Europe should de-risk from China, but not disengage

September 28, 2023 22:27

The most prominent European businessman in China says that Europe should "de-risk" from China but not disengage. "If you refuse to sit at the table with China, then you will be on the menu."

Joerg Wuttke is Emeritus Chairman of the European Chamber of Commerce in China and CEO of BASF in the country. Next year he is moving to a new job in Washington D.C. after nearly 40 years in China.

"I see China as an increasingly important part of the world economy. Political leaders in the U.S. and, to a lesser extent in Europe, have called on companies to move their supply chains out of China. This is too expensive and complicated. It will only happen in security-related areas, where governments are willing to pay for the move," he said.

"Everyone must realise that China’s growth story – given the size and backwardness of the economy – is not over. In five to ten years from now, businesses will become more China-focussed, China-bound and China-dependent. The GDP of Guangdong is larger than that of Italy, the GDP of Shenzhen larger than that of South Africa," he said.

He urged foreign firms to stay in the "fitness club" that is China, to remain globally relevant. "The Chinese economy is extremely good at developing products and processes; foreign companies can learn to be faster and more willing to take risks in the Chinese market."

At the same time, President Xi Jinping has changed China. "He is clearly a Marxist, a true believer. No-one is left to question or challenge him. I see no challenge for a long, long time. He is all about control and state companies."

"For him, security and stability are a priority. He is willing to sacrifice economic growth for the sake of stability – this is a game-changer from Deng Xiaoping. He wants to make China less dependent on the outside world," he said.

For Europe, China is a partner, a competitor and a systemic rival, all three at the same time. "Communism teaches us that it has a struggle with capitalism and that it will prevail. We should take that seriously. When President Xi talks about ideology, he believes it. China has given up co-operation with the West, which is not good for us," he said.

So the right policy for the EU is "de-risking". It was outlined in a major speech on March 30 this year by Commission President Ursula von der Leyen. Wuttke advised her on the policy in Brussels and Beijing.

"De-risking is genius," said Wuttke. "It really distinguishes itself from de-coupling. This is something we need to learn from China. During COVID, we learned how dependent were on Chinese pharmaceutical precursors and that China might threaten to cut us off from rare earths. China supplies 80-90 per cent of our magnesium and vitamin B1. It is prudent to see where we are excessively exposed."

In her speech, von der Leyen said that the EU was excessively dependent on China for 98% of its rare earth supply, 93% of its magnesium and 97% of its lithium. "Our demand for these materials will skyrocket as the digital and green transitions speed up. Batteries that are powering our electric vehicles are forecasted to drive up demand for lithium by 17 times by 2050." So the EU must diversify and secure its supply.

Among European firms, German companies are the largest investors in China, especially in autos, pharmaceuticals and chemicals. German investment in China exceeds 90 billion euros.

Wuttke was responsible for negotiating the largest single foreign investment in China – BASF’s US$10-billion-dollar "Verbund" in Zhanjiang in Guangdong province. Verbund means a large complex of inter-connected production facilities. The Zhanjiang one will be BASF’s seventh in the world and the second in China, after Nanjing. The site is under construction and due to be completed in 2030. BASF has 100-per-cent ownership of the project.

In 2022, BASF posted sales of about 11.6 billion euros to customers in Greater China. Over the last two decades, the company has invested more than nine billion euros in Greater China; with partners, the figure reaches more than 13 billion euros.

Wuttke said he very much favoured Chinese investment in areas where there was a technology gap and Europe can learn from China.

He cited Chinese firm CATL, the world’s largest maker of electric vehicle batteries, is building a plant in Debrecen, Hungary, with an investment of 7.3 billion euros. It will supply Mercedes-Benz, BMW, Stellantis and Volkswagen.

"This will mean that we can put competitive products in our cars. This is good; interdependence will bring us more advantages. While I am in favour of doing security checks in sensitive areas, we must not lose the market liberalism in our DNA. Industrial policy causes conflicts, but we live in a society that can resolve such conflicts. Autocratic systems cannot," he said.

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A Hong Kong-based writer, teacher and speaker.

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