‘MADE IN CHINA’: European firms hesitate to invest in China as potential partners increasingly focus on developing in-house technology for local supply, a report said

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

European firms are growing hesitant about investing in R&D in the world’s second-largest economy as the local firms they would 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, chamber president Joerg Wuttke said.

“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 (習近平) 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 nation’s increasing isolation. However, many are facing growing competition from local champions like Huawei Technologies Co (華為) — 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 (浪潮集團), 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.

In a survey taken by the EU chamber, 52 percent 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. About 26 percent 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 “zero COVID” strategy as having the greatest negative impact. Some 88 percent of respondents to the question about trends influencing R&D chose COVID-19 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 firms are becoming more worried about future political pressure to select suppliers whose entire value chains are based in the country.

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

About 45 percent 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.”