Low-cost China lures European busi­nesses

Expan­sion drive accel­er­ates des­pite fears of politi­cians and risks for con­tin­ent’s eco­nomy

JOE LEAHY AND RYAN MCMORROW WILLIAM LANGLEY — GUANGZHOU ADRIENNE KLASA — PARIS Addi­tional report­ing by Andy Bounds and Alice Han­cock in Brus­sels and con­tri­bu­tions from Tina Hu in Beijing

• Settings
• Print
• Share
• Listen

European man­u­fac­tur­ers are increas­ing their invest­ment in Chinese factor­ies, des­pite grow­ing anxi­ety among the con­tin­ent’s polit­ical lead­ers about indus­trial depend­ence on the world’s export­ing super­power.

Emmanuel Mac­ron, France’s pres­id­ent, is expec­ted to be the latest leader to warn about China’s crush­ing trade sur­pluses with Europe — which hit €305.8bn last year — dur­ing a three-day visit to Beijing start­ing today.

But steady invest­ment by European man­u­fac­tur­ers — much of it inten­ded to pro­duce goods for export — is adding to China’s power­ful indus­trial base.

European com­pan­ies say China’s low costs and effi­cient sup­ply chains make it increas­ingly dif­fi­cult to com­pete with Chinese rivals, while Beijing’s pro­cure­ment rules also make a local pres­ence neces­sary to access the Chinese mar­ket.

“Today, it is not com­pet­it­ive any more to bring [products] into China when there is local com­pet­i­tion,” said Con­rad Keijzer, chief exec­ut­ive of Swiss chem­ic­als maker Clari­ant.

The com­pany is spend­ing SFr180mn ($226mn) expand­ing its plant in China’s Daya Bay pet­ro­chem­ical hub in Guang­dong, where last year Ger­many’s BASF and Brit­ish oil major Shell also announced big invest­ments.

“On bal­ance, European com­pan­ies are not becom­ing less depend­ent on China. On the con­trary . . . com­pan­ies around the world are, in gen­eral, becom­ing more depend­ent on China,” said Jens Eskelund, European Cham­ber of Com­merce in China pres­id­ent.

A sur­vey by the cham­ber of its mem­bers this year found that about onequarter were mov­ing more pro­duc­tion into the coun­try — twice as many as were diver­si­fy­ing to other coun­tries.

The num­bers included 80 per cent of respond­ents in the phar­ma­ceut­ic­als sec­tor, 46 per cent in machinery and 40 per cent in med­ical devices.

China’s increas­ing local con­tent require­ments for gov­ern­ment pro­cure­ment were spur­ring this trend as inter­na­tional com­pan­ies sought to tap the local mar­ket, the cham­ber said.

Wash­ing­ton-based Rho­dium Group said its fig­ures sug­ges­ted that EU man­u­fac­tur­ing for­eign dir­ect invest­ment had con­tin­ued to flow into China since 2021, with com­pleted EU green­field FDI hit­ting a record €3.6bn in the second quarter of last year.

But per­haps more wor­ry­ing for Europe is that many com­pan­ies are mov­ing pro­duc­tion to China to use it as a base for exports.

More than three years of pro­du­cer price defla­tion and a 20 per cent depre­ci­ation of its cur­rency against the euro since mid-2022 have made China a far cheaper pro­duc­tion base, while European energy and other costs have also soared fol­low­ing the Ukraine war.

“Strength­en­ing domestic con­sump­tion and allow­ing a more mar­ket-driven appre­ci­ation of the ren­minbi would both help reduce trade imbal­ances and con­trib­ute to a more stable long-term eco­nomic rela­tion­ship with Europe,” said Elisa Hörhager, chief rep­res­ent­at­ive in China of Ger­man industry group BDI, at a recent forum in Beijing.

But instead, Beijing was plan­ning to pri­or­it­ise sup­ply-side indus­trial policies and sub­sidies over the next five years, ana­lysts said, poten­tially fur­ther depress­ing costs loc­ally and ulti­mately for­cing more pro­duc­tion to China.

“If you have a global sup­ply chain and you need to stay cost com­pet­it­ive, you will go to the place where you get the most cost-com­pet­it­ive com­pon­ents and in many, many indus­tries, this is in China,” said Eskelund.

This comes as com­pan­ies in Europe are shed­ding jobs — par­tic­u­larly in the auto­mot­ive sec­tor. Ger­man car parts sup­plier ZF Friedrich­shafen, for example, recently announced job cuts of 7,600 in Europe by 2030, less than a year after announ­cing its latest expan­sion in Shenyang, north-east­ern China.

French engin­eer­ing group Schneider, power-train maker Dan­foss, wind tur­bine maker Ves­tas of Den­mark, and phar­ma­ceut­ical com­pan­ies includ­ing Swiss drug­maker Roche and AstraZeneca, have all recently announced China expan­sions or fact­ory upgrades.

In addi­tion to mov­ing their pro­duc­tion capa­city to China, west­ern com­pan­ies are deep­en­ing their research and devel­op­ment work in the coun­try.

Shell declined to com­ment. BASF said it was not relo­cat­ing capa­city from Europe but invest­ing in China to par­ti­cip­ate in expec­ted rapid growth there. Schneider did not com­ment.

Kim Faus­ing, Dan­foss chief exec­ut­ive, said the com­pany was “region­al­ising” pro­duc­tion to be closer to cus­tom­ers.

Schaeffler and ZF said their China expan­sion was aimed at the regional mar­ket and did not come at the expense of European jobs. Roche, AstraZeneca and Ves­tas did not respond to requests for com­ment.

Joerg Wut­tke, a part­ner at con­sultancy DGA Group and former EU Cham­ber of Com­merce in China pres­id­ent, said Europe must bear some blame itself. “What Europe has to do is, first and fore­most, fix them­selves, dereg­u­late, get energy prices down, get com­pet­it­ive­ness up, raise edu­ca­tion stand­ards, par­tic­u­larly in engin­eer­ing. We can’t blame China for that.”

He said European car­makers were using the coun­try’s mar­ket for elec­tric vehicles as a “fit­ness centre” to nav­ig­ate the trans­ition from leg­acy com­bus­tion engines. But China with its lower costs might then become the main export centre for European com­pan­ies to sell to third mar­kets as well, fur­ther hit­ting the industry at home.

“The car industry is def­in­itely going to export from China into those mar­kets, which will then can­ni­bal­ise the exports of the headquar­ters. So what is Europe doing about that?” Wut­tke said.

The European Com­mis­sion is begin­ning to respond, with plans to improve the bloc’s indus­trial land­scape, includ­ing meas­ures to push Chinese com­pan­ies to invest in the EU in order to access the bloc’s single mar­ket.

And if exports from European com­pan­ies in China also flow back to their home mar­kets, that could prove polit­ic­ally explos­ive, oth­ers warn.

“You can try to sus­tain the global rules-based order as much as you want but if China is doub­ling down on policies that are hurt­ing growth and jobs, that will lead to the kind of reac­tions that you are see­ing in the US,” said Agatha Kratz, a part­ner at Rho­dium Group, refer­ring to Pres­id­ent Don­ald Trump’s pro­tec­tion­ist policies. “I would ima­gine it will soon hap­pen with European part­ners too.”