China’s capacity benefits us all

Why is “China’s overcapacity” a fallacy, an excuse for protectionists?
In this episode of China Trends, European entrepreneurs explain the benefits of China’s capacity. Competition should not be feared but welcomed.

Guests:
Maximilian Butek, Executive Director and Board Member of the German Chamber of Commerce in China·East China
Titus von dem Bongart, Partner with EY

Transcript

You Zhixin:
China Trends, staying updated on the latest news and events in China. Welcome to this edition of China Trends. As the largest developing country and the largest economy in Europe, what's the future of the China-Germany trade relationship? What will be the future of the China-EU trade and economic relationship? Today, I invite two experts to share their views with us.

 Maximilian Butek:
My name is Maximilian Butek, the executive director of the German Chamber of Commerce in China. 

Titus von dem Bongart:
My name is Titus von dem Bongart. I am a partner with EY.

 You Zhixin:
As we all know, there are around more than 5,000 German companies taking root in China. Could you please share the key findings or any noteworthy trend in your recent-published survey？

 Maximilian Butek:
I think the majority 90 percent of the companies say we don't have any plans to withdraw from the market; 50 percent state that we will invest further; and 80 percent of those 50 percent say we will invest in our competitiveness. 
What's quite new is that, over the last 5 years, Chinese competitions became very strong. So, in the past, there was a quite good share for German companies here, mainly in the high-tech sector, and Chinese, rather, in the traditional manufacturing sector. But now it has changed that Chinese companies really became competitive in the high-tech sector, therefore, they are going directly into our markets where we are traditionally strong.

 You Zhixin:
And, Titus, what do you think of the survey results. And have you noticed any noteworthy trends in terms of the road map of the German company's investment in China?

Titus von dem Bongart:
The German one has always been better than others in terms of our overall business sentiment. I think this trend continues. When I consider the discussions of decoupling and the associated risks, it's sometimes forgotten that most of our companies have been operating here for decades, with some conducting business in China for over 100 years. They are integral parts of their business communities. I believe the majority of them are here for the long term and are viewing the market from a long-term perspective.

You Zhixin:
Now let's turn to a specific industry, the EV industry. The EU's recent anti-subsidies probe into the Chinese EV market is drawing much attention. So what do you think will be the possible results and its impacts on the China-EU trade and economic relations?

 Maximilian Butek:
I think this is a trend under the headline of overcapacity. If you follow the media, it's written that Chinese products are flooding the European markets, and the visit of (US Treasury Secretary) Yellen to Guangzhou was also a huge topic. As (for) the German economy, we are highly export-dependent and oriented. So, we believe in open markets, and I think also that Olaf Scholz has made it quite clear that our markets have to be open. So, in regardless of what the result of this investigation is, I believe (in) Germany, neither the companies nor our chancellor has an interest to, for example, implementing tariffs on Chinese EVs. I believe that Germany will not be very much in favor of any kind of tariffs on Chinese EVs. We are willing to take up the competition and we have to remain competitive. 

 You Zhixin:
Titus, what's your observation?

 Titus von dem Bongart: When talking about this subject, I find it's getting more and more "political game". Overall, I really hope that we can come to a conclusion which avoids further deterioration in that regard. But, as I said, the political impact is something which is a big part outside the power of our companies. 

 You Zhixi:
Just as you mentioned, overcapacity is a very controversial topic in China. What do you think of this? Do you think it really exists or it's another narrative of the trade protectionism?

 Maximilian Butek:
We see it in the provinces, right? The government, for instance, says we want to promote green technology, and then every province starts focusing on green technology. And then you have huge overcapacity. 
But this is not a new topic, because we also benefited from the last 30 years of cheap imports from China, right? Because China has this huge scalability. They have these huge ecosystem of supplies so that they can produce cheap and ship it to us. So, we benefited from it. What's new is that, as I mentioned at the beginning, the Chinese market also became highly competitive in the high-tech sector and the EV sector. In general, the overcapacity is something we benefited a lot in the past.

 You Zhixin:
How do the members of your chamber deal with this possible situation?

Maximilian Butek:
There is almost no discussion among our members because most of the companies say the only way we can handle that is by becoming more competitive. So they are investing more in China, into local R&D, in their cost efficiency, etc. We have to be able to compete with Chinese companies here. There is no other way out. Otherwise, we cannot compete on the global markets. And our companies are quite optimistic that they can manage that.

 You Zhixin:
And besides open capacity, there are also some concerns about China's economic slowdown and insufficient demand. How do you interpret these concerns?

 Maximilian Butek:
First of all, it's clear that there will not be any big stimulus from the government. We, from the international community, were waiting for the increase in domestic demand, consumption, etc. Now it became quite clear that we are in a structural change of the economy: Changing from this rather low-labor-cost industry towards high-tech industry, (such as) semiconductors, green energy technologies, EVs, et cetera. And the ultimate goal is, I believe, what you call as common prosperity byincreasing the salary and productivity of the people to generate higher consumption. I believe that we have to be a little bit patient now until this structural change of the economy which will hurt the next two, three, four years, probably. But, after that, we will see if that was successful. The majority of our companies are quite confident that the situation will improve over the next 2 to 3 years.

 You Zhixin:
(As of) the first quarter, China's economic data issued (shows) the GDP growth by 5.3 percent year on year is quite encouraging. The new quality productivity forces play a more and more important role. So, what's your expectation?

 Maximilian Butek:
So, I believe that there are good signs. I think the growth also, when we look into the industrial output, was mainly driven by this new economy, EVs and semiconductors. But the consumption still lags. So we hope that the growth will come back to a stage where it's driven by domestic demand. 

Titus von dem Bongart:
China definitely is very ambitious in how it wants to restructure its growth which was very much focused on production and cheap labor in the past into new driving forces like cloud business, like automation, digitalization, AI. I don't think that these are the factors, which already are driving the increase or the change of the economy. But, for sure, looking at the determination and also the success in the past of objectives from an economical point of view, these driving forces can become or they really can become the driving forces in the future.

 You Zhixin:
We've heard different voices when it comes to China in EU countries. Someone even said China is the systematic rival. What's your view of the future China-EU relations? Where are we heading?

 Maximilian Butek:
We need a lot of exchanges. We see that when many German politicians come to China and have a direct dialogue, (saying that) we really need to enhance and support bilateral exchanges. And this is not only on political level, but also on company level, on students level, (and) on sports level, et cetera, so that we create a good common ground on trust. We are positive about the relations, per se, at least when it comes to the economic perspective, because I think China cannot be really without European Union and we cannot really be without China. 

 You Zhixin:
As to enhance exchanges between China and EU, or China and Germany, is one of the duties of the German Chamber of Commerce, so, Titus, what's your forecast and expectation? 

 Titus von dem Bongart:
I couldn't agree more with Max. It's all about exchange. People have to talk to each other. And I think this was also, for me, one of the big positive things as Mr. Scholz comes to China. He talks to the leadership here in China, and not about the leadership. This is very crucial, also going forward., the points you made, I find them very important. It's not only business; it's cultural; it's the exchange of students. The root has to be set among young people, so that there is a bigger exchange of young people, knowing each other better. Chinese students can study in Germany, and Germany students can study in China.You set the outline as competition and partnership. Honestly, competition, in my eyes, is nothing bad. I want to quote, I think it was from the CEO of a big German company who said, "for us, China is like a fitness center”. And in that regard, I understand (that) for many of my clients, they are very confident that they can meet this competition and still can strive in the future on the partnership level. For sure, there are so many topics where we have joint and common interest where we can work together in the future. So basically, there is a lot of common ground where we can build on. And hopefully, we can manage to set the right indicators and the right guardrails in order to make the best out of it.

 You Zhixin:
Thank you, both of you, for sharing deep insights with us on this topic.Thank you for your time. Looking forward to seeing you on the next China Trends.