, taxes and pharmaceuticals to telecoms and aerospace, each discussing one or several issues and concluding with a set of recommendations. Below, excerpts from several chapters.

Aerospace: Level Playing Field
Concern: The Chinese government purchased a number of helicopters in the end of 2003, apparently without giving any consideration to European manufacturers. It is anticipated that this incident could be repeated as China is set to upgrade its rescue helicopter fleet in the coastal cities.

Assessment: The Chinese government and its many entities would obtain lower prices and generally benefit from being committed to a fair procedure of government procurement and the industry would benefit from free competition among Chinese and foreign manufacturers of aircraft.

Recommendation: Become a signatory to the WTO Government Procurement Agreement and the WTO Agreement on Trade in Civil Aircraft and implement more transparent regulations regarding government procurement in the fields of aircraft and related parts and components.

Automotive: Local Content
Concern: The new Automotive Industry Development Policy requires investments of: approximately Euro 50 million for a R&D center for new auto manufacturing projects; an engine production plant for new passenger vehicles or heavy duty trucks projects. Both requirements imply an unnecessary duplication of investments, which goes against the development of a competitive Chinese auto industry and is not in line with the policy's will to encourage automotive companies to form alliances and to share resources. This new policy also splits up a complete vehicle into assemblies / systems, sets up principles to assess when each assembly/ system is considered as locally produced, and when the imported set of parts is classified or not as a complete vehicle (CBU). The EU Chamber has ideas on the way things are done and the corresponding import tax imposition. Such rules are an indirect push for localisation through an increase of import duties.

Assessment: The new automotive law sets an obligation to include engine production in a Sino-foreign JV manufacturing complete vehicles, with foreign equity shares limited to 50% maximum, which is in contradiction with the fact that it allows foreign equity to be superior to 50% in Sinoforeign joint ventures manufacturing engines.

Manufacturers should be free to determine their industrial strategy and rationalise their investments, thus contributing to the development of a competitive automotive industry in China. This is essential to secure the potential for the export development of China-made vehicles.

Consolidation of R&D forces should be allowed to maximise the efforts of such an expensive activity and avoid unnecessary duplication of human resources and costly testing facilities. Details should be given regarding the split up of a complete vehicle into different assemblies / systems. Manufacturers should also be free to choose which parts, components, systems or assemblies they need to localise based on quality, cost and delivery time requirements in order to ensure efficient and profitable operations, thus meeting Chinese consumer expectations.

Key Recommendation: Allow manufacturers the choice to establish a new engine plant or use an existing consolidated engine plant; allow a foreign OEM to establish a consolidated R&D centre to service multiple joint ventures; prevent imposition of increased import duty levels by re-classifying parts and components as local content requirements.

Telecoms: Uncertainty re 3G Decisions
Concern: Uncertainty regarding China's approach to 3G, and the degree of political influence in decision-making is preventing long-term planning for the telecommunications industry in China. This uncertainty is threatening the healthy development of the whole telecommunications industry, and several artificial approaches are emerging to circumvent unclear regulations, further fragmenting the telecommunications industry in China. Uncertainties extend not only to technology selection issues, but also to licensing concerns, e.g., the number and timing of licenses, and the procedures by which they will be issued.

Assessment: The telecommunications industry needs long-term planning to support the investment in the development of 3G technology and services in China. Fragmented and poorly integrated technologies will be a hindrance for the long-term development of a healthy telecommunications industry in China. For European industry, the cost of delaying 3G could be calculated as EUR 200 million annually (rough estimation: China 3G business EUR 50 billion for 5 years, of which European companies share is 40%, with 5% annual interest). For Chinese industry (assuming 30% market share) the delay cost is roughly EUR 150 million annually. If the whole 3G opportunity is missed, then the lost business could amount to EUR 20 billion for the European IT & Telecom industry.

Recommendation: 1) The Chinese Government should let the market decide the technologies to be selected by implementing transparent, open and efficient processes and procedures for 3G technology adoption in China, in accordance with WTO commitments. 2) Further encourage the commitments to retain technology neutrality and permit the operators to make their own selection of technology, equipment vendors, etc., based on their business needs. 3) Encourage close consultation with domestic and foreign mobile operators, vendors and service providers to maximize 3G benefits to the Chinese economy and to the future of the global mobile market.

Utility: Exclusion from bidding
Concern: The Working Group is concerned by the exclusion of European power equipment manufacturers or their Chinese JVs from bidding for the supply of power generation or transmission equipment.

Assessment: In order to bid, foreign manufacturers have to transfer technology to designated state owned companies and use these companies as local sub-contractors. They also have to take full responsibility for the performance of the project, including the performance of their local partners. European manufacturers strongly feel that they will soon be excluded from bidding in the Chinese power transmission and generation equipment market after being forced to grant extensive transfer of technology and will be left to only offer assistance and services. Because of this, the European manufacturers may not be able to maintain their level of presence in China. This would considerably reduce the transfer of technology to SOEs. Given the complexity of the latest technology, it is questionable whether SOEs would be able to achieve all the benefits if undertaking such projects on their own. The negative impact of such a situation would be severe: longer delivery time, lower quality, availability and reliability, and cost overrun.

Recommendation: Eliminate the discrimination against European manufacturers of power equipment and their Chinese JVs. China is urged to become a signatory to the Government Procurement Agreement under the WTO framework.

Petrochemicals, Oil and Natural Gas: Integrated Policy
Concerns: China does not have a clear integrated long-term energy and petrochemical policy to develop the country's energy, oil, gas resources and markets at present. There is also no framework conducive for natural gas, oil, energy and petrochemical infrastructure development.

Assessment: China needs a clear and coherent clean energy and petrochemical policy, covering natural gas, oil and chemicals to encourage coordinated development. Regulations on the energy and gas industry in China remain unclear and fragmented. For example, permission to invest in local distribution networks appears to depend on local, non-transparent conditions. Similar concerns have been raised by multi-government agencies that have also put forward recommendations to encourage China to develop a coherent integrated clean energy and petrochemical policy put forward.

Recommendation: Integrate the national policy for clean energy and petrochemicals together with the regulatory framework for the business environment conducive to clean energy and gas. Infrastructure development should be introduced together with active cooperation and sharing of best practice with the EU Companies in the sector through the European Chamber.