Europe’s firms face fierce competition in Chinese market

Date: 01/06/2000

By Shada Islam

THE US' insatiable appetite for foreign goods helped fuel world trade growth for most of the last decade. Now the international business spotlight is set to turn on the changing tastes and demands of China's consumers.

As Beijing gets ready to complete its 14-year-old quest to join the World Trade Organisation, the battle to capture the hearts and souls - not to mention the wallets - of millions of Chinese consumers looks set to mark global business patterns for at least the next ten years.

European companies - including banks, telecoms firms, department stores and exporters of luxury goods - stand to make significant gains from the market-opening deal clinched by Trade Commissioner Pascal Lamy and China's Foreign Trade Minister Shi Guangsheng in Beijing earlier this month.

With its focus on speeding up China's liberalisation of its telecoms and insurance sectors, combined with tariff reductions for up to 150 European exports, the agreement is expected give EU companies an important initial fillip when doing business with Beijing. The "sound commercial package" agreed by Lamy and Shi reflects the Union's specific trading interests, as EU foreign ministers stressed last week.

But European companies face tough times ahead. From French wines to

German cars, Chinese consumers may have increasingly acquired both a taste for European products and the resources to purchase them. But Union firms are not alone in seeking to do more business in China. Under WTO rules, concessions granted to any one member of the organisation have to be automatically extended to all others. Competition on the Chinese market is therefore set to heat up as thousands of enterprises from Detroit to Seoul scramble to meet the country's booming demand for foreign goods and services.

The US House of Representatives' approval of permanent "normal trade relations" with China last week will give a strong boost to an already powerful American business presence in the country. Meanwhile, savvy companies and governments across the Asia-Pacific region have also long been preparing for a further boost to China's fast-growing trade with the region.

Geographical proximity to China, and a deep cultural understanding of the country, could give many Asian firms an added advantage in dealing with Beijing. Asian nations supplied 60% of China's €181-billion worth of imports last year.

China's lure as a business and investment location is nothing new.

For years, the long and often-bumpy road to Beijing has been crowded with hopeful American, European and Asian business leaders eager to make their fortune in the country.

It has not been easy, however. Prime Minister Zhu Rongji's reformist ambitions notwithstanding, the country has continued to shelter behind high tariffs and other protectionist trade barriers, with many officials openly favouring domestic state-owned enterprises over foreign firms and local businesses under little pressure to comply with international rules on protecting intellectual property rights.

WTO membership will eliminate many of these difficulties as China strives to meet its international obligations. The expected changes in the country's economic landscape will amount to "a revolution", Lamy predicted recently.

Economic, administrative and even cultural changes unleashed by China's accession to the WTO will transform the way the country conducts itself both on the expanding domestic market and in its dealings with the rest of the world.

The transformation will be gradual, however. Under both the EU deal and the terms of the country's future WTO membership, Chinese firms have been spared a sudden, overnight exposure to the rigours of foreign competition.

The market will open in carefully programmed stages, expected to last between three and five years.

Crucially for foreign businesses, however, WTO accession will provide an anchor for Rongji's reforms, ensuring that economic liberalisation becomes irreversible.

Equally importantly, Chinese enterprises are expected to become more efficient, giving European and other firms - especially from Pakistan, India and Bangladesh - a run for their money on markets abroad. Faced with foreign competition, once-bloated state-owned companies in China are already becoming leaner and meaner. After some initial pain, WTO rules which ban state subsidies, counterfeiting and dumping of goods will force Chinese firms to further hone their business skills, making them even stronger global competitors.

The US International Trade Commission recently predicted that Chinese exports would grow by 12% and merchandise imports by 11% over a period of three years following WTO entry. The Washington-based Institute of International Economics foresees a 20% rise in imports of services by China as high non-tariff barriers are eliminated.

The Lamy-Shi deal ensures that European firms will be among the winners in the race to enter the Chinese market. Telecoms giants such as Nokia and Ericsson, eager to expand their foothold in what is expected to be the world's largest market, look set to reap big rewards as Beijing accelerates its market-opening timetable by two years and allows a 25% stake in joint ventures on accession, rising to 49% after three years. In addition, China will open up its leasing market in three years, allowing foreign companies to rent capacity from Chinese operators and resell it domestically and internationally.

Seven new licenses will be granted to European insurance companies, in both the life and non-life sectors, before China joins the WTO. EU insurers like France's AXA, Germany's Allianz and British Insurers Royal Sun Alliance and Prudential will be among the companies which benefit from the provisions for effective management control secured for foreign participants in life-insurance joint ventures in the form of a choice of partner and a legal guarantee of freedom from any regulatory interference in private contracts on a 50-50 equity basis.

Europe's leading retail and department stores, including Ahold, Carrefour and Ikea, are expected to make inroads in the Chinese market following the lifting of joint-venture restrictions on large shops and the elimination of the 20,000 square metre size limit for foreign stores.

Equally important will be the gradual opening up of China's state monopoly on importing crude and processed oil and fertiliser.

Tariffs on imports of foreign cars will not go lower than 25% by 2006 as obtained by the US last year. But significantly for European carmakers like Volkswagen and Peugeot with investments in China, Beijing has agreed to give them greater flexibility to choose what types of vehicles they can build and eliminate joint-venture restrictions for engine production.

European farmers meanwhile can look forward to boosting their exports of pasta, olives and wine, while cosmetic firms will gain entry into the booming Chinese beauty business.