The changing Chinese economic model: an opportunity for Spanish companies

Shanghai. Photo: Ayala (public domain)

Original version in Spanish: El cambio de modelo económico chino: una oportunidad para las empresas españolas


This analysis focuses on China’s changing economic growth model and the important new business opportunities this change is generating for Spanish companies.


Spanish companies have gradually engaged China over the years and now boast a notable presence in this Asian country. Nevertheless, despite that, Spain’s modest investment presence in China does not yet reflect its full investor potential. Currently, the Chinese economic growth model is undergoing profound transformation, characterised by greater economic opening, further extension of the market and a boom in private consumption. Such change opens up new opportunities for Spanish companies to invest and position themselves in the Chinese market. Whether or not Spanish companies can take advantage of this opportunity to increase their presence in China will depend on multiple factors, chief among them the role of public policies in helping the private sector overcome current obstacles.


The consolidation of Spanish investment in China over the course of 30 years

The rapid emergence of China as a great power and the country’s progressive opening to the world –together with the increasing Spanish interest in the Asian giant– have led to intensified cooperation between the two countries. Currently, relations between Spain and China are basically of an economic and business character. It is in that space, where their interests overlap, that their bilateral relations have been developed and consolidated. It is enough to point out that today China is Spain’s largest non-EU trading partner and the leading non-OECD investor in Spain (with €9.2 billion of cumulative investment).1

The engagement of Spanish companies in the Chinese economy has paralleled the evolution of Sino-Spanish relations. Starting with a scant initial presence, Spanish companies have gradually entered the Chinese market, and a healthy group of firms now have a consolidated investment position. It was not until the mid-1980s that Spanish companies began to show an interest in China, facilitated by government initiatives. The measures adopted for institutional support (with recurring high-level visits), trade promotion (commercial fairs and trade missions) and financial support (through FAD loans)2 were very important for Spanish companies operating early on in China. During the 1980s, Spanish companies experienced their first cases of success in China. These included the Técnicas Reunidas concession for a detergent factory in Fushun (from which the Spanish engineering firm would go on to sign contracts to operate petrochemical and steel plants across the country) and the market entry of Alsa, which began as a taxi and minibus company in the Shenzhen Special Economic Zone and today operates more than 5,000 buses in China.

During the 1990s, the average annual level of Spanish investment was still quite low, around €40 million (compared with €495 million that Spain invested annually in Germany and €320 million in France), and the number of companies remained limited. There were some notable exceptions, like the entry of the first Spanish firm in the food sector, Bodegas Torres, today completely consolidated in the Chinese market. There was also the appearance of Indra, the technology and engineering company. However, in the following decade (2000-09), a large cadre of Spanish companies went to China, contributing to a trebling of the annual Spanish investment flow to €135 million, and they continue to operate there today. During this period the Mondragon GroupFicosaGestamp and Pikolin, among many others, entered the Chinese market; some companies developed plants and important greenfield projects, like the Befesa desalination plant in Qingdao and the Ferroatlantica silicon factory in Sichuan. The large multinationals also began to prudently take positions: BBVA signed a strategic alliance with China CITIC Bank, and Telefonica and China Unicom agreed on a modest cross-holding of shares. Probably none of the large Spanish multinationals has had as much success in China as Inditex. China has become the Galician group’s second-largest market in the world in terms of numbers of stores (only behind the Spanish market), where today it operates in 68 cities.

Spanish investment in China has experienced further strong growth during the present decade, reaching €481 million annually in 2010-16. This growth in the volume of investment is in large part due to the investment expansion by Spanish companies already present in the country. Examples include: Abengoa’s entrance into the water management company, Pekin GreenTech; the new establishments opened by Meliá, the hotel group; and the Road Safety and Testing Centre recently opened by Mapfre together with a US partner. In addition, legal firms and other services companies have expanded their presence in the Asian country in recent years to provide services to both Spanish companies interested in investing in China and to Chinese companies seeking to invest in Spain. In short, in parallel to the evolution of company presence and investment volumes, Spanish firms have gone from a very weak starting position to a broad-based corporate presence in China.

Nevertheless, despite this undeniably positive record, the current position of Spanish companies in China falls short of what might be expected, considering the importance of both economies. Today Spain is one of the largest national investors in the world, with the 12th largest accumulated stock of outward foreign investment (€516 billion), and its companies are global leaders in many economic sectors. But the internationalisation of the Spanish company has taken place mainly in two regional markets: the EU and Latin America, which together account for 73.7% of cumulative outward Spanish FDI. Despite being the world’s second-largest economy, the world’s second-largest host to inward FDI and the world’s third most attractive market for investment,3 China has only received €4.86 billion of Spanish FDI –a mere 0.54% of the total–. A comparison with other European countries only underlines the still relatively minor presence of Spain in China. Data from Eurostat indicate that Spain has invested €2.75 billion (‘net’ outward FDI) in China, well below Italy (€8.1 billion), France (€24.1 billion) and Germany (€71.5 billion). Meanwhile, Spain has 600 companies in China, compared with 1,600 French and 5,200 German.4

It is apparent, then, that the current Spanish investment position in China –even after having grown considerably in recent years– continues to constitute one of the principal pending challenges facing Spain’s international sector. In this regard, the importance of having Spanish businesses already consolidated in the Chinese market is not always sufficiently appreciated. China is not only the world’s largest market in size (with a population of 1.38 billion), but also the economy is projected to grow more than any other large economy during the coming years (the IMF forecasts average annual growth of 6.1% up to 2022), along with India. In addition, cities like Beijing, Shanghai, Shenzhen and Canton are experiencing a boom in private consumption and business creation which is turning them into the major industrial and services centres of the world. In this respect, a relatively thin presence implies passing up the opportunity to access enormously large consumer markets and generate economies of scale in the production process, as well as accepting a significant geographic separation from the world’s principal production centres.

The changing Chinese model: a new period of opportunity opens for Spanish companies

Spain now has a good opportunity to expand its presence in China, particularly given the current juncture of that country’s economy. The Chinese economy is moving towards a new model characterised by a more significant external opening (evidence of which can be found in the liberalisation of the capital account and in many services sectors increasingly open to foreign investment) and by larger swathes of the economy opened to the market (as revealed in the policies aimed at stimulating entrepreneurial activity). The change is also shifting the principal drivers of growth, as private consumption (on the aggregate demand side) and services and the so-called ‘industry 4.0’ (on the aggregate supply side) take on a growing role as the new essential pillars of Chinese growth. Furthermore, this change of growth drivers interacts with a sustained increase in disposable income, one of the key objectives of the current Five-Year Plan XIII, which aspires to double per capita GDP during its half-decade course (2016-20). Regardless of the Chinese capacity to achieve such an ambition, the objective itself is evidence that the Chinese government will continue to foster an increase in the incomes of Chinese families and to raise their purchasing power over the coming years from the 2016 level of US$8,123. The profound economic transformation underway in China has only begun, but it is generating new and interesting opportunities for Spanish companies. But what do these structural changes imply and what concrete opportunities are within reach of Spanish companies?

First, the continued growth of incomes during China’s long expansion cycle has generated a boom in private consumption in different branches of the services industry and shaped a more urbane, sophisticated and globalised ‘typical’ consumer. Currently there is an enormous and growing demand for educational services (including Spanish courses) and for health and wellness services (including personal care), as well as for leisure, restaurants, cinema and, especially, tourism. Among traditional products, like food and clothing, new niche markets, particularly ‘premium’ segments, are emerging. And the transformation is not just changing what is consumed, but also how. Today China leads the world in the growth of electronic commerce, and the demand for products and services is increasingly met via smartphone apps. This Asian country is already an innovative force in diverse fields, and it boasts a strong business prowess in technology and a high level of digitalised demand in the supply of goods and services –from which derive many opportunities for Spanish companies–. There are independent cases of Spanish companies already taking advantage of such opportunities. For example, responding to growing demand for quality baby food products (the locally available substitute products being perceived as somewhat unsafe), the Spanish company Pronuben Baby has entered the Chinese market with great success. At the same time, in the face of growing demand for technology products, the video game start-up Ludei and the Barcelona publicity firm for apps Tappx have also recently entered the Chinese market.

Secondly, the government explicitly foments a group of strategic sectors and activities in line with its different plans, like the XIII Five-Year Plan. As such, opportunities for Spanish companies are emerging not only in sectors and activities where foreign investment is permitted, and growing, in line with the Catalogue of Industries for Guiding Foreign Investment,5 but also in many sectors that are directly stimulated by the government. Among these, two groups of possibilities stand out: (1) those that can augment the capacities of a country determined to become a technological power, through the incorporation of technology industries like artificial intelligence or computer science (although China is already a significant ‘endogenous’ producer in both fields), the Internet of Things and robotics; and (2) those which can affect the sustainability of the energy mix and reduce the serious levels of pollution that currently exist, which have given a significant boost to the development of low carbon industries, clean technologies, the electric vehicle, and waste management and water treatment (although foreigners already operate in plants which are under strict shareholder control). Furthermore, in addition to more opening in a broader range of sectors and activities, reforms introduced into state-own companies, including the promotion of new mixed ownership models, also open up new possibilities for cooperation by Spanish companies.

Third, the current phase in the construction of China’s technological and innovation prowess also offers possibilities in two ways for Spanish companies. On the one hand, there is a growing possibility to outsource R&D centres. The combination of entrepreneurial talent and capabilities, fiscal incentives and the geographical proximity to local competitors and/or global clients constitutes a major advantage. Already more than 1,300 foreign companies have set up these kinds of centres in China. Some Spanish companies are already involved in this way, as in the case of the second R&D centre opened by Gestamp (this Spanish company had already opened such centres in China to be close to final customers). On the other hand, new platforms and marketplaces open new possibilities to penetrate the Chinese market without assuming the risks and costs associated with a physical establishment. For example, this is the case of Tmall Global, which belongs to the e-commerce giant Alibaba. The latter allows foreign companies to use the platform to reach the Chinese market without having to establish a company in China. In this context some bilateral initiatives are emerging like, for example, the recently announced alliance between Alibaba and the Correos group to foster a larger presence of Spanish companies on the Chinese group’s platforms.6

Public policy as a key instrument of support for Spanish companies in China

The confluence of the two factors mentioned above –scant relative presence of Spanish companies in China and the opportunities that are emerging for the change in the Chinese growth model– leads to the current juncture of great opportunities for Spanish companies to strengthen their presence in China. Successful materialisation of these opportunities will depend on many factors, including public policy in support of the private sector and aimed at favouring a larger Spanish corporate presence in China. The design and implementation of such policies first require the identification of the major barriers currently blocking a more significant Spanish presence. In general terms, these barriers can be divided into external and internal factors.

The first group of internal factors can also be divided and classified. First, there are the previously mentioned geographic, cultural and linguistic barriers that contribute to a mutual lack of knowledge, limiting both China as a zone of corporate internationalisation in the Spanish corporate imagination and restricting the positioning of Spanish companies in the Chinese consumer imagination. Secondly, the Chinese market is highly complex, still highly restrictive for foreign companies, fragmented, very competitive in margins and subject to a high level of regulatory uncertainty. These complexities and restrictions are clearly reflected in the comparative international indexes. For example, China is 78th in the World Bank’s ‘Doing Business’ ranking, behind El Salvador, Albania and Uzbekistan, and it is one of the countries with the most restrictions on foreign investment, along with Saudi Arabia, according to the OECD’s FDI Restrictiveness Index. In many economic sectors foreign investment is prohibited or subject to obligation of having a local partner.

Overcoming such barriers requires various lines of action. The first would be to continue the commercial diplomacy and trade promotion activities of the different institutions and organs under the Secretary of State for Trade (particularly the ICEX for promotion and COFIDES for financing), along with the chambers of commerce and business associations, as well as other regional autonomous and municipal entities and institutions. The assistance provided by these entities is of significant help to Spanish companies attempting to obtain more information on the Chinese market, in identifying and contacting local partners, for financing projects or covering commercial risks, as well as for launching promotional campaigns for Spanish brand products and services. The sum of such actions –which require continuity over the middle run to generate impact– contribute in an essential way to reducing geographical and cultural distances and to building essential business links. Secondly, with respect to the complexities of the Chinese market and its significant barriers to entry, it has become necessary to support, and even play a central role in, the demands for market access reciprocity that have emerged around the EU in the last two years. In this regard it should be mentioned that EU institutions are currently designing a new regulation allowing for more capacity to block foreign acquisitions of ‘strategic’ companies –a measure provoked by the acquisition of the German technology company Kuka by the Chinese company Midea–. This should help put pressure on China to reduce the barriers to entry in the Chinese market for European companies.7 The current negotiations for signing the Bilateral Investment Treaty (BIT) between the EU and China, covering many important aspects including market access, might also serve as an addition lever to pressure China.

These geographical and cultural distances partly explain the limited presence of Spanish companies in China, but they cannot explain their reduced presence in terms relative to other European countries, which also face a similar distance and an absence of historical ties. Very significant in this regard is the significant concentration of Spanish outward FDI made by large multinationals into the regional markets of Latin America and Europe (which receive three of every four euros of Spanish outward FDI), as are the specific contexts which gave rise to the previous large Spanish investment waves to each of those regions. Spanish multinationals entered Latin American markets at the end of the 1980s and during the 1990s, induced by the processes of privatisation and external capital opening in Spain, as well as by historical ties across the region. In the case of Spanish investment in Europe, the detonator was the integration of Spain in the supranational European project (and facilitated by geographic proximity) from which derive many business advantages, including lower perceived political and macroeconomic risk, elimination of tariffs and the abolition of exchange risk with different countries. Nevertheless, there has been no critical driving factor of the same importance in the case of Spanish investment in China, translating into much lower Spanish multinational presence.

Beyond the multinationals, the rest of the Spanish industrial fabric faces an obvious barrier to internationalization: average business size. It should be recalled that smaller the business size, the lower the capacity to access talent, finance and R&D, or to generate the competitive advantages necessary for successful internationalisation. In Spain, nine of every 10 companies are small and medium-sized enterprises, and 40.5% of employment is concentrated in micro-businesses (11.3 percentage points higher than the European average).8 From this perspective, expanding Spanish investment positions internationally requires a larger number of companies which are sufficiently large and competitive. And to increase the average size of companies in Spain requires, in turn, a combination of far-reaching, cross-sectoral policies operating with different financial, regulatory and other mechanisms. With respect to the financial sector, one critical factor is access to growth capital, as is the importance of reducing the weighting of bank finance and of relying more on the alternatives, including developing the venture capital and private equity industries, and fomenting markets like the Mercado Alternativo Bursátil (MAB, Alternative Stock Market) and the Mercado Alternativo de Renta Fija (MARF, Alternative Bond Market). With respect to the regulatory framework, recent studies undertaken by the Spanish administration have found 130 existing regulations which directly affect business size. Currently there is an intense barrier around the threshold of 50 employees, above which regulation becomes much more complex, creating a ‘step effect’ which undermines the incentive to jump to the next level of business size by companies.9


Spanish companies have expanded their investment position in China in recent years, regaining some of the ground lost there to other Europeans countries with stronger business ties to the Asian country. Today China is engaged in the transformation of its economic growth model which will generate important economic and business opportunities for Spanish companies. To take advantage of such opportunities will require continuity in specific programmes supporting Spanish business presence in China and the design and implementation of cross-sectoral policies aimed at increasing the average size of Spanish companies.

Adrián Blanco Estévez
PhD in Economics, specialising in public policies and international economics

1 Official data published by the Spanish Investment Registry, 21/XII/2015.

2 The Development Assistance Fund (DAF) is a fund without legal personality and of concessional nature, granted by the State to finance Spanish business projects internationally. This financing mechanism was created in 1976 and was ultimately replaced by other financial instruments in 2010.

3 See The 2017 A.T. Kearney Foreign Direct Investment Confidence Index.

4 See Ficha país de China, Oficina de Información Diplomática.

5 See Catalogue of Industries for Guiding Foreign Investment (Revision 2017).

6 See CORREOS y el Grupo Alibaba se unen para impulsar las exportaciones de las empresas españolas a China, Correos.

7 For more information on the demands of European companies with respect to the business climate in China for foreign companies, see John Seaman, Mikko Huotari & Miguel Otero-Iglesias (eds.) (2017), ‘Chinese investment in Europe: a country-level approach’, European Think-tank Network on China (ETNC).

8 See F. Steinberg & Alfred Arahuetes (2014), ‘V Índice Elcano de oportunidades y riesgos para la economía española’, Informe Elcano nr 17, Elcano Royal Institute.

9 The Spanish executive is currently working in this regard on a Business Growth Strategy.