German firms 'de-risk' from the West in their China policies, plus Nomura executive exit-banned & South China Sea tensions escalate -- China Boss News 9.29.23
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What happened.
Rather than heed Berlin's warnings about reducing exposure to China, some of Germany’s largest firms are doubling down on their holdings there by "striking deals with Chinese suppliers to make their supply chains more local," Wall Street Journal's William Boston reported last week.
BASF, Siemens, Volkswagen, BMW and Mercedes-Benz have all announced plans for significant new investment despite increasing tensions between China and the West as they battle to hang on to PRC market share.
BASF, a global leader in chemicals, will invest $10.7 billion in China for the rest of this decade. It recently broke ground on a new factory in Zhanjiang, China, “to make synthetic gas and hydrogen for local use.”
Siemens will invest less, around $148.8 million, to expand a digital factory in Chengdu, Sichuan. It will open a new R&D center in Shenzhen for “motion control systems with digitalization and power electronics technology,” the company said.
VW recently announced that it will invest $700 million in Chinese EV maker XPeng, while BMW will spend $1.4bn to expand EV battery output in China and Mercedes Benz is making China “central to its next electric vehicle (EV) campaign starting in 2025,” according to Reuters.
The firms “ride-it-out-in-China” strategy puts a neat spin on the “de-risking” terminology EU and German officials are currently using in their messaging to make their own steps toward ‘decoupling’ more palatable to, both, businesses and Beijing.
But the doubling-down of Western businesses in today’s China presents a number of critical issues likely to saturate future headlines and policy white papers for a long time to come. Two of the more obvious ones are discussed below.
Why it matters
Forced labor
The extent to which forced labor products taint China’s supply chains is probably unimaginable. But we’ll try to tackle it, anyway.
Products made from slave labor are, obviously, made without wage costs. That means the producer can slash prices and dramatically undercut the competition.
Regular wages have been rising for years in China. It’s one of the reasons manufacturers began leaving China for South East Asia or re-shoring even before the trade war began under President Trump.
When the higher labor costs began to threaten China’s position as the "World's Factory," a critical source of Party wealth and influence, leader Xi Jinping turned to Xinjiang Production and Construction Corps (XPCC), also known as the "Bingtuan."
XPCC is a state-owned enterprise and paramilitary organization that is directly responsible for the human rights abuses against ethnic minorities in the region.
Unfortunately, in recent years it has also become - and I cannot stress this enough - a rather powerful and lucrative part of the Chinese government.
Researchers at the Helena Kennedy Center for International Justice at UK's Sheffield Hallam University describe the XPCC as “a regional government, a paramilitary organization, a bureau of prisons, a media empire, an educational system, and one of the world’s largest state-run corporate enterprises.”
If that doesn’t make your stomach turn, this will. From the report, the XPCC:
has estimated direct and indirect corporate holdings that could amount more than 862,000 entities worldwide
holds a 50% or more stake in at least 2,873 companies (according to C4ADS)
concentrates much of its corporate holdings in agriculture and construction
has expanded its holdings to energy, mining, chemicals, oil and gas extraction, logistics, apparel, electronics, wine, food processing, insurance, tourism, and many other sectors
produces approximately 33% of the Uyghur Region’s cotton (amounting to about 8% of the world’s cotton) and a third of the world’s tomatoes used for paste, and contributes significantly to the apparel, electronics, and pharmaceuticals sectors, for both domestic and international consumption
produces goods that reach far into global supply chains and operates construction projects in the XUAR as well as throughout China, Central Asia, the Middle East, and Africa
Last week, Evan Halper at the Washington Post broke a story about Tesla's link to "materials that go into its vehicles [which] come from the Xinjiang region."
But Musk is far from alone, Halper, who “spent months mapping the opaque China-based supply chains behind the production of millions of electric vehicles,” said.
“Tesla is among several EV companies that have suppliers with Xinjiang connections, records show. Ford has a deal with a battery maker that congressional investigators allege has ties to vast lithium mining and processing operations in Xinjiang, and Volkswagen operates a factory in the region with a Chinese partner,” he said.
Halper earlier this week released an update on the challenge Ford now faces, noting that the controversy over its "collaboration with Chinese battery maker CATL" - who allegedly continues to source from Xinjiang - has led the company to "pause" work on a $3.5 billion electric vehicle battery plant in Michigan.
For the optimistic German EV manager who will hang him- or herself on the nuances of America’s aggressive China hawks versus those more docile at home, RFA news recently reported that Belén Martínez Carbonell, the Managing Director of the EU’s External Action Service (EEAS) last week announced to the UN General Assembly that the European Parliament is “working on Europe’s own version” of the US’ Uyghur Forced Labor Prevention law. Scheiße!
Civil-military fusion
In case you didn’t know, Australian Strategic Policy Institute (ASPI) has been documenting "links between China’s civilian universities, military and security agencies" since 2019 and its researchers have compiled a list of Chinese universities who are “engaged in defense research, training defense scientists, collaborating with the military and cooperating with defense industry conglomerates.”
ASPI’s China Defence Tracker website is a "database that sorts institutions into categories of very high, high, medium or low risk," with 92 PRC institutions currently - you guessed it - at the very top in the 'very high risk' category.
As the number of institutions on the ‘very high risk’ category grows, so does the risk that German firms who collaborate with local universities and R&D centers become suppliers of Western know-how and technology to China’s military-industrial complex.
“Military–civil fusion is the CCP’s policy of maximizing linkages between the military and the civilian sector to build China’s economic and military strength.The policy was promoted by President Hu Jintao in 2007 but has been elevated to a national strategy by President Xi Jinping, who personally oversees the Central Commission for the Development of Military–Civil Fusion (中央军民融合发展委员会). …Many countries seek to leverage private industry and universities to advance their militaries. However, as scholar Lorand Laskai writes, ‘civil–military fusion is more far-reaching and ambitious in scale than the US equivalent, reflecting a large push to fuse the defense and commercial economies,” ASPI researchers explain.
There is, currently, much discussion about the the lack of oversight in the US for collaborations with institutions involved in China’s military-civil fusion program, although much of it centers on partnerships between Western and Chinese universities.
Jeff Stoff and Glenn Tiffert wrote a very long and detailed Hoover Institution report that got a lot of interest on the Hill last year about how "academics can't just neatly compartmentalize the risk." Probably so, but it would also be challenging to see how Western firms desperate to hold onto to their Chinese market positions could “compartmentalize” any better.
Stoof and Tiffert:
Guided by the concept of military-civil fusion, the PRC is resolutely integrating private sector innovation into its defense industrial base, in part by tapping the capabilities of ostensibly civilian domestic institutions. Some of these institutions participate in a coordinated, state-directed technology transfer apparatus that is tasked with obtaining, commercializing, and weaponizing advanced foreign R&D.
Only now is the US research community awakening to the intensity and scope of this enterprise and its military or dual-use dimensions. However, in the absence of external regulatory or policy mandates, US research institutions have been slow to adapt their due diligence and risk management frameworks. Weak institutional reporting mechanisms and compliance cultures have permitted some collaborations to go unknown, unreported, or underreported.
Note that most attorneys would consider this issue almost ripe for "regulatory risk."
In sum, these are but a few of a dozen or so such risks that run the gamut of public interest developments. There’s the action thriller, like the risk of a Western manager being charged with treason for complying with China’s intelligence law in order to keep market position to the slow burn of violations of EU privacy law, the GDPR, and their rising reputational costs.
Worse, these risks don’t look like they’ll abate with time, so long as Chinese leader Xi Jinping, who has recently done a good bit of his own “doubling down” on security in Xinjiang and strengthening the country’s military, still has the final say. Put differently, BASF, Siemens, Volkswagen, BMW and Mercedes-Benz et al. look set to learn China’s difference from WWII Germany and Putin’s Russia the hard way.
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