China's high-end European label

Beijing's production move into the eurozone will shore up sales against the region's debt crisis, but also signals a shift from Beijing's position as the world’s low-cost factory.

While European political leaders are praying that China will use some of its massive $US3.2 trillion foreign reserve stockpile to buy bonds of debt-strapped eurozone countries, Beijing is busy thinking up strategies for tightening its hold on important European markets.

China has been deeply worried that the spreading recession in its largest export market, the European Union, will crimp demand for its goods. In January, China’s exports to the region slumped 3.2 per cent from a year earlier, as European consumers tightened their belts and cut spending.

Even though China successfully boosted its exports to emerging markets, such as Brazil, the country still saw its total exports fall by 0.5 per cent over the year to January, the first decline in more than two years.

But Beijing is now looking for ways to counter this trend. According to the China Daily, Chinese Commerce Ministry officials have indicated that they plan to give exporters special tax breaks to help them cope with flagging export volumes.

It’s a strategy that China has used before. In the wake of the global financial crisis, which saw demand for Chinese exports slump, China raised export tax rebates seven times, lifting them from 9.8 per cent to 13.5 per cent.

At the same time, Chinese producers are also experimenting with other ways to boost their grip on European markets.

Eighteen months ago, the giant state-owned China Ocean Shipping Company (COSCO) won a $US4.2 billion contract to take over operations at Greece’s largest container port, Piraeus. The port is one of the major transport hubs for goods entering the European market.

As part of the contract, COSCO signed a 35-year lease to operate two of the three container berths at the port. It will invest $707 million upgrading the port facilities, building a new pier and almost tripling the volume of cargo the port can handle.

At the same time, Chinese producers are increasingly moving production into the eurozone.

Yesterday, the Chinese firm Great Wall Motors became the first Chinese car maker to assemble cars in the EU when it opened a new plant in Bulgaria.

The new car plant, which is owned by Great Wall and Bulgaria’s Litex Motors, will at first produce cars aimed at the local market. But Great Wall’s ultimate plan is to gradually expand into other European markets. Because Bulgaria is a member of the EU, Great Wall will be able to sell cars that are assembled at the new plant to other EU countries with zero tariff levels.

The Chinese have also made inroads in France, with the setting up of a special €500 million Sino-French industrial park near Chteauroux in central France. It is hoped that the Chteauroux business zone, which is largely dedicated to assembling components that are made in low-cost China, will eventually create 4,000 jobs.

The Chteauroux business park offers significant benefits to Chinese firms. Products made at the park will carry a "Made in Europe” tag, which European consumers find much more appealing than "Made In China”.

This is an important advantage for Chinese firms, many of which struggle with poor brand recognition in European markets. Because European consumers tend to equate low prices with poor quality, Chinese firms have to find ways to counteract the negative image of cheap Chinese-made goods. Increasingly, Chinese producers are likely to shift more production into Europe as they battle the perception that their goods are low-end.

But not all of China’s forays into Europe have been successful. Last year, Poland cancelled a deal for Chinese builder COVEC to build part of a key highway linking Warsaw and Berlin.

When COVEC, which is a subsidiary of the giant China Railway Engineering Corp, won the contract in September 2009, it was seen as a watershed because it was the first time a Chinese firm had won a large-scale construction project in Europe.

But by mid 2011, COVEC had abandoned work on the project, citing problems with getting paid by Poland’s road agency and sudden increases in raw material prices.

Despite this setback, it’s clear that China’s trade strategy is shifting. The country is no longer content to be trapped in the role of the world’s low-cost factory. Increasingly, it is looking for ways to boost the image of its products in order to lift sales. It’s also keen to invest in trade-related infrastructure (such as air, shipping, ports and railway) and logistics to ensure that it has strong access to markets.

At the same time, high oil prices – which translate into higher freight charges – are providing China with an additional incentive to move production closer to its consumers.

Even though Europe is increasingly doomed to recession as a result of its ongoing debt crisis, China is carefully plotting strategies to ensure that its sales to that vital region don’t get crunched.

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