Xi’s Tech Self-Reliance Push Leaves Europeans Wary of China R&D

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(Bloomberg) -- China’s push to become self-reliant in the technology sphere is driving more European companies operating there to rethink their research and development plans, according to a report published Friday by the European Union Chamber of Commerce in China.

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European firms are growing hesitant about investing in R&D in the world’s second-largest economy as the local firms they’d partner with — either state or privately owned — increasingly purchase and use products that are either wholly made in China or are completely devoid of US-linked components, said Joerg Wuttke, the chamber’s president.

“It’s something that makes companies hesitate about investing in R&D in China,” he said. “If you don’t know whether your goods will be on, say, procurement lists in one or two years from now, then the chances of investing in R&D will be close to zero.”

The EU chamber’s report comes as Beijing ramps up a tech autonomy campaign aimed at creating domestic supply chains that are insulated from external shocks. Chinese President Xi Jinping has criticized Washington for what he has called a strategy of “containment and suppression” — led by trade restrictions, blacklists and investment curbs — that has challenged China’s technological development.

European companies such as Volkswagen AG and SAP SE are among the biggest foreign enterprises in China, despite the country’s increasing isolation. But many are facing growing competition from local champions like Huawei Technologies Co. — one of the most prominent firms Washington has blacklisted. These local firms are developing their own in-house alternatives to foreign software and circuitry.

Others such as state-backed Inspur Ltd. are driving research and expansion into areas such as servers and cloud computing, betting on Beijing’s support and that Chinese clients would prefer using domestic substitutes.

Concerning Sentiment

In a survey taken by the EU chamber, 52% of respondents said sentiment in the EU toward collaboration with China has negatively influenced their company’s R&D activities or strategy in the country. Some 26% said similar sentiment in the US had a negative effect.

The survey — which polled 107 European firms late last year — still overwhelmingly listed China’s Covid Zero strategy as having the greatest negative impact. Some 88% of respondents to the question about trends influencing R&D chose Covid curbs as having either a highly or somewhat negative effect.

In follow-up interviews with European firms conducted in January and February this year, several companies focused on concerns about supply chain restrictions.

One interviewee from the information and communication technology industry said they had been told by a state-owned enterprise customer that they must localize technology and R&D in China if they were to continue to qualify as a “Made in China” supplier.

Another respondent from the manufacturing sector said private companies are becoming more worried about future political pressure to select suppliers whose entire value chains are based in the country.

Geopolitical Risks

The fight between the US and China over technology isn’t the only geopolitical concern for European companies with Chinese business interests.

Some 45% of respondents to the question about influential trends for R&D decisions cited Russia’s invasion of Ukraine as having a negative impact on their activities or strategy.

“A potential escalation of Russia’s war in Ukraine or further frictions in the Taiwan Strait are scenarios that businesses are taking into account,” the authors of the EU chamber survey wrote in the report. They added that the potential risks posed by those tensions “do not support a case for increasing R&D investments in China.”

The survey also concluded that multinational corporations appear to be tempering plans to “substantially increase” R&D in China. Last year, a third of multinational respondents indicated such spending would “increase greatly” in the coming year, according to the survey. When asked this time whether those firms would boost spending over the next five years, only 5% of respondents said they expected to increase R&D spending “greatly” over that time period.

“That does not necessarily mean they are retreating from doing R&D in China, but rather tempering their ambitions,” the report said. Of the firms polled, about a third were multinationals.

The surveyed companies still cited several positives for wanting to push deeper into China and localize, including the size of the market and the strong demand it offers. The speed with which R&D can be commercialized in the country would also create opportunities to take products developed in China and deploy them in other markets, too.

“The rewards of localizing technology and R&D into China are considerable,” the report said. “But so are the potential hazards.”

--With assistance from Gao Yuan and Edwin Chan.

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