How China is “taking over Europe”

BERLIN, Germany — China’s third richest man, Liang Wengen, launched a new $140 million factory amid considerable fanfare last week.

The construction machinery plant stands in a town on a river outside a well-known industrial hub. But it’s not Shanghai on the Huangpu River.

Rather, the new factory built by Liang’s firm, Sany, is in the town of Bedburg near the Rhine River just west of Cologne, in Germany’s industrial heartland.

Chinese products, Liang told reporters, were seen around the world as cheap and second-class.

“It is my determination to change that,” he said.

So China has come to the country famed for its first-class manufacturing because it fully intends to become first-class itself. Public officials celebrated the move, but the cooperation with Germany also holds warning signs for the industrial giant, and by extension the United States, as China gains economic influence and global know-how.

But this week, the fanfare was on again, as Premier Wen Jiabao landed in Berlin and was greeted by Chancellor Angela Merkel. Wen brought with him 13 ministers who held a joint cabinet meeting with Merkel’s government — a gesture of closeness Germany has never made to a country outside Europe, except Israel.

Together, the leaders signed 14 new agreements and China inked $15 billion in new business deals, including the purchase of 62 new Airbus A320 passenger jets.

Both leaders used the term “a new chapter” to describe their deepening relationship, which comes at a time when some observers fear the emerging Asian giant is poised for a European invasion.

(Read: Deal between Ryanair and Comac signals China's viability as a competitor to Boeing and Airbus.)

Germany’s celebrated economic boom is in large part thanks to China, which is now its third largest trading partner after France and the United States.

Nearly one in four Volkswagen cars are today sold in China. And as an emerging economy, China can’t get enough of Germany’s precision machine tools to outfit its production plants.

“China may be the world’s factory, but German companies are building it,” management consultant and author Bernd Venohr told a recent conference in Vienna.

During Wen’s visit, Merkel and German Foreign Minister Guido Westerwelle both spoke out on human rights and political reform in China, mentioning for instance the artist Ai Weiwei who, after sitting in jail since April, was released last week ahead of Wen’s European tour.

Wen responded with what seemed a rehearsed response, politely telling the West to focus on what it had in common with China, rather than the differences.

Germany, in short, is extremely grateful for China. But as the new Sany plant in the Rhineland shows, China is also ambitiously getting involved in Germany and Europe — and not just as a trading partner.

“China is taking over Europe,” the European Council on Foreign Relations wrote this week in a preview of a major paper on Chinese-European relations that will be released this month.

The co-author of the paper, senior policy fellow Jonas Parello-Plesner, said the biggest concern was the imbalance in the growing relationship. If Spain or Poland wants to built a highway, Chinese firms can bid for the contract — which they do, often successfully. But European firms, with limited exceptions, can’t do the same in China because its government procurement rules favor Chinese firms.

If Europe were more united right now, it could present a common front against such one-sidedness, but instead individual countries are striking deals with China when it suits them.

“This isn’t China-bashing. You take economic opportunities where you can,” Parello-Plesner said. “It’s about Europe’s strategy on China, which was embryonic before and is now much more difficult because countries don’t want to wait for" the European Union to coordinate a united front. “As Europeans compete with each other for Chinese business, they diminish their leverage and thus reduce their chances of collectively striking a better deal with China.”

Another example of the one-sidedness is China’s method of effectively poaching European know-how. If a German wind turbine company wants to sell its products in China, it has to meet a 70 percent local content rule. Effectively that means building a factory in China and partnering with a local firm.

After a few years, the local firm has earned a lot of German technical knowledge and can make its own wind turbines to the same standard more cheaply, a process known as “involuntary technology transfer.”

Until now, European firms have accepted the trade-off because it gives them access to a huge market, meaning they’re better off overall. But the next phase, Parello-Plesner says, may be Chinese firms undercutting Germans in third markets — selling wind turbines to, say, Latin America — with what are essentially knock-offs of German products.

Right now, China is a bountiful market. But increasingly it will become a tough competitor.

“China is the most serious competitor for German firms,” said author Hermann Simon, of the consultancy Simon-Kucher & Partners. “I have visited factories in China that are already world class.”

Then there’s the bonds issue. Over the past year, China has arrived as a white knight, buying Greek and Spanish bonds, which props up their shaky government debt and reassures markets. But the help comes at a price.

China’s so-called bond diplomacy had “serious implications for Europe’s ability to present a united front to China on issues including trade reciprocity, climate change and human rights,” Parello-Plesner wrote in his preview paper this week.

For example, China bought Greek bonds last year as “a quid pro quo for acquiring major public assets.”

The chief danger in all this for the United States is that, as the world’s number one and two exporters, China and Germany are united against Washington’s attempts to curb their massive trade surpluses.

Washington wants China and Germany to stimulate their own domestic demands through higher wages and tax cuts so that they buy more U.S. goods. The exporting duo joined forces to resist this pressure at last year’s G20 meeting in Seoul.

For all the triumph and mutual respect of Wen’s visit, German commentators were skeptical, with newspaper editorials and opinion pages bristling with warnings that China was using economics to further its strategic aims.

The German mass-circulation tabloid Bild, a reasonable barometer of the nation’s sensitivities, ran a picture of a grinning Wen. The caption read: “What hides behind this smile?”