Student projects/outputs No. 001 France China Economic Relations Trade and Investment BMT MBA Exchange May June, 2008 China Europe International Business School, China MBA 2007 2008 EMLYON Business School, France
France and China established diplomatic relationship in 1964, but the fast progress of economic relationship emerged thirty years later. It was very late that French enterprises entered into China, almost ten years lag behind UK and Germany. One reason is that France didn t treat China as a preferred choice of its international economic strategy in 1980s ; On the other hand, in 1991, two large arm deals between France and Taiwan caused strong reactions from Beijing. Until 1994, France and China announced a joint communiqué and French government committed stop selling arms to Taiwan, Sino French relations became normalized. Now, Sino French economic relations keep progressing. The amount of trade and investment is continuously growing but getting more imbalanced. France is China s 4th largest trade partner in Europe. For France, China is not only the No.1 trade partner in Asia, 7 th largest trade partner in the world, but also the biggest source of trade deficit, ahead of Germany. Trade Growing but Imbalanced According to the statistics published by China Customs, in 2007, two way trade between France and China came to $ 33.7 billions, increased 33.7% from previous year. China s export to France reached $ 20.3 billions, increased 46.1%; the amount of import from France was $13.3 billions, increased 18.3%. France incurred a trade deficit with China of $ 7 billion. Despite of late entry, industrial structure of France is the key reason causing the imbalanced trade with China. 1
Country(Region) amount of import and export Trade Statistics of China, 2007 amount of export amount of import Unit: USD 10,000 % change from the same period last year import and export export import World 217,383,301 121,801,452 95,581,850 23.5 25.7 20.8 United States 30,208,271 23,270,398 6,937,874 15.0 14.4 17.2 Japan 23,602,193 10,207,129 13,395,064 13.9 11.4 15.8 Europe 44,793,250 30,127,361 14,665,890 30.7 34.8 23.1 EU(27 countries) EU(15 countries) 35,615,124 24,519,173 11,095,951 27.0 29.2 22.4 32,733,786 22,132,814 10,600,972 27.7 30.9 21.4 Germany 9,411,164 4,871,826 4,539,338 20.4 20.8 19.8 Netherlands 4,634,082 4,141,320 492,762 34.3 34.2 35.0 U.K. 3,943,539 3,165,837 777,702 28.6 31.0 19.5 France 3,366,765 2,032,586 1,334,180 33.7 46.1 18.3 Source: China customs France is the sixth largest industrial country in the world. Several industries, such as energy (especially nuclear power plant), aviation, national defense, chemical, ground transportation and environmental protection etc, are all in world s leading positions. But with respect of consumer goods, such as consumer electronics, garments, even cars, French enterprises are apparently lack of advantages or face fierce competitions from local enterprises or emerging countries. Apparently, France does not take full advantage of Chinese economy s growth potential, especially strong consumer spending accompanied by double digit annual GDP growth. On the contrary, China has been increasingly exporting consumer goods (textiles and garments, in particular), consumer electronics and electronic equipments to France, enlarging the trade deficit of France. The imbalanced trade causes tensions. One example is textile dispute in 2005. Millions of sweaters, trousers and blouses produced in China were blocked at European ports because they exceeded import quotas. Because of having large domestic textile industry, France insisted on strict compliance on the 2
quota. This attitude was different from Germany. German government supported domestic retailers request to let the textiles pass the borders and referred to consumer s benefit of buying cheap clothes. 1 Worsening trade imbalance will become a source of potential tensions in Sino French economic relations. That also could lead to interest conflict among France and several key EU member countries, and make EU more difficult to formulate a coherent economic standpoint when facing China. 2 FDI (foreign direct investment) In 2007, France invested 268 projects in China; the amount of investment was USD 456 millions. Number of projects decreased 20.71%, but the amount increased 15.35%. Until the end of 2007, France had totally invested 3,593 projects, accumulated amount of investment reached USD 8.3 billions. For China, France is the third largest FDI country in EU, only next to Germany and U.K. In 1980s and 1990s, like the other foreign capitals, most of French enterprises entered into China in the forms of equity joint venture or contractual joint venture. Accompanied with accumulated experiences, and at the same time local regulations became more flexible, French enterprises started to invest wholly owned subsidiaries and adopt M&A as a development strategy. For example, Michelin consolidated its four equity joint ventures to become a wholly owned subsidiary in Aug, 2003. In the same year, L Oreal acquired Chinese local company Little Nurse, and then acquired another local cosmetic brand YUE SAI in 2004. countries/region number of projects,2007 Breakdown of FDI in China % of change from 2006 percentage of total projects,2007 % of change from 2006 Total 37,871 8.09 U.S. 2,627 18.03 6.94 0.79 EU 2,384 8.97 6.3 0.01 Germany 548 4.86 1.45 0.06 U.K. 475 2.81 1.25 0.14 Italy 348 14.91 0.92 0.07 France 268 20.71 0.71 0.1 1 Weske, S, 2007, The Role of France and Germany in EU-China Relations, EU-China Studies, p.5. 2 For further comments, see Godement F., (2007), The EU Meets China: United We Stand? http://www.ecfr.eu/content/entry/commentary_eu_china_summit/ 3
countries/region Amount Of Investment,2007 % of change from 2006 percentage of total FDI,2007 unit: USD 10,000 % of change from 2006 Total 7,476,778 13.59 U.S. 261,623 12.79 3.5 1.06 EU 383,838 29.43 5.13 3.13 UK 83,094 10.13 1.11 0.04 Germany 73,397 63.36 0.98 2.06 France 45,601 15.35 0.61 0.01 Source: Foreign Investment Department of the Ministry of Commerce In spite of various and flexible business actions, at present, the pattern of French investment in China is still dominated by big projects/contracts. Although there re around 1,800 French companies in China, the investment is mainly undertaken by around 20 big French enterprise groups, such as EDF, Suez, Alcatel, Thomson, Saint Gobain, Scheider Electric, Alstom, Carrefour, Veolia, Danone, Loreal, Psa Peugeot Citroen, BNP Paribas, Crédit Lyonnais, Air France etc. A certain number of the projects targets on China s fast growing infrastructure developing needs, such as electricity, water supply and transportation. Because Chinese government and state enterprises are key stakeholders in these projects, state level political relation naturally become important factor for French corporations to gain project contracts. It s not surprisingly to see French big enterprises obtaining contracts or announcing new investment plans during or after meetings of Sino French heads of states. In January 2004, Chinese President Hu Jintao visited France, followed by that of Vice Premier Zeng Peiyan in June 2004, allowed for several investments to be made in the form of joint companies and cooperation agreements in structuring sectors defined in the joint declaration (electronuclear, ground transport, aeronautics). In November 2007, France President Nicolas Sarkozy visited China, several long term big contracts also formally being signed. The most significant one was French energy giant Areva selling two EPR nuclear reactors to Canton province s third generation nuclear power plant, and providing fuel for 15 years. China s FDI policy always follows the rule of market in exchange for know how. Facing the competition from the other highly industrialized countries such as U.S. and Germany, political relation is definitely a 4
leverage for France to win the contracts, but the scale and the level of technical transfer is inevitably increasing. For example, Airbus group could always get big orders during the time when Sino French heads of states met. Technical transfer was an inseparable part of these orders. In 2005, Airbus established a technical center in cooperation with Chinese aviation manufacturers. In 2007, an Airbus assembly line started to operate in Tianjing. Airbus committed to transfer A320 wing structure manufacturing techniques to Chinese partners. This type of FDI causes some controversies in French side. In a presentation document, a financial counselor of French economic mission in Beijing elaborated his concerns: The future of our investment in China is a key question. Are we partners or adversaries when facing the chase of Chinese technology (e.g. aerospace or automobile)? 3 Chinese FDI in France According to the statistics published by Invest In France Agency, until the end of 2007, there were 100 Chinese enterprises directly investing in France. 40 of them started their investment in 2005 and after. From 2005 to 2007, there were around 20 Chinese FDI projects in France which represented the amount of 500 millions each year. These projects mainly concentrated in several sectors, including textiles, chemicals, electronics, home wares and freight transports. The number and amount of projects of Chinese FDI is extremely limited, and mainly made up of company representatives and regional offices, like telecom equipments company Huawei Technologies set up its European Headquarter at Cergy, Ile de France. However, it s clear to see the trend of change since 2007. In January 2007, Chinese chemical corporation BlueStar acquired a subsidiary of French industrial giant Rhodia Group. The amount of the deal reached 400 millions. In August, machines and mechanical 3 Cieniewski S. (2005), La Chine en 2020, Perspectives Et Implications Pour l Economie Mondiale, Mission Economique de Pékin, Chine. 5
equipment company NFM Technologies acquired two French ailing firms. Eight takeovers were done in 2007. That marked M&A became a entry mode adopted by Chinese companies. Conclusion Sino French economic relation is getting more and more closer since 2000. France plays an important role as a contractor, partner and source of techniques in the fields like aerospace, energy, and environmental engineering. Nevertheless, despite the big contracts signed, the technology transfers carried out, trade remains modest and imbalanced for France. Structure and competitiveness of French industries is the main reason. High level political tie between both sides is an advantage for French industrial giants. But growing trade imbalance, concerns about technology transfer and divergent interest between France and EU will constitute uncertainty in Sino French economic relation. 6
Reference Qi, J and Zhou, J. (2006), French Direct Investment In China: A Survey Report, East Asia Economic Research Group, Discussion Paper No.6, January, 2006. Invest In France Agency, (2008), 2007 Report On Foreign Direct Investment In France Cieniewski S. (2005), La Chine en 2020, Perspectives et implications pour l économie Mondiale, Mission Economique de Pékin, Chine. Weske, S, 2007, The Role of France and Germany in EU China Relations, EU China Studies Centesr Programme, August, 2007 中 國 駐 法 使 館 經 商 處, (2007), 當 前 法 國 對 外 貿 易 的 特 點, http://fr.mofcom.gov.cn/ztdy/ztdy.html 中 國 駐 法 使 館 經 商 處, (2007), 法 國 媒 體 高 度 關 注 中 法 簽 署 一 系 列 經 貿 合 同, http://fr.mofcom.gov.cn/ztdy/ztdy.html 中 國 駐 法 使 館 經 商 處, (2007), 法 國 媒 體 稱 中 國 已 成 為 空 客 公 司 主 要 合 作 夥 伴, http://fr.mofcom.gov.cn/ztdy/ztdy.html 7