Spain in the Face of China’s Technological Ambition (ARI)

Spain in the Face of China’s Technological Ambition (ARI)

Theme: To gain a clear understanding of China’s impact on the global market it is essential to take into account its obsession with technology. For Spain, this situation is both a challenge to be overcome and an opportunity for the taking.

Summary: This analysis begins by describing the obsession with technology in today’s reforming China, which in recent years has started to yield significant results. Secondly, it argues that, for Spain, this situation is both a challenge and an opportunity. For Spain to take advantage of this opportunity it must increase its overall expenditure in R&D and education and, in its relations with China, promote services exports and its inflow of tourists, as well as boosting its investment in China.

Analysis: China’s race towards modernisation and its emergence in international markets are one of the central pillars of globalisation. While in 1978, when Deng Xiaoping launched the ‘economic reform and opening up policy’, China’s exports totalled US$9.75 billion, in 2006 they totalled US$969.07 billion. In other words, in 28 years, China’s exports have soared one hundred-fold. In 2006, China was the world’s second-largest exporter, behind Germany. China’s share in world-wide exports increased from 1.2% in 1983 to 8% in 2006. By 2010, China will be the world’s leading exporter, according to the OECD.

An Obsession with Technology
To gain a clear understanding of China’s impact on the global market it is essential to take into account its obsession with technology. Missing the train of the Industrial Revolution led to a century of submission and humiliation for China from the first opium war (1840) onwards. Having learned History’s stark lesson, China’s leaders are anxious not to fall behind in the Information Revolution. To this end, they are ready to lead the way in science and technology. In 2000, the then Secretary General of the Chinese Communist Party (CCP) and President of the People’s Republic of China, Jiang Zemin, who had formerly been Electronics Industry Minister, left no room for doubt: ‘China will focus on the development of advanced technology and on applying IT to the economy and to society as a whole. Our strategy is industrialisation through information technology. We need to make a huge technological leap’.

According to the OECD, China invested US$136 billion in R&D in 2006, overtaking Japan (US$130 billion) and coming second only to the US (US$330 billion). This figure accounts for 4.9% of China’s GDP (US$2.618 trillion) vs. 4.2% for Sweden, 2.9% for Japan, 2.5% for the US and Germany and 1.1% for Spain.

Apart from its own increasing production, China is acquiring foreign technology either by purchasing it (for example, Thomson’s television division by TCL, or IBM computers, one of the foremost symbols of US capitalism, by Lenovo), by receiving transfers from foreign companies (because of its market’s appeal, China is the leading developing country to receive technology transfers almost without restriction from multinationals) or, as foreign entrepreneurs so often complain, by copying it.

Deng Xiaoping, China’s moderniser, after rising to power and becoming the country’s de facto leader in 1978, decided to turn his attention to education, science and technology. Deng himself asserted that science and technology were the main production factors. All nine members of the CCP Politburo Standing Committee, the Communist Party’s most powerful body, are now engineers, starting with the Secretary General and President of the Republic himself, Hu Jintao, and the Prime Minister, Wen Jiabao. Their two predecessors, Jiang Zemin and Zhu Rongji, were also engineers.

Between engineers and scientists, China produced 1.3 million graduates in 2004 (Financial Times, 19 October 2005). In 2005, China unveiled its plan to place 100 of its universities among the world’s best in science and engineering. It has roughly half a million students abroad; while in 1985 only 3% returned to China, 25% do so now. In 2005, 170,000 students had returned after completing their education abroad. According to the Financial Times, China is now in a position to go from being the world’s factory to being the world’s engineering centre.

While high-tech products were all but absent from Chinese exports in 1990, in 2005 its telecommunications equipment, electronic products and computers accounted for 43% of the total. In 2004, China became the leading exporter in the information industry, edging ahead of the US. It is true that foreign companies control the high-tech sector, since basically items of low added value are produced and assembled in China. Yet an increasing number of Chinese companies now have their own brands and technology. In the IT and telecommunications sector, Huawei, ZTE and Lenovo are competing globally with the world-wide leaders. They spend more than 10% of their budgets on R&D, and they employ Chinese engineers very cheaply or, when it suits them, foreign personnel. According to Gérard Dega, President of Alcatel Shanghai Bell: ‘Huawei can do anything we do. They employ 2,000 engineers (at four or five times lower salaries than in developed countries) and they place them on a project. It’s as simple as that’.

In the auto sector, the flagship of industrial societies, Chinese companies, starting almost from scratch in the mid-1990s, controlled 27% of the domestic market in 2006, competing with the major multinationals. They will soon start to export to industrialised countries, using various methods. In 2005, the Nanjing Automobile Group acquired control of the UK car company MG; it plans to manufacture from the UK for the European and US markets. In the same year, Daimler-Chrysler reached an agreement with China’s Chery Automobile Company to market the latter’s utility cars in Europe and the US. In April 2007, the first car manufactured in China by a Chinese company, the Brilliance Jin Bei Automobile, reached the German market. The fact that it has gained a foothold in Europe via its most competitive and sophisticated market in the sector is a clear indication of the ambition and audacity of Chinese manufacturers. In other words, China is following in the steps of Japan and Korea. Although still far behind, it has a will of iron and is making very fast progress. The New York Times sees ‘an inundation of the US market by Chinese cars as possible’ (International Herald Tribune, editorial dated 15 July 2006), as always at unbeatable prices.

Earlier this year, China announced its strategic decision to build a large commercial aircraft to compete with Boeing and Airbus. The latter is building an assembly plant in China for the A320, which will enter into operation in 2009. Boeing, which already has partners in China for some of its programmes, has said it would be willing to support China in developing its project. The interest in the Chinese market, which will need 3,000 large passenger planes from now until 2025, means that these major players are willing to make significant technology transfers.

China has launched a navigation satellite system known as Blidou, with a view to developing a GPS which could actually jeopardise the commercial success of the European Galileo project (in which China is a partner but which is currently floundering due to various problems).

In confirmation of its boundless technological ambition, in 2003 China launched its first manned space flight, thus entering the exclusive club which had hitherto included only the US and Russia.

Its obsession for advanced technology, then, is crucial to understanding the full meaning of China’s economic emergence and the impact it will have on the global economy and geostrategy in the future. The speed at which China is able to conquer new high-tech sectors and to secure greater added value will determine the pace of its economic development, its penetration in world markets and its conversion into a real global power.

China’s Technological Boom: The Challenge for Spain
Obviously, the industries of the most advanced countries will fare better in competition with China as the latter begins to dominate high-tech sectors, because they will be in a position to develop technology that is not yet within China’s reach. Countries like Spain, at the rear of the leading group of countries, with mid-level technology in many sectors, are those whose industries are set to suffer most. My view is that, as a country, Spain is not yet fully aware of the magnitude of the challenge ahead.

The way to respond to China’s challenge is not protectionism (tempting to both the US and EU), which would end up impoverishing us all, but prioritising R&D and education expenditure. In 2005, Spain spent just 1.1% of its GDP in R&D, a figure which, as we have mentioned, is very much lower than the most advanced European countries, the US, Japan or China. In education, Spain is equally far behind the front-runners in the EU, as evidenced by the latest PISA Report. Spending per university student in Spain is just 45% of the OECD average.

The Spanish Prime Minister, José Luis Rodríguez Zapatero, reiterated recently that maintaining economic growth is linked to greater investment in R&D and to improving the education system. The Vice-President, Pedro Solbes, and the Governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez, often cite the lack of competitiveness of Spain’s economy and the need to remedy it. The opposition leader, Mariano Rajoy, specifically referred to China several times in response to the public’s questions in a recent television show. There is, therefore, consensus in this regard from all political spheres, and this consensus also coincides with the EU’s Lisbon Agenda. In other words, the medicine needed to improve economic relations with China is, to a large extent, the same needed by the Spanish economy and the European economy as a whole in order to meet the challenges of globalisation. The trick is, then, to take that medicine. Otherwise, much of Spanish industry will suffer badly, and, one day, former Chinese Prime Minister Zhu Rongji’s quip could come true: ‘China, the world’s factory; the United States, advanced technology; Europe, museums and tourists’.

China’s Technological Boom: The Opportunity for Spain
In addition to the risks it poses, there is another very different side to relations with China: a huge opportunity for the rest of the world. The more China sells, the more it buys. While in 2004 its imports totalled US$512 billion, in 2006 the figure was US$791.61 billion, implying massive annual growth of over 25%. China offers increasing opportunities for exporting goods and services, for investment as the manufacturing base, as a source of investment and for services management. China needs just about everything and there are good opportunities for Spanish companies. In a survey conducted in 2005 by Spain’s Industry, Tourism and Trade Ministry, titled ‘Analysis of Foreign Markets with High Potential’, China ranked top. Whether or not this potential can be tapped depends on whether Spain has attractive enough goods and services to appeal to Chinese buyers.

Spain’s exports to China are scant: €1.499 billion in 2005, approximately 1% of the total. Spain has been steadily losing market share: in 1985 Spanish exports accounted for 1.3% of China’s total purchases, a record; in 1995, the figure was 0.69%; and by 2005 it had fallen to 0.32%. This downturn came despite the government’s efforts to encourage Spanish companies to go to China and to help those which do, and despite the increasing number of Spanish companies established in China. The reason is clear: other countries make much greater efforts than Spain in the Chinese market, or have goods and services which are more appealing to Chinese buyers. To sell in China you have to be present and you have to invest. There are around 500 Spanish companies in China, including Hong Kong, of a total of some 600,000 foreign companies. In other words, Spanish companies account for less than one-thousandth of the total. And direct Spanish investment in China went from 0.1% of the total in 2004 to 0.37% in 2006, in the wake of major investment by Telefónica and BBVA. In other words, just one of every US$300 of foreign investment in China comes from Spain. Obviously, these figures are not fitting for the world’s eighth-largest economic power and the sixth-largest global investor. Nevertheless, the arrival of Spain’s leading multinationals to China marks a turning point and awareness in the business world and in the government of the need to intensify Spain’s presence in China is increasing.

Judging by the pace of recent years, by 2010 Chinese imports will total between US$1.4 billion and US$1.5 billion. This massive figure signals a huge opportunity. Obviously every effort must be made to improve Spain’s poor export figures, and this means boosting expenditure on R&D and education.

Even if the trade deficit is cut (in 2005 it totalled €10.141 billion, 13% of Spain’s total trade deficit, with a meagre 12.8% coverage), the trade balance will continue to run a deficit in the long term, in view of the irresistible appeal of Chinese products’ price-quality ratio (for Spanish consumers and others). Services must enable us to offset the trade deficit at least in part.

According to the World Tourism Organisation, by 2020 China will be the world’s number one tourist destination: it will receive and send out more than 100 million tourists annually. Obviously, Spain will be in a position to tap much of that tourism. In 2004, 30,000 Chinese tourists visited Spain (40,000 to 50,000 including visitors from Hong Kong and Macao), accounting for 0.06% (or 0.1%) of the total. In 2010, Spain could take in an estimated 300,000 Chinese tourists, ten times more than in 2004.

In other kinds of services, such as banking and telecommunications, Spain is also among the global front-runners. The recent arrival of Telefónica and BBVA in China, which will logically be followed by that of other multinationals, augurs well.

Conclusions: China’s becoming an opportunity or a risk for Spain hinges on Spain doing its homework in R&D and education, and on its major services companies deciding to venture into the Chinese market.

Spain must boost its spending on R&D and education, in line with the EU’s Lisbon Agenda. As for bilateral relations with China, it is necessary to boost exports in services and to foster the inflow of tourists, so as to partly offset the trade deficit which is set to persist. It is also necessary to plough more investment into Spanish companies in China. The recent arrival of Telefónica and BBVA in China, which will logically be followed by that of other multinationals, augurs well.

Eugenio Bregolat
Ambassador to Andorra; formerly Ambassador to China (1987-91 and 1999-2003)