European Union Businesses And The Belt And Road Initiative – A Guide To Changing The Modus Operandi And Getting Involved

Posted by

Op/Ed by Chris Devonshire-Ellis

The European Chamber of Commerce in China (Eurocham) have just released a report, entitled “The Road Less Travelled” concerning Eurocham members observations on their ability to participate in China’s Belt & Road Initiative. A link to downloading the report, which is complimentary, can be found hereThere are some profound issues with the report, which paints a negative picture concerning participation, mostly due to something they refer to as “global competition being seriously blunted by China’s vertically-integrated state-owned enterprises” and citing a lack of fairness by China because many of these SOEs “are national champions that emerged in China’s heavily protected market, which has allowed them to achieve extraordinary economies of scale…..these difficulties are further exacerbated by the additional layer of state-aid extended to Chinese companies in the form of dirt-cheap financing and political support attached to the initiative.”

While this remains true, the implication of the report is that unless there are massive political and governmental changes in China as to how Beijing manages its State Owned Enterprises, then this state of affairs will continue. Which it will. But in producing a report that points out the failings, then stating a situation both well known to EU members in China, Eurocham doesn’t have anything new to say on the alternatives. Wishing for a sea change in China’s politics of the magnitude presented just isn’t going to happen. As a result the report tends to be a grumbling complaint and thereby discredits the sophistication needed to truly access the Belt & Road – and profit from it. It’s hard to see what the point of the exercise was other than to promote a largely unpromising critique.

It is also worth remembering that the EU itself has taken a fairly negative stance towards the Belt & Road Initiative and has at times been quite cynical about it. A letter, signed off by all EU Ambassadors to China criticizing the BRI wasn’t an especially great idea, while the EU’s Position Paper On EU-Asian Connectivity omitted to mention China or the Belt & Road. There is a disconnect then between Brussels and how it views China and the Belt & Road Initiative, and EU businesses that wish to participate in the infrastructure build. Laying the blame on China for EU businesses Belt & Road failings is somewhat disingenuous. Brussels hasn’t exactly been entirely helpful either, and its overall negativity towards the scheme ends up painting a somewhat partisan attitude. This is a shame. It is also a dubious stance.

Of the 1,700 members the European Chamber of Commerce has, just 132 of those completed the survey, and of those, just 20 had any experience in actually bidding for contracts. These are very small numbers from the available pool, and there are consequently issues over the credibility of both the data and the extent to which EU businesses are actively looking for participation. Just 3.4% of Eurocham’s China membership could provide any meaningful data in terms of experience, and that’s really not enough to justify an considered or meaningful opinion.

Of the 20 companies that had bid on projects, the report mentions that “most cite the lack of transparent bidding and procurement processes as a major barrier to participation, with only two having found projects through publicly available information. Of those that have participated, most have done so after being pulled in by business partners or local governments. All but a scant few have played niche roles, like providing certain technology or experience in the recipient country, which, given the scale of the BRI, saw most respondents refer to their level of involvement as ‘crumbs from the table”.

The type of participating business isn’t mentioned, however given that there is reference to “partners”, it suggests several are EU-China Joint Ventures, and the others significant enough to be able to provide either specific experience or technology. The “crumbs from the table” remark is also telling – suggesting these are MNC’s expecting larger, multi-million dollar rewards. European MNC’s can tend to be overly reliant on their Governments (and the Chamber) to get them contacts in China, and to have public services do their bidding and introductory work for them. They have a tendency to take up the time of commercial consuls looking at new business contacts from China.

However, while it is an obvious route, it can be a misleading one. Not all Commercial Consuls are experienced enough in industry to really make an impact in China, and most are rotated out after 3-4 years, leaving little time to develop relationships or industrial expertise. A question for EU MNC’s in China to ask about Commercial Consuls is if the individual concerned would be a suitable candidate for marketing or China market research within their own business. I suspect that many would not, and this is where perhaps an overly reliant relationship between MNC and their Embassy may not be especially productive.

EU Belt & Road Initiative Lesson One:
Hire a dedicated professional in China to assist with Belt & Road Project Market Research and give them a budget to do so. Don’t just rely on “Government contacts”.

Another issue with the report is that it may have come too early. In fact, China is well aware that it needs to get more foreign expertise into the Belt & Road Initiative. There are been numerous examples of Chinese contractors cutting corners and building shoddy infrastructure, and in the more complex projects, specific skills and technologies are required at a level that Chinese SOEs can find beyond their competencies. To deal with this shortfall, China has, as of 1st January this year, amended its Foreign Investment Law. This actually opens up the China procurement market to foreign bidders, precisely so they can bid for needed supplies and services. The law has also been amended to allow Fixed Project Term Sino-Foreign Joint Ventures to be incorporated, allowing a JV to be formed to deal with a specific project, profits divided, and then closed. These are useful tools to use and are specifically geared at improving foreign participation in Belt & Road infrastructure projects. We wrote about this way back in June last year in the article “China’s New Foreign Investment Law And Its impact On The Belt & Road Initiative”.

EU Belt & Road Initiative Lesson Two:
Research the China Procurement websites and access the China tenders relevant to your business. There are plenty of Government websites that list these – in Chinese. Need assistance? Our Belt & Road Business Intelligence Unit can assist. Email: silkroad@dezshira.com

China’s Belt & Road Initiative is also by its very nature made up of hundreds of bilateral projects. It is important for foreign businesses to understand that they face competition not just from Chinese SOEs (a point the EU report fails to observe) but also SOEs and domestic companies from within the partner country concerned. It then becomes pretty obvious that China procurement aside, only contractors with experience and an existing presence in a third country are going to be able to take part – something the report acknowledges but fails to address the implications of.
There is no chance of a China based, EU owned business being able to participate in a Belt & Road infrastructure project in countries and regions such as Russia, The Balkans, Uzbekistan, Zimbabwe or any of the other BRI nations unless they are already operational in that market. If they are, then a strategy between the China entity and the third country entity needs to be jointly developed to bid and win contracts – it is not going to happen in China alone.

EU Belt & Road Initiative Lesson Three:
The majority of BRI contracts are bilateral in nature. Aside from any China procurement angle, expertise is required in the recipient nation. If you have subsidiaries along the Belt & Road, work with them to create a joint strategy for bids. It can’t be done just from China.

There is an additional Belt & Road participation angle that the EU report swats away with the words “Some new opportunities have emerged as a result of new infrastructure that has been completed along the BRI” but then fails to develop.

This is a mistake, and again smacks of a short-sighted approach towards Chinese-built infrastructure – in nearly all cases, the commercial impact of the infrastructure is worth far more than the cost of the infrastructure itself. I wrote about this in some detail in the article How Foreign Businesses Can Prosper Along China’s Belt & Road Initiative: Exploit The Infrastructure.

Looking at the BRI from this perspective is going to be much more rewarding than merely looking for contracts to build bridges and ports. There are other benefits too – SMEs upstream can get involved, using infrastructure build is pan-industrial and involves multiple business sectors, and those opportunities don’t necessarily mean having to deal with the Chinese at all. China SOE’s built the Sri Lankan Southern Expressway, at a cost of millions, but it has been foreign investors from hoteliers to beach bed suppliers, shops and tour operators who have overseen a tourism boom worth billions per annum to Sri Lanka’s south-east coast.

EU Belt & Road Initiative Lesson Four: Exploit The Infrastructure
Participation in the Belt & Road Initiative isn’t just about the projects. It’s about exploiting what is being built. How can your business invest in the subsidiary add-ons a new infrastructure project will bring? Retail outlets? Hotels? How can you use the infrastructure build to invest in new projects?

In the three years since we began Silk Road Briefing, our firm, Dezan Shira & Associates has been one of the few researching what has been developing, and explaining the opportunities. We have consequently handled many business intelligence requests concerning understanding these.

There are many examples, but here is one from a client looking at putting in serviced apartments near an overseas section of Belt & Road infrastructure development. These are the questions they are now pondering to justify looking at exploiting the new infrastructure:

“We need tailored research which would mainly be around city GDP growth forecasts, current and future pipeline development of hotel and serviced apartments in the city, other infrastructure developments underway that would impact upon visitor passenger flows, existing hotel occupancy levels, the expatriate population, and related details that will supplement a business plan for a new long stay residence opening.”

It is an excellent example of the sort of questions EU (and other foreign businesses) should be asking where significant Belt & Road infrastructure projects are taking place. New roads, rail, ports and airports will all increase human traffic flows, and wherever humans are, they have needs and require services.

While the EU has done a decent enough job of its report, the inherent problem with it is that it reads as a political treatise rather than a business commentary. It lacks the thinking outside the box that is required to completely understand the opportunities that are coming out of China’s Belt & Road Initiative. It also appears to grumble about China’s business and governmental structures and criticize this as an EU inhibitor and reason why EU businesses are not making much headway along the Belt & Road. It advises that the EU itself “recognizes Beijing’s One China policy” while complaining that Beijing isn’t reciprocating. It ultimately falls down as being full of Brussels speak rather than providing a business case and ideas for Belt & Road participation. It is critical without offering any viable participation alternatives, and this is a shame as the European Chamber should be a business focused, not political body. Consequently it doesn’t actually tell us anything new.

In terms of accessing the opportunities, more imagination, less reliance on EU Governmental support, coupled with developing in-house intelligence would be a better solution for most EU MNC’s – and looking at how to exploit the infrastructure build as a rather more lucrative opportunity as a whole. There is plenty for EU and other foreign businesses to go for in terms of generating income from the Belt & Road Initiative instead of only concentrating on how to partner with Chinese firms over project involvement. Europe’s smart money should go it alone and invest in their own development strategies. Now is the time to be building and budgeting for these – the opportunities are there to be exploited.

Related Reading

 

About Us

Silk Road Briefing is written by Dezan Shira & Associates. The firm provides strategic analysis, legal, tax and operational advisory services across Eurasia and has done since 1992. We maintain 28 offices throughout the region and assist foreign governments and MNC’s develop regional strategies in addition to foreign investment advice for investors throughout Asia. Please contact us at asia@dezshira.com or visit us at www.dezshira.com

 

Leave a Reply

Your email address will not be published. Required fields are marked *