René Raaijmakers
1 September

A recent German report states that competitive pressure from China is increasing. Chinese companies are marketing more and higher-quality products in Europe. The EU is struggling to formulate a proper response. Bits&Chips asked China expert Sanne van der Lugt to put things in order.

In recent years, it has become increasingly clear that Western countries have erred with their naive attitude toward China. While the US opts for confrontation, European countries struggle to formulate a common strategy and speak with one voice. The fact that competition from China is increasing was rubbed in again last week by the report “Konkurrenzdruck durch China auf dem EU-Markt.” This research from the German Economic Institute (IW) notes that export champion Germany is losing ground to China in Europe.

Author Jürgen Matthes outlines a painful development. The five product groups that are most important from a German perspective show significantly more negative share changes in the 2010s than in the 2000s. These include motor vehicles, motor vehicle parts, pharmaceutical preparations, plastics in primary forms and air and spacecraft and related machinery. Add to that the fact that Chinese companies are improving their offerings. “In five of the ten most important product groups, the approximated quality of imports from China has risen significantly in recent times, for the most part,” writes Matthes. The 23-page report echoes an article by the website Politico, a year ago, headlined “How Germany opened the door to China — and threw away the key.”

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“This really is about the leadership of the fourth industrial revolution”

In a recent Bits&Chips article, China expert Sanne van der Lugt also made clear that Chinese companies have started to outpace Western companies with more advanced and innovative products. She showed the example of Gaussian, a Chinese producer of cleaning robots that delivers high quality. “Above all, I want to warn against a major fallacy,” she stated. “We think we’re still technologically ahead of Asian countries and that we need to protect our technology so that it doesn’t get stolen, bought or copied. What we’re not prepared for is that there are also companies coming our way with more advanced products according to our own laws in a liberal market.”

Hungry dragon?

During her career, Van der Lugt frequently noticed European media, including scientific publications, being disconnected from reality. “The narrative in Western media was very negative. They portrayed China as a hungry dragon that came to steal resources in Africa with no regard for the environment or the people. That was not what I observed. In practice, I saw African countries taking the initiative toward China.”

She points at the Chinese Sudan deal as an example. “Sudan was abandoned by oil companies as a result of US sanctions and couldn’t explore its large reserves by itself. I got to know the Sudanese ambassador in Beijing and he told me that his country had literally begged the Chinese government to invest in its oil industry. The Chinese initially referred to Chevron, but as a result of the sanctions, Sudan could no longer expect anything from any US company.” China subsequently invested in Sudanese oil production along with Malaysia and India. “So it wasn’t the hungry Chinese dragon that came down on African oil. The same thing played out in the Congo with copper.”

Diametrically opposed

For many years, Van der Lugt was an ad-hoc member of the Institute Clingendael, in her view “the number one think tank in the Netherlands.” In 2019, she got a permanent position there and founded the China Centre with a small group. “Clingendael is the place where the smart minds come together to provide the Dutch ministries with the information that matters today. So, if I think a topic should be on the agenda of our political leaders, I always try to do that through my network at Clingendael.”

One of these topics is her study on the security and privacy issues that come with cleaning robots and IoT devices in general. In the recent Bits&Chips article, Van der Lugt argues that we should not only look critically at Chinese products but also at American products that collect data. The problem is that data collected by American companies like Google and Amazon but also by IoT products and service providers will end up in the US.

In the case of data stored in the EU by US companies, the GDPR by definition offers no protection, states Van der Lugt. “The EU says: anything with data stored on European soil is European property and must abide by European law. The American Cloud Act says that the data of any American company must always be available when the US government considers it to be an item of national security interest. That also applies to data stored outside America by American companies. Those two legislations are diametrically opposed and there’s no umbrella body yet that can decide on the matter,” she pointed out in Bits&Chips.

Wake-up call

Van der Lugt argues that we shouldn’t be naive in thinking that data collection by American companies is harmless. “Edward Snowden has made that clear to us. We have to be aware that we’re now on the eve of that fourth industrial revolution. The agendas of the US and Europe do not necessarily align. We’re not automatically partners. Right now, the cards are being reshuffled and, as in the past, every industrial revolution has its leader. Until now, the leader of each new industrial revolution also became the new world leader.”

That means we shouldn’t blindly follow America’s agenda. “We mustn’t be naive. We seem to have the same interests. But the idea of China as an existential threat, that’s particularly true for the US. There’s a possibility that the US could be knocked off its throne by China. For Europe, that’s much less of an issue. We don’t have that leading position in the world and whether you’re the third market after the US or China won’t make a whole lot of difference to our power position.”

America often portrays China as the new aggressor. Van der Lugt: “What goes around comes around. When Americans see the Chinese making a move, they often interpret it one-sidedly. A defensive action by China is seen as an attack. But look at the origins of the Beidou navigation system. Americans view that as an attack on their GPS system. After all, they shared that with the whole world. So, why would China need to set up an alternative system? But the Chinese experienced in 1993 that a ship bound for Iran had to float aimlessly on the open sea for twenty days because the Americans had deliberately broken the GPS signals. They thought the ship was full of nerve gas ingredients. Eventually, the ship was examined and the cargo was found to contain at most some paint. That was a wake-up call for China: they couldn’t rely on GPS.”

Hypocritical

Van der Lugt also views the US actions against Huawei as highly political. Also in this case, publicity around the Chinese reactions has led to a hypocritical attitude in the Western world. In late 2018, China detained two Canadians to press Canada into freeing a Chinese Huawei executive. Early 2019, more than 27 diplomats from seven countries and 116 scholars and academics from nineteen countries signed an open letter urging for the release of the Canadians and warning China that such detentions will result in greater distrust.

In an opinion piece in the Clingendael Spectator, Van der Lugt finds this to be hypocritical. “I fully support the request for the immediate release of Mr. Kovrig and Mr. Spavor, who are victims of a political power game,” she writes. “What I’m missing, however, is a second letter sent to the Canadian and US governments with a similar request for the immediate release of Ms. Meng, since she too is a victim of this political power game.”

When Van der Lugt raises this issue with European politicians and policymakers, the response is often one-sided. “I usually get the reply that these are two very different cases. They argue that Ms. Meng’s arrest follows normal judicial procedures, while the arrest of the two Canadians is purely political. I do understand that people have more empathy for those poor Canadians in a Chinese prison than for Mrs. Meng, who’s still allowed to live comfortably in her villa.”

In her Spectator article, Van der Lugt quotes a leaked document from the National Security Agency that suggests that if China were to get widespread 5G coverage before the US, “China will win politically, economically and militarily.” She argues that Meng’s arrest and the US sanctions are strongly politico-strategically motivated. “Only in late 2017, the US found out that we were on the eve of a fourth industrial revolution. Like oil and electricity in previous revolutions, it’s now about 5G technology as basic commodity. The painful thing for the Americans is that they’re not building systems for the heart of 5G networks. For that, they’re dependent on Ericsson and Nokia from Europe or China’s Huawei and ZTE.”

By the way, the 5G systems from all four companies use chip technology from the US. Base stations heavily rely on FPGAs from Xilinx (recently acquired by AMD), Altera (now Intel), Actel (now Microchip) and Lattice, who are all based in America. US companies also are the major suppliers of 5G handset chips. Apple designs its own chips, made by TSMC. 65 percent of ZTE phones contain Qualcomm chips, according to technology consultancy company Canalys, Reuters reported in 2018.

China-bashing

“In a way, we’re dependent on each other,” says Van der Lugt. “But the US is restricting access to technology for Chinese companies. So, China will be pushing hard for independence there, too. The US story of spying on Huawei networks distracts from what this is really about, which is leadership of that fourth industrial revolution. We have to be aware of that. We can then of course choose to go along with the spy story if we’re on board with such a strategy. To contain Huawei and ZTE, to buy time to develop faster technologically, to prepare Europe or the US for the leadership role in that fourth industrial revolution. But right now, the European attitude comes down to parroting the Americans, without having a clue about the underlying story.”

President Trump was known for his China-bashing, but the Obama administration already heightened scrutiny over technology investments by companies with Chinese ties concerned about the Chinese economic policy after 2010. Two of those were about FPGA technology: the 1.3-billion-dollar bid by Canyon Bridge to buy Lattice Semiconductor, blocked in 2017 by Trump, and the 23-billion-dollar takeover of Micron Technology by Tsinghua Unigroup in 2015. Obama also blocked the 730-million-dollar bid for Aixtron (a German supplier of gallium nitride deposition equipment).

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Embarassing

In the Netherlands, the takeovers of two semiconductor spinouts of NXP by Chinese entities were able to proceed as planned: Ampleon to Chinese state-controlled investment company Jianguang Asset Management in 2015 and Nexperia in 2018 to Wingtech Technology. Dutch semicon companies told Bits&Chips they regularly receive phone calls from Chinese investors. Shouldn’t the Dutch protect their high-tech industry more by being more cautious? “Our government is working on the introduction of mechanisms to screen investments,” says Van der Lugt. “The question is when and how. What sectors should we mark as a national concern? It’s also a challenge how to present this. Setting up screening mechanisms because of defensive reasons would come across as reproachful and would lead to counteractions.”

According to Van der Lugt, it’s all about the tone of the message. If it’s diplomatically formulated, then China will understand. “For example, we think we have secure networks with the 5G systems from Ericsson and Nokia, but a lot of the internal components are manufactured in China. So, if the Chinese government wants to embed backdoors, it could do so in Ericsson and Nokia networks as well. I can imagine the EU telling the Chinese government that we’re reshoring production as a precaution because we’ve been naive and stupid to have those strategic components produced in Asia in the first place. If we’re very open and honest about it, I think the Chinese will say: actually, we didn’t understand from the start why you’ve been outsourcing that to us for so long. It depends very much on how you present it. If done the Trump way, you can expect counteractions. Likewise, to stop takeovers, you have to come up with good reasons.”

Luuk van Middelaar, political philosopher, historian and Leiden professor of EU law, recently used the same arguments in the Dutch daily NRC Handelsblad. According to him, Europe is struggling to formulate its own story. “It’s important to define what we do and do not want as a European Union,” he wrote, “to develop the ability to make the choice ourselves. At the moment, the Netherlands and its neighbors are only hobbling behind the US in terms of security; that we do so grumbling or doubting only makes it more embarrassing.” Van Middelaar painfully observes that regaining the ability to stand up to Washington on big issues, is “very hard work for Europe”, adding: “Yet, we have to do that. It’s time we draw new political strength from this awareness of vulnerability.”

Arrogance

On the recent report from Germany’s IW, Van der Lugt says: “We shot ourselves in the foot several times. Initially, because we were looking at that huge Chinese market with dollar signs in our eyes. It started with technology companies wanting to produce cheaply in China. In doing so, they took for granted that they had to share knowledge and technology, or they found out that some employees weren’t employees after all but came in with notepads. That, of course, was very naive.”

“Perhaps it’s our shareholder structure that forces short-term thinking. A move into the Chinese market may provide great growth figures for a few quarters, but in ten, fifteen years, there’s a very good chance that you will simply have lost your technology. It will have been taken over. There’s a kind of arrogance behind it: we’ll keep innovating, they won’t catch up with us, the Chinese aren’t innovative. I’ve heard this a lot.”

Staying ahead isn’t just a matter of concern. Van der Lugt’s research shows that Chinese cleaning robot supplier Gaussian is much more innovative than its Western competitors. That’s largely down to financial clout. In general, tech companies in China can find investors much more easily than their Western competitors. In niche markets, too, this immediately translates into much larger development teams. Van der Lugt: “Gaussian has two hundred and fifty robotic engineers; a German company that’s also doing very well has ten. Gaussian employs so many robotic engineers that the rivals probably won’t be able to compete in the long run.”

According to Van der Lugt, the current international developments require a different attitude. We might have to introduce regulations, for example. Otherwise, our markets will be flooded by foreign brands that European companies can no longer compete against. “For a very long time, we’ve promoted liberal market forces all over the world. Such a policy works well when your national companies can compete with the biggest companies in the world. But as soon as you fall behind, you don’t want to open your market to foreign companies at all.”