China High-End Value Added - The German Connection

Sept. 14, 2010 - PRLog -- By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Last week, we talked in detail about the central role German exports to China are playing in the current success of its economy.

Despite what some consider this dependence –

which analysts are beginning to compare in global importance to the relationship between China and the US –

we noted that members of the German industrial elite openly express deep concern about the long-term prospects of the relationship.

These fears center around the possibility that –

through the miracle of reverse engineering and other “learning processes” –

the Chinese can overtake not just Germany, but the entire world,

in key sectors that can give ANY country an “early capture” advantage –

above all, clean / green / high-tech energy,

where the Chinese have already been making bolder moves than any other country.

China is already developing an automobile and aviation industry, manufacturing high-speed trains

and building chemical factories that could easily contest the global status of German manufacturers.

China wants to become the world's preeminent producer of the cars of the future: hybrid and electric vehicles.

It wants to manufacture aircraft that consume less gas than comparable models by Airbus,

and power plants w lower CO2 emissions than those of Western rivals.



Solar

In one future-oriented sector, the solar industry,

country has already managed to unseat the leading producer.

A few years ago, companies like Siemens and Sharp were still far ahead in terms of solar cell production.

Germany, in particular, was making every effort to secure

a top spot in production of photovoltaic systems.

The consensus, both among the general public and among politicians,

was that solar energy was an important industry for the future.

This led to generous subsidies for solar energy in Germany.

Germans who mount solar panels on their roof are paid guaranteed rates for the electricity they produce and feed in to the grid.

Experts estimate that German consumers will be paying at least €14 billion ($17.6 billion)

over the next 20 years for the solar modules installed in 2009 alone,

and as we know from our piece last week on Portugal,

consumer price is a key consideration in this sector.

The domestic solar industry supposedly benefits from this bonanza.

But that's not even half the truth, because a significant portion of the money now goes directly to China.

Even leading German solar system manufacturers are already quietly installing Chinese-made solar cells.

Beijing has promoted the development of this future-oriented industry more than any other country on earth.

The government subsidized research into solar technology,

and companies built large production plans for solar modules.

Today four of the world's 10 largest producers are from China,

while not a single German company is among these top 10.

And while the large German solar providers' share of exports continues to decline,

the Chinese are constantly expanding their position.

This is partly because the Chinese-made products are cheaper.

But the Chinese solar cells are by no means of poorer quality.

Only a few years ago, Chinese modules had the reputation of being more prone to failure and more harmful to the environment,

but now the quality has improved dramatically.

In fact, a recent study by the Stuttgart-based bank Landesbank Baden-Württemberg (LBBW) concluded that

the productivity of Chinese producers is now higher than that of their German competitors.

And according to TÜV Rheinland, a technical inspection agency,

Chinese solar cells are of high quality.

China owes its rapid rise in the solar industry partly to German energy policy.

About 70% of its total production is exported,

and ~ half goes to Germany,

known for its generous subsidies for solar electricity.



Automobiles of the Future?

What's happening in solar industry is seen as

a warning sign for Germany's most important sector,

the automobile industry.

Even strong sectors are at risk when China goes on the offensive.

The country is pursuing a dual strategy.

On the one hand, China gains access to state-of-the-art technology through joint ventures.

On the other, it is developing the technology of the future: electric cars.

Chinese companies are already world leaders in battery technology,

which could give the newcomer a decisive competitive edge

over established European and Japanese carmakers.

VW, Daimler and the like are still benefiting from the China boom more than companies in most other industries.

In fact, German carmakers are having trouble producing enough cars to meet Chinese demand.

The most popular German cars in China are the large luxury sedans,

for which China is now the biggest market worldwide.

VW, Daimler and BMW are building new plants

and intend to at least double their production in China.

However, these new plants are not VW, Daimler and BMW plants,

but joint venture operations between the German manufacturers and Chinese companies.

This form of cooperation has been dubbed the "concubine economy."

Just as the Chinese emperors once selected their concubines,

China's current leadership selects foreign companies and

grants them the right to produce goods locally in cooperation with a domestic partner.

The People's Republic compels the German carmakers to enter into these joint ventures.

By imposing high import duties, the government prevents the Germans from simply exporting German-made cars to China.

Any company interested in selling large numbers of its products

is required to build factories in China with a Chinese partner,

thereby giving the country access to their technology.

A campaign by the Chinese company Shanghai Automotive Industry Corporation (SAIC) illustrates what this means in practice.

SAIC is involved in joint ventures with both VW and General Motors
.

When the US carmaker was fighting for its survival last year, SAIC took advantage of its partner's weakness.

It gained a controlling interest by increasing its share of the joint venture to 51 percent.

The business publication Jingji Cankao Bao wrote triumphantly:

"A new model of cooperation between Chinese and foreign automakers has been established."

The Chinese have also become far more self-confident lately in their joint venture w VW.

In the long term, says senior employee, Beijing won't tolerate

one of country's most successful companies being run by managers in Wolfsburg.

VW CEO Martin Winterkorn convinced Chinese will remain dependent on German technology

for vehicles with classic gasoline and diesel engines.

But Beijing intends to extricate itself from this dependency by focusing on new technologies.

The company that is expected to make a key contribution to this effort is called BYD, or "Build Your Dreams."

BYD has only been making cars since 2003,

but it is the world's second-largest manufacturer of batteries for mobile phones.

Its research division has 10,000 employees

and has just developed a new type of electric cell designed to power electric cars.

Whether the BYD dream will come true is still up in the air.

Daimler, at any rate, is intrigued.

The Stuttgart-based company is developing an electric car together with BYD.

In doing so, it is testing a new form of cooperation,

in which the Chinese partner is responsible

for a substantial portion of the innovative technology.



Eco-Friendly Power Plants ???

China is pursuing the same strategy in the construction of power plants as it does in the automobile industry.

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