Will Protectionism Fly?

Two stories caught my eye recently, both relating to protectionism � a risk issue that has been highlighted for some time by �China Shakes the World� author, James Kynge.

In the first story Reuters reports of protectionism in China�s energy sector:

�A strong bias toward local producers and rigid price controls hinder European investors from making significant inroads into China’s vast energy sector, the head of the EU Chamber of Commerce in China [Joerg Wuttke] said on Wednesday.�

Factors are said to include:

� Project bidding restrictions, such as for the Three Gorges dam hydro-electric project

� Technology transfer pressures � for technologies that some would rather keep in-house (such as for Areva nuclear plant project)

� Antitrust protection (against foreign ownership) for big state power firms

� Local content requirements for wind farms (70%) and in petrochemicals

While these protectionist measures may help local firms in the short term, Wuttke points out that China also needs to update its energy sector and to become more efficient and environmentally-friendly. New, imported technology and investment could help this process.

The second story is from Forbes, and looks at the situation for plane makers:

�Aircraft manufacturers must expect to move more production to China in return for securing orders there, according to the head of the Chinese division of Airbus, the European aerospace group.

‘China cannot just be a sales operation. You cannot expect the Chinese to buy hundreds of planes and there be no spin-off for China,’ Laurence Barron, president of Airbus China, told the Financial Times.

In October, Airbus agreed to open an aircraft assembly line with Chinese partners in Tianjin, a move that has made Airbus ‘a good corporate citizen,’ Barron added.�

Of course, it is not just China that has protectionist tendencies. The US and EU have a lot of domestic political pressure to combat Chinese imports (while the foreign content of those imports is often forgotten).

For businesses these challenges may increasingly be seen on an industry level rather than in sweeping trade policy initiatives, while the benefit of localization is something that will have to be balanced with the risk of technology transfer.

Of course, despite these problems, there are still plenty of opportunities for foreign firms to supply China with equipment and other goods, especially at the high end. I recall doing a study on power distribution equipment some years ago, and being entertained by the reaction of the European manufacturer when, during our presentation, we congratulated them on winning a contract to supply equipment for a certain Senior Leader�s compound outside Beijing (that required the very best). I think their surprise was as much to do with the fact we knew about the contract before them, as it was about the fact they had won it at all! Business intelligence can be fun�

See news sources:

Europe sees high fences around China energy
Wed Sep 5, 2007 5:42AM EDT
Reuters

Planemakers must assemble more in China as tradeoff for orders - Airbub exec
Forbes
09.06.07, 2:58 AM ET

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