China has attracted economists and academicians for its economic performance. Within the last few decades, the People’s Republic of China has achieved significant economic growth as well as unusual development. As a result, the country has become an important economic player within a short time period not only regionally but also globally. Globally, China is ranked as the second largest economy after the United States and it is considered as the largest and the fastest growing economy. Due to increased economic activities in China which have contributed to its position internationally, China is regarded as the most heavily engaged in the global business and investment. Multinational companies particularly from the west are increasingly investing in China. The economic growth and development of China can be traced to the economic reforms which have transformed the country into important international chains. As a result, China has significantly integrated into the international economy thus enabling the economy to become a major force as well as a promoter of globalisation.
Among other things, the remarkable development and economic transformations have resulted from a series of governmental strategic plans. This is evident by the words of Chinese President, Xi Jinping during the 13th Five- Year Plan for Economic and Social Development for China (2016-2020) that; “Reform is a powerful force for development. In line with the chief objectives of improving and developing socialism with Chinese characteristics and modernizing the country’s governance system and capacity for governance, we need to improve the systems by which the market plays the decisive role in resource allocation and the government plays a more effective role. Placing particular emphasis on economic structural reform, we need to work more quickly to improve institutions and mechanisms in every area and remove all systemic barriers to effective development so as to provide sustained impetus for development.”
The aim of this thesis is to understand the business impact of China’s policy of going out on Swiss companies. Therefore, the main focus of the study is on the latest Chinese business policies and their impacts on economic business factors in Switzerland. Specifically, the following policies will be analysed in this study; “Made in China” and “One Belt, One Road” (OBOR).
China has remained committed to its opening- up policy and has continued to integrate to the global economic system particularly by its determination to revive the traditional Silk Road. As stated in a communiqué by the Ministry of Commerce, The National Development and Reform Commission (NDRC), and the Ministry of Foreign Affairs; OBOR is a win- win situation that improves economic development and prosperity by promoting mutual understanding. The communiqué further noted that, OBOR improves cooperation in all sectors and it helps in building a community of shared vision, interests, and responsibility by integrating mutual economic trust, political trust, and cultural inclusiveness. However, win- win diplomacy concept is rejected as a code for “double win for China”.
Figure 1: One Belt and One Road Overview
(Retrieved from McKinsey & Company, 2016)
To achieve the Made in China (MIC) 2025 initiative, China aims at conducting deep structural adjustments and revitalizes the real economy. The supply side structural reforms are aimed at promoting the domestic products as well as production in 10 priority sectors (see appendix) which will result to a gradual replacement of foreign products with domestic technologies. As a result, the Chinese overcapacity of production is a threat to the west. As a result of the fear, companies and countries adjust and establish policies, strategies, and regulations towards and with China.
Though there is a large body of research on OBOR focusing on its implementation, there is little focus on its relation with MIC 2025 as well as the evolving possibilities and risks. This notwithstanding, the focus of this study is on the Silk Road Economic Belt with the exclusion of the 21st Century Maritime Silk Road. Therefore, this study examines the future economic development of China and how Swiss companies can successfully and sustainably discover these new challenges.
To answer the main research question, this study will analyse and discuss 10 MIC 2025 priority sectors on their impact on the OBOR initiative. Consequently, the analysed sectors will be ranked on their level of importance to the Swiss companies and then examined selectively using qualitative interviews. The results will be used to give recommendations for the selected sectors.
This study is divided into six sections. The first section involves the introduction of the background of the study and establishment of the research question and problem. The next section is a theoretical framework that draws on the overview of the two policies. The next section describes a thorough analysis of the two policies by highlighting their drawbacks and benefits. Next, the study will outline the Sino/Swiss trade relations. Fifthly, hypotheses are made for the evaluated and examined industries and explained. Sixthly, interviews are used to examine the most important results of the interviews. Finally, the study findings based on the evaluated interviews form the basis of conclusions and recommendations.
- Theoretical Background
This section offers the basis of the subsequent analysis. Extensive review of the previous literature reveals the meaning of the two aforementioned Chinese initiatives.
- Literature Review
China’s OBOR and MIC 2025 are the major drivers of bilateral trade between China and Switzerland and hence they are discussed in this study. In an attempt to explain their close connection, the two initiatives were evaluated together though each one is introduced separately in the theoretical framework.
2.1.1 Vision and Action on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road
In the recent decades, China has seen the revival of the great Silk Road which has become a driving force for the global economic and political sectors with the peaceful growth and development of China. However, from the China’s point of view some clarifications need to be addressed first. Some scholars and think tanks relate the concept of OBOR with economic corridor. It is therefore, important to introduce and discuss relevant facts according to the official document Vision and Action on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road. Beijing is considering six economic corridors countries that are along the Belt and Road trade route. These corridors are divided into two; the New Silk Road (NSR) on the land and the Maritime Silk Road (MSR) on the water. As illustrated in figure 2 (Vien, 2015), corridors are supposed to be named and run through China- Mongolia- Russia Economic Corridor (CMREC), China – Indochina Peninsula Economic Corridor (CICPEC), Bangladesh – China – India – Myanmar Economic Corridor (BCIMEC), China – Central and West Asia Economic Corridor (CCWAEC), China – Pakistan Economic Corridor (CPEC), and New Eurasian Land Bridge (NELB).
Figure 2: The Six Economic Corridors
(Retrieved from IRU, n.a)
The establishment of trans-Eurasian economic corridors that comprise of the northern, southern and central regions is considered by three infrastructural projects within the larger OBOR. These projects are simply referred to as the NSR. As noted by Sipri (2017), these corridors end up in Madrid, Rotterdam, Prague, and Hamburg in the European Union. The three land routes have different purposes according to State Council as illustrated in Table 1 below.
|North||– New Eurasian Land Bridge (NELB)
– China – Mongolia – Russia Economic Corridor (CMREC)
|Focusing on logistics and transportation|
|Central||– China-Central and West Asia Economic Corridor (CCWAEC)||Focus on oil and natural gas pipelines|
|South||– China – Pakistan Economic Corridor (CPEC)
– Bangladesh – China – India – Myanmar Economic Corridor (BCIMEC)
|A transnational road to develop five Chinese province-level regions in the northwest area; Chongqing, Sichuan, Gansu, Inner Mongolia and Xinjiang|
(Adopted from Vien, 2015)
According to Vien (2015), these corridors enable China to improve the current transportation networks, build intermodal transport hubs, and build new roadways. However, China will not start from the scratch because it has already constructed a patchmark of infrastructure across Eurasia. Therefore, OBOR will play the role of linking the current segments of road and railway. Based on the intentions of China for cooperative economics, Vien (2015) noted that there are possible areas of joint work on projects along the Belt and Road Initiative (BRI). Several economists and academicians refer to OBOR as a Chinese strategy to pursue national interests. OBOR is regarded as a strategic vision. Nonetheless, a joint project between the researchers from Sichuan University (SCU), Chengdu, and United Service Institution of India (USI) argued that, vision has a deeper meaning. China has a possibility of facing changes in opportunities and challenges in the open economy. Nivedita, Yang, Huang and Rajesh (2016) developed a coordinated perspective that an international and national focus should enable in the promotion of China’s foreign trade cooperation.
Nivedita, Yang, Huang and Rajesh (2016) distinguished OBOR in an internal and external perspectives: From an external perspective, the BRI is not a mechanism or an entity but an idea or a strategy that helps in improving cooperation and development. As documented in the China’s Vision and Actions plan, OBOR initiative depends on the existing multi-lateral entity such as APEC and ASEAN Plus China for cooperation and practical development. China’s Vision and Actions plan further explained how the policy matched the needs of the above named countries to pursue fast development and can create new opportunities to identify the modern advantages and follow opening up and development. On the other hand, the internal perspective OBOR considers it as a new method adopted by China to develop its less developed economic regions such as the Central, West, and Islands. According to Godement, 2015), the strategy covers about 55% of the Gross National Product, 75% of the known energy reserves, and 70% of the global population. According to the Chinese government, realizing bilateral cooperation and opening up with those countries along the Belt and Road is beneficial for them and also conducive for China.
As observed by the government, through this cooperation has encouraged competition with other major economies and this competition is likely to become fiercer. Nivedita, Yang, Huang and Rajesh (2016) argued that, central Asian countries are major trading partners and energy suppliers to the EU and the contention between EU, China, and the USA is inevitable.
Wang (2016) discussed a system of two divisions, two accommodations, and double track to anticipate and approach the rising political tensions. The authors argued that by two accommodations, the OBOR policy will accommodate the current local cooperation strategies without establishing new ones. Further, the policy accommodates factors which are outside the region and does not seek to exempt the powers such as the US, Japan, Russia, and Europe. The two divisions on the other hand, refer to the effective division of responsibility and work. For instance, Chinese banks cannot only focus on financial investments or the army focus on security matters. It is imperative that the local stakeholders support the attempt to diversify the risks. Double track is the simultaneous promotion of various aspects such as;
- Double track of economy and security: This involves the resolution of the territorial water disputes in bilateral negotiations
- A double track of bilateral and multilateral cooperation: For the success of OBOR, negotiations on investment agreements, bilateral cooperation, and free trade zones are critical. In order to have economic cooperation with win- win results, multilateral corridors are imperative.
The discussed literature review has focused on the promotion of OBOR from a Chinese perspective. This paper therefore, implies that China must have relatable partners across the world in order to complete the massive project.
Excess Capacity Transfer
OBOR has the capacity of improving the Chinese companies for transnational trade and develop foreign trade strongholds as well as production bases. Additionally, the initiative enables China to address its severe problem of surplus production. Based on these arguments therefore, OBOR has the capacity of providing China with a new opportunity for development as well as promoting orderly going out for the Chinese companies. Economic improvement of China, rebalancing and furthering opening are the main objective of OBOR according to Godement (2015). In addition, OBOR is an important long term national strategy for economic development which helps in addressing additional strategic challenges like domestic excess capacity market, national security, strategic depth, trade dominance, and resources acquisition. The country’s excess capacity contribute to a wide range of problems on economic operations but OBOR offers new avenues of opening new exploit market (Chen, 2015).
That notwithstanding, Lam (2015) discussed the “three no changes” of the Chinese communist party politburo: reforms on the state-owned businesses, protect the assets as well as the interests of the private sectors, and uphold the open door initiative which focuses mainly on welcoming foreign capital. Additionally, the economic involvement of the Chinese government in some selected sectors can be discussed on its important breakthrough in the high speed railway innovation. Chinese state- owned businesses are a major component of the government’s involvement in building high- speed railroads along the NSR. These businesses stand to benefit significantly from their important role in the policy that monopolistically controls the railway development (Harutynyan, 2017). More particularly is the merger that was formed in 2015 by the China South Railway Corporation Limited (CSR) and the China North Railway Corporation (CNR) to form China National Railway Locomotive & Rolling Stock Industry Corporation, (CRRC) (Beauchamp-Mustafaga, 2015). As Lam (2015) puts it, the CRRC which enjoys subsidies from the treasury wins contracts in the new markets of Central Asia, Africa, and East Europe.
In an article, Xinhuanet (2017) reported that China has signed over 130 regional and bilateral transport agreements with countries involves in the OBOR project, these agreements covered road, air, rail, and sea transportation. As a result of the OBOR initiative, China has opened more than 356 international road routes for goods and passengers. Accordingly, Nivedita, Yang, Huang, & Rajesh (2016) argued that several non- Chinese industry experts and think tanks view OBOR as a strategy to transfer overcapacity to the west. These scholars give three counter arguments:
- Excess capacity transfer in China is aided by the fast development of economic globalisation.
- In addition to offering an effective way for addressing the excess capacity problem in China, OBOR offer opportunities for the development of the recipient countries
- OBOR does not offer extra economic guarantee for businesses to transfer capacity
Based on the above facts, it is clear that there is a great need to understand the issue of excess capacity dialectically. As mentioned by Hillman (2018), some researches on BRI have improved trade, tourism, investment, and other flows between China and BRI partners. Nonetheless, there are questionable timelines that mostly depend on data predating BRI, and which do not separate recent developments from economic development which were already started prior to BRI. There are other popular measures which are incomplete. A good example is the Chinese state media that reported the increase in freight train services between China and Europe. However, the media did not have data on the value of the cargo ferried and they did not refer to the trains going to the opposite direction which are less frequent and have more empty containers.
- The Chinese Made in China 2025 Initiative
With high economic development, China’s manufacturing industry has faced challenges such as environmental and resource issues, rising labour costs, and export slowdown among others. In an effort of counter steering this trend, the government initiated the MIC 2025 ambitions. MIC 2025 is a 10- year plan that aims at giving the manufacturing sector which is globally perceived as the low- cost factory a radical makeover. As noted by Li Keqiang, Chinese premier;
“We will implement the Made in China 2025 strategy, seek innovation-driven development, apply smart technologies, strengthen foundations, pursue green development and redouble our efforts to upgrade China from a manufacturer of quantity to one of quality.”
MIC 2025 initiative is aimed at making the domestic manufacturing sector competitive, effective, and innovative by improving it to a high level and pioneering manufacturing power. Hui (2015) summarized the rationale behind the MIC 2025 initiative in three purposes: Firstly, the slowdown of Europe and the US has reshaped the structure of the international manufacturing. This reshaping offers an opportunity for China to develop a high level manufacturing and expand in the global market. Secondly, the labour costs in Chinese manufacturing industry are on the rise as a result of resources and competition from Southeast Asian countries that have intensified their focus on manufacturing. Therefore, China needs to improve the manufacturing sector to gain a new push in the economy. Despite that China’s manufacturing is the largest globally, China is a weak manufacturer based on major innovation and technology. Therefore, MIC 2025 aims at transform the China’s manufacturing sector from the largest globally to the strongest globally.
As the politics in China push for industrial modernization, opportunities are opened for economic partners in the US and Europe as analysed by MERICS (2016). As mentioned by MERICS (2016), principally, there are a good rationale for the international economy to welcome the China’s quest for increased technological and innovation capacity as long as China abides by the rules and laws of fair competition and open market. However, the current form of MIC 2025 depicts exactly the opposite. For instance, the government interferes with the domestic markets to ensure that the state- owned businesses dominate and benefit from the market to the disadvantages of foreign rivals. This strategy by the government is evident from smart manufacturing as well as other high level industries which are the target of the initiative. MIC 2025 stresses terms such as self- sufficiency and indigenous innovation. In this case, the strategy aims at increasing the domestic market share of the Chinese suppliers for the major components as well as important basic materials to over 70% by the year 2025 (MERICS, 2016).
METRICS (2016) examined four major business obstacles faced by foreign competitors in China: exclusion from local subsidiary programs, intensive digital data collection by the state, closing on the market for information technology, and low level of data security. Therefore, as the smart manufacturing capabilities in China develop, there is a high likelihood that the state will intervene with discriminatory practices and restrictions of market accessibility particularly in the smart manufacturing field (METRICS, 2016).
METRICS (2016) further pointed out that the aim of the China’s industrial policy in digitalization and manufacturing is to achieve technology catch- up. This objective progresses and its substitution penetrates the MIC 2025. Figure 3 below illustrates semi- official targets for the local market share of Chinese products.
Figure 3: Semi-official targets for domestic market share of Chinese products
(Retrieved from METRICS, 2016)
METRICS (2016) identified small but growing challenges facing manufacturers in industrial countries. The author noted that MIC 2025 will have significant impacts on various businesses: In the use of smart manufacturing, China will have frontrunners, hopefuls, and latecomers. Frontrunners will eventually become competitive in the global market. The frontrunners will improve their processes based on their interests but the policy accelerates their efforts. On the other hand, the hopefuls will be most impacted by the policy. Since their operate at less advanced levels, the hopefuls will move to the next advanced level through improving production when they are provided with the right incentives. The effectiveness of the policy implementation will determine the failure or success of the hopefuls. On the other hand, the development of the hopefuls is very critical towards China’s competitiveness in the smart manufacturing particularly in the medium term.
In conclusion, METRICS (2016) argued that in these countries; the targeted high- tech sectors which include aerospace equipment, biomedicine, new energy vehicles, electrical power equipment, and rail transportation among others contribute significantly to the economic growth. Following the modern gold- rush for international enterprises in China, the country’s industrial agenda will adversely influence the international tech suppliers as well as manufacturers in future. The government promotes investment in the leading international technology companies in order to acquire advanced technology and produce large scale technology transfer. Currently, China is an open market for greenfield investment particularly of the foreign tech suppliers in the smart manufacturing. Nonetheless, with the increase in protection, the country poses a serious and long- term risk to international tech suppliers. Despite that there is available research on the challenges for industrial high- end economies, there is no research for Swiss industries.
Figure 4: Affected Countries from Made in China 2025
(Retrieved from METRICS, 2016)
- Ease of Doing Business
As mentioned above, the win- win philosophy in China must be considered seriously. China ranks 78th position out of 190 countries globally on ease of doing business according to the “Ease of Doing Business Index”. Therefore, China ranks lower than Switzerland (33rd) and Japan (32nd). In comparison, the most powerful economy measured by GDP ranked 6th in 2018. This information is illustrated in Table 4.2 below.
Table 4.2: Ease of Doing Business Index Ranking
Retrieved from The World Bank, n.a.)
To calculate the index, countries are scrutinized on 10 different aspects such as trading across borders, dealing with construction permits, getting credit, paying taxes, registration of properties, starting a business, protecting minority investors, getting electricity, and enforcing contracts resolving insolvency. With this consideration, companies increasingly face challenges when conducting business in China. Nonetheless, in most some cases companies cannot afford to do business in China because it is one of the largest global markets.
The past researches have focused mainly on two sides: China peaceful rise or how it enforces its soft imperialism. This study argues that a common denominator of Chinese policy and Swiss industry can be found by analysing the correlative Swiss industries of MIC 2025 and ABOR. The following steps will be applied: Several articles and reports from third parties will be analysed to understand the respective policies. Hypotheses will be drawn focusing on a foreseeable future of the aforementioned industries. The hypotheses will form the foundation of qualitative interviews with Swiss business experts. Lastly, the common denominators of dialogues will be compared with the expectations of the Chinese policy. Then a summary of the findings and sustainable competitive recommendations will be offered at the end.
- One Belt One Road Initiative: Opportunities and Risks in an International Environment
To understand the affected Swiss industries, this paper focused on OBOR and discussed its advantages and shortcomings from an international perspective. Major investments are always risky. Nonetheless, the factors of connectivity which include; road connectivity, unimpeded trade, understanding between people, policy communication, and monetary circulation are not purely about road and bridge construction or connecting different places as quoted by Xi (The Japan Times, 2014). This thesis therefore, focused on economic aspects. However, it is important to understand important environmental factors in order to gain a holistic view. It is difficult to isolate the economic and political effects of the BRI and they may have opposing long and short term effects.
Political risks are related to the interactions between nations and international strategies of other nations as well as multilateral bodies. Initially, OBOR project covered several countries as well as economic regions. As illustrated in Figure 6, the policy had a large geographical coverage that extended across the Eurasian continent and had a lot of influence on areas along the route. The initiative closely links Asia, Europe, and Africa together.
Figure 6: Influenced areas by OBOR
(Retrieved from IRU, n.a.)
Most of the projects along the Belt and Road are faced with a complicated risk assessment and avoidance and they include a multifaceted infrastructure network with large amount of capital and long investment periods.
Table 3: Overview of some Published Infrastructure Projects
|Fields||Projects Under Planning or Implementation|
|Cross-border high speed rails||-Central Asia High- speed Rail that starts from Urumqi (China) and passes through Uzbekistan (Iran), Turkmenistan (Turkey), and arrives in Germany
-Eurasian High-speed Rail that starts from London and passes through Paris, Berlin, Warsaw, Kiev, and it is divided into two parts after passing Moscow: One part extends to the Russian far East and enters Manchuria, China while the other part enters Kazakhastan.
-Pan-Asian High-speed Rail that stretches from Kunming, Yunnan (China) to Myanmar. The main line stretches through Laos, Vietnam, Cambodia, Malaysia to Singapore while the other line stretches to Thailand.
|Infrastructures||-Renovating and improving the Indian Railway
-Constructing Line D of the China-Central Asia natural gas pipeline
-Improving the construction as well as operation of Sri Lankan ports and the industrial parks around the public parks.
(Retrieved from Wang, 2016)
Basically, geopolitical and ecopolitical tensions arise with a wide spread initiative like the BRI. While some BRI’s political impacts are positive, some are negative. Some countries that has signed the BRI have experienced a huge gap between expectations and actual benefits of the initiative. For instance, though South Korea has embraced the initiative but it must cooperate with China to establish concrete projects. The differences over North Korea have hindered economic cooperation. This shows how BRI do not consider other interests (Hillman, 2017a). The initiative has faced high degrees of uncertainty and concerns elsewhere like India, Western Europe, and Japan. Though the initiative links about 70 member countries, about 125 countries have not joined it. As a result, the initiative’s long- terms political effects centre on its implementation and its economic performance.
- European and Swiss Implications
When making a speech in Beijing in May 2017, Jyrki Katainen who is the European Commission’s vice president noted that the European Union is aware of the uncertainties associated with the initiative (European Commission, 2017). However, as the competition over market economy continues, China’s presence in Central and Eastern Europe has increased. In the year 2012 for instance, China created the “16+1” mechanism which is a platform where the Chinese prime minister meets with the leaders of 16 countries including Baltic states, Bulgaria, Slovenia, Poland, and Hungary as well as non- European members such as Albania, Serbia, and Montenegro annually. As mentioned by Le Corre (2017), European Commission was admitted as an observer on the 16+1 group after some complaints from Brussels.
Hillman (2017b) argued that though Chinese officials have described a framework of free trade agreements that support the BRI, China is mainly focused on bilateral trade deals. As a result of the diversity of the participating countries in BRI, it is highly unlikely to have a BRI- wide trade agreement. Removing the trade barriers between China and individual markets would not solve the situation because additional bilateral deals would complicate a network of rules that challenge companies as the case of the 130 transportation agreements between China and BRI participants (Scio.gov, 2017). All these efforts do not have the potential to promote trade of a high- standard regional agreement or a truly multilateral effort.
Switzerland is the only continental European country that has a Free Trade Agreement (FTA) with China and hence it has strategic position when it comes to dialogue between China and European Union regarding the development of OBOR. The FTA between China and Switzerland is a good example that leads to development of similar agreements with European Union that is driven by OBOR. Chapter 5 will outline recent economic performances under the FTA.
When the Federal Council President Doris Leuthard attended the BRI summit in Beijing in May, 2017, the strong relationship between China and Switzerland was further strengthened. As noted by UVEK (2017) open market as well as the development of transport infrastructure are the bottom-line for the bilateral relations as emphasized by the official communiqué of the Federal Department of Environment, Transport, Energy and Communication.
Notably, BRI is the most ambitious geo-economic vision in the modern history. The initiative covers more than two-thirds of the global population because it spans over 70 countries. Adoption of a creative economic development model is the vision and action of the Belt and Road Initiative; this model connects the two most economic circles. A report published by The Economist (2016) noted that the vision should include Chinese investment approaching to $4 trillion. The economic growth tends to strengthen hard infrastructure with constructions of new railways and roads and soft infrastructure with transportation and trade agreements.
- The Lack of Reciprocity
Infrastructure forms one of the main components of the BRI and offers an opportunity to its broader implications. Though major infrastructures in BRI have kicked off, lack of reciprocity in trade is a concern. The unparalleled high-speed railway infrastructure market in China was shaped by CRRC which is one of the country’s top state-owned businesses. An good example is the reconnection with Balkan by building a line between Belgrade and Budapest. This project is a clear illustration of the project allocation disparity between Chinese, local, and foreign contractors. An interactive map created by the Centre for Strategic and International Studies (CSIS) (see Appendix) is an open- source database with more than 2,200 transportation projects along the BRI. Though China has the apparent supremacy on the database, they are not the only important point of this database. That notwithstanding, it is the most active. The key findings of this database include:
First, though China is the biggest spender it is not the only important actor. There are three competition zones emerging across the Eurasian supercontinent. In the Eastern and Central European region, European funders are the dominant in several countries. In the Southeast Asia, Japan has outspent China in many countries and in Central Asia, there are significant activities conducted by the Development Bank and other multilateral development banks (MDB). To ensure that this is not a zero- sum competition, there are many projects funded by China and MDB. As China continues to compete with and adapt to other visions for connectivity, these are important areas to watch.
Secondly, Chinese projects are not open to the international and local participation. 89% of the contractors participating in projects funded by China within the Reconnecting Asia are Chinese, 7.6% are local companies headquartered at the same country where the project is conducted, and 3.4% are international companies. In contrast, 29% of the contractors participating in projects funded by the multilateral development banks are Chinese, 40.8% are local companies, and 30.2% are international companies. This information is illustrated in the Figure 7 below.
Figure 7: Chinese Companies Win Majority of Eurasian Projects
Retrieved from Hillman, 2018)
The findings illustrated above display some hard political and practical realities. From a practical point of view, it is surprising that most of the contracts for Chinese- funded projects are won by Chinese companies. Additionally, Chinese companies have dominated the transport sector. Though further research is required, there is a high possibility that Western companies are highly competitive in provision of related services around Chinese- funded projects; such as consultation and legal services. China has a high advantage from the tools it uses which are discussed further in the next section.
- China’s Tools to Boost Export
China utilizes a wide range of tools to improve its exports. Many of these tools fall under the umbrella of BRI such as infrastructure, national champions, and trade agreements. Chinese state- owned businesses benefit from a wide range of scale and subsidies. For instance, the Fortune’s Global list 500 of the global largest companies by revenue released in 2000, nine out of the 10 Chinese companies included were state- owned companies (EY, 2017). A more recent list released in 2017 had 75 out of 107 Chinese companies being state- owned. This trend is mainly dominant in the construction industry. For instance, 7 out of 10 largest construction companies listed globally in 2017 were Chinese. Therefore, when Chinese state- owned businesses compete for foreign contracts, they benefit from these advantages.
Table 4: Top Construction Companies in 2017 Worldwide
|Rank 2017||Rank 2016||Company|
|1||1||CHINA STATE CONSTRUCTION ENGINEERING CORP. LTD., Beijing, China|
|2||2||CHINA RAILWAY GROUP LTD., Beijing, China|
|3||3||CHINA RAILWAY CONSTRUCTION CORP. LTD., Beijing, China|
|4||4||CHINA COMMUNICATIONS CONSTRUCTION GROUP LTD., Beijing, China|
|5||6||POWER CONSTRUCTION CORP. OF CHINA, Beijing, China|
|6||5||VINCI, Rueil Malmaison, France|
|7||7||ACS, ACTIVIDADES DE CONSTRUCCION Y SERVICIOS SA, Madrid, Spain|
|8||8||CHINA METALLURGICAL GROUP CORP., Beijing, China|
|9||10||SHANGHAI CONSTRUCTION GROUP, Shanghai, China|
|10||9||BOUYGUES, Paris, France|
(Retrieved from ENR, 2017)
Credit accessibility is a very powerful incentive that has helped the Chinese companies to compete in the global market. A research conducted by William and Mary in 2017, Chinese lending between 2000 and 2014 amounted to $354.4 billion with transport and power sectors benefiting most (Aid Data, 2017). About three- quarters of these loans had commercial terms. China has successful locked in higher rates because it assumes risks which cannot be assumed by other lenders. For instance, China was willing to offer a $1.3 billion loan in Sri Lank for the construction of a new port after MDBs declined. China agreed to take equity in the port after the Sri Lankan government failed to repay the interest on the debt. Additionally, China offers to pursue projects even without solicitation.
Infrastructure projects impact Chinese export in long and short terms. In the short term, these projects help in the export of construction- associated goods. For instance, as mentioned by Sender and Stacey (2017) between 2012 and 2015 Chinese exports to Pakistan increased to 77%. Following intense competition of Chinese companies in construction companies, Chinese concrete and steel producers stand to benefit from construction projects as well as Chinese engineering firms. These projects offers an important but uncertain solution to the Chinese overcapacity, a problem that needs to be addressed even after reaching the BRI’s ambitious spending targets. As noted by Dollar (2015), the BRI’s scale is very small to address the overcapacity problem in China. Though these tools magnify short- term incentives for projects they can also mask long term risks.
- European and Swiss Implications
The vast scale and scope of BRI guarantees the implications for Swiss interests regardless of whether it succeeds or not. Switzerland has a lot of economic interests that range from the immediate commercial opportunities to making sure the global systems are stable and viable in the long term. For Swiss suppliers, investors, and service providers to participate in the BRI- related projects, they must feel the commercial opportunities. Currently, Swiss suppliers participate through joint ventures with Chinese companies. However, joint ventures offer opportunities for Swiss logistic companies as well as other potential users of the completed projects. Nonetheless, the current participation of US and Western companies in the BRI- related projects has been relatively uncertain.
The BRI’s systems can be revised by a BRI that succeed on China’s terms to display Chinese interests. There have been several changes in the supply chain for goods especially in the manufactured goods, energy, and other resources. Chinese technical standards in high- speed railway systems and wireless networks are increasingly adopted because of the Chinese preference for environmental and social safeguards. Eventually, therefore, Chinese currency will become widely used. Since the admission of the Chinese currency into the IMF’s currency basket of Special Drawing Rights (SDR), there are several agreements signed by the Chinese and European officials to establish easy accessibility of RMB trades. Over six countries including Germany, Britain, and France currently hold Renminbi Qualified Foreign Institutional Investor (RQFII) as noted by SWI (2015). According to an announcement made by the Swiss National Bank (SNB), Switzerland joined this group of countries since the beginning of 2015 has received a share of RMB 50 billion (CHF 7 billion) to establish itself as a RQFII (SNB, 2015). The share will enable the country to become a major global “offshore renminbi (RMB) hub” and will enable the Swiss commercial traders to make and clear direct trades with their Chinese partners in China (SWI, 2015). Further the share offer Switzerland an opportunity to make economic transactions related to OBOR in RMB between China and European countries.
The failure of BRI affects the Swiss economic interests. Developing countries are assuming significant financial burden through Chinese loans. As a result, many recipients try to sustain high GDP growth to pay their loans thus setting very ambitious goals that do not encourage errors or unexpected events. Current assumptions made about China are based on its remarkable growth rates over the recent decades. As a result of broader global economy, events within and outside China could lead to these loans failing. Therefore, BRI may bring the region back thus harming global growth instead of helping improving regional integration. These economic developments have strategic implications as outlined in Chapter 6.
- Made in China 2025: The Chinese Approach
MIC 2025 initiative was officially released in May 2015 by the State Council. This initiative identifies ten priority sectors as illustrated in the table below:
Table 5: MIC 2025 10 Priority Sectors
|Aviation and Aerospace Equipment||China aims to increase its global competitiveness in the aviation industry by the year 2020 as well as completing the manufacture of aircraft industry. The country aims at becoming the regional leader for aircraft retrofitting and repair. China aims at competing effectively in the global market through delivery of its own C-class large aircraft as well as engines and to compete in medium sized helicopters, emergency and special- use aircraft, and high- end business jets.||-Private and luxury jets
-Specialist aircrafts and helicopters
-Specialist airport equipment
-Aircraft components and equipment
-Commercial passenger aircraft
|Electrical Power Equipment||Some of the objectives of MIC 2025 include improving capacity in power generation, transmission, and transformation equipment. The major components of these equipment include circuit breakers, safety valves, and rectifiers. The aim of the initiative is to produce more than 95% of the equipment domestically in some areas.||-Provision of nuclear, coal- fired, and offshore wind power
-High- end safety and monitoring
-Transmissions and transformation sets
|New Materials||Despite the numerous export restrictions in the global market, there still exist various opportunities to enable Chinese producers move up the value chain. China depends heavily on imported new materials currently but is working very hard to more original capacities and opportunities are there across industries such as automotive, rail, aerospace, plastics, speciality steel, and integrated circuits among others.||Chinese producers have opportunities in high- end structural metals, special metallic function, advanced polymers, high performance fibres and composite materials, and advanced glass and ceramics.|
|Rail Transportation||In the last one decade, China has heavily invested on the new high- speed rail infrastructure as well as trains by partnering internationally with Siemens, Kawasaki, Alstom, and Bombardier and as a result, the country has over 18,000km of operating high- speed railways. China has invested heavily on domestic R&D and as a result, it has its own IP in key technologies. Investing in R&D has enabled the company to develop the leading global high- speed training manufacturing technology. The recent merger between China North Rail Group (CNR) and China South Rail Group (CSR) has enabled the country to effectively win international contracts. Domestically, China focuses on making the rail safer, environmentally friendly, and energy efficient through Intelligent Transportation Systems (ITS).||-The improvement of rail transportation has opportunities in:
-Signal and operations control and testing
-High- end rolling stock components
Rail infrastructure equipment
|New Generation Information Technology||Over the recent years, the China’s ICT industry has seen incredible development and Chinese domestic big companies such as Alibaba, Huawei, Baidu, and Tencent have grown into dominant forces in their respective sectors. Due to restrictions by the Chinese government on many subsectors of ICT, foreign players have often struggled and they are unable to keep in pace with the demands from companies and consumers. The mobile phone industry has experienced an impressive growth: For instance, China has more than 674 million mobile broadband users that include 230 million on 4G networks. These challenges notwithstanding, there are considerable opportunities. The key MIC 2025 objectives include; new developments in the Internet of Things, development of 5G and industrial software as well as operating systems, development of indigenous capacity in integrated circuits, commercial secure communications, and hyper connectivity.||Opportunities presented by MIC 2015 initiative in the new generation information include; smart grids, data integration and advanced analytics, cloud computing, new telecoms infrastructure, core hardware and software components, and operating systems and industrial software.|
|Biomedicine and Advanced Medical Apparatus||It is the objective of the MIC 2025 initiative to develop capacity in several areas such as 3D printing and stem cell techniques, imaging equipment and medical robots, and wearable devices and telemedicine among others. Switzerland has a profound history in the life sciences sector. As a result, the Swiss companies are strategically placed to partner and work with large Chinese companies to offer global solutions.||The opportunities presented by MIC 2015 initiative in the biomedicine and advanced medical apparatus include; product testing and compliance, research and development and clinical trials, in vitro diagnosis, digital health, and high- end medical devices.|
|Maritime Engineering||Improvement of China’s capacity to build enhanced LNG and LPG carrying ships, energy-saving and intelligent vessels, arctic route vessels, and luxury cruisers is the country’s main focus on moving up the value chain. The country has prioritized on deep sea exploration, offshore operation support equipment, and testing and inspecting equipment. China aims at taking steps in becoming a global shipbuilding powerhouse with an integrated supply chain incorporating design, equipment supplies, construction, and technical services.||MIC 2025 initiative in Maritime engineering offers a wide range of opportunities such as; marine materials, luxury cruisers and yachts, high- tech marine equipment, offshore renewable energy, and ocean/deep- sea exploration|
|New Energy Vehicles||In the past two years, China has experienced a significant growth of domestic sales of energy vehicles. This growth has been experienced as a result of subsidies for domestically produced energy vehicles up to 2020 as well as other incentives like reduced purchase tax and free licence plate registration. Major cities in China such as Shanghai, Guangzhou, Beijing, and Shenzhen have implemented plans to construct related distribution and charging infrastructure. The Chinese government has led with examples by ensuring that over 30% of government cars purchased annually are electric or hybrid cars. Based on these ideas, the aim of MIC 2025 is to improve the domestic manufacture of electric vehicles and offers opportunities to encourage the market for new energy vehicles as well as associated infrastructure. The initiative highlights hydrogen fuel cell electric vehicles (FCEV), plug- in hybrid electric vehicles (PHEV), intelligent and connected vehicles, and public and commercial vehicles.||The opportunities presented by MIC 2015 initiative on new energy vehicles include; production of hybrid and electric vehicles, production of fuel cell and high- end sport vehicles, and production of intelligent and interconnected vehicles.|
|High- end Robotics||The MIC 2025 has some ambitious goals and objectives across the control systems as well as advanced robotics, machine tools, and 3D printing to improve the situation. Switzerland has invested heavily on R&D in the CNC tools and robotics industry and hence many of the globally leading related universities and research departments positioned to take advantage of the opportunities that will develop.||The opportunities presented by MIC 2015 initiative on the high- end robotics include; robotics, high- end machines, computer numerical control tools (CNC), and 3D printing|
|Agricultural Equipment||The objective of MIC 2025 is to increase China’s capacity in domestic product ion as well as manufacture of high quality farming equipment to enable domination of the home grown companies in the domestic market and the development of China’s export potential.||The opportunities presented by MIC 2015 initiative on the agricultural equipment include; new farming materials, high- end food production and processing, smart and integrated farming systems, high- end cultivating equipment, large- scale farming machinery, and specialist agricultural R&D and education among others.|
(Retrieved from China-Britain Business Council; UK Trade & Investment, n.a.)
As noted by the World Bank, the above discussed industries account for about 40% of China’s entire industrial value added manufacturing. The aim of the MIC 2025 initiative is to increase the domestic content of the key materials to over 40% by the year 2020 and 70% by the year 2025. Currently, there is low domestic content for high- tech goods as noted by Hsu (2017) and the foreign content account for over 50% of these products on average.