Thursday, August 13, 2009

President Hugo Chavez's Historic China Strategy

Wednesday, August 12, 2009
15:35 Mecca time, 12:35 GMT

Chavez's 'historic' China strategy

By Dima Khatib in Caracas

At a land base in Venezuela, Chavez and Morales cheer the satellite's successful launch

As the rocket carrying the Simon Bolivar Venesat-1 satellite lifted into space from south-western China, Hugo Chavez, the Venezuelan president, could not help but show his excitement.

Watching the launch live from Bolivar State, in south-eastern Venezuela, with Evo Morales, the Bolivian president, Chavez described the October 2008 launch of the country's first satellite "of strategic and historical importance for Venezuela and China".

The satellite is now used by Venezuela to meet some of its telecommunication needs and is one of the main achievements of Caracas' strategic partnership with Beijing.

Venezuela's interest in such a partnership provided China an excellent opportunity as it searched for a reliable partner that could guarantee energy, particularly oil, supplies in the long run.

Their relationship now stretches from the depths of space to Venezuelan soil.

Developing oil fields

In central Venezuela's Faja del Orinoco, believed to be the world's largest oil reserve, China is helping Caracas explore an area that is believed to hold about 40 billion barrels of crude oil, twice the volume of oil reserves in the US.

As Venezuela seeks to diversify and expand the reach of its energy exports in the world instead of largely depending on US markets, it has started exporting oil for the first time in recent years to far-away China.

It currently exports to China almost 400,000 barrels a day and hopes to reach 1mn barrels by 2010. It is also planning to build refineries in China.

In the meantime, China is also helping Venezuela develop its telecommunications and hi-tech infrastructure.

In the Paraguana Peninsula in western Venezuela, China has helped Venezuela manufacture its first mobile phone and computer.

"Best" mobile phone

Baptised the Vergatario, or in colloquial Spanish "the very best", the new mobile phone is assembled in a joint Chinese and Venezuelan company called VTELCA.

Chinese engineers have contributed the technology and parts while Venezuela provides the manual labour, infrastructure and financing.

The Vergatario costs a mere $14, the cheapest by far in the market, and is intended to cater to low-income Venezuelans.

The phone was released for the first time on Mother's Day in May earlier this year. Within hours all units were sold out and many Venezuelans are waiting for the next batch to come out.

Technological sovereignty

VTELCA is one of 290 new socialist companies that have been established to help Venezuela reach what Chavez has termed 'national technological sovereignty'.

Most of its 170 workers were hired through local "communal councils" in the area's towns and villages. Comprised of housewives and labourers, the workforce was trained by the Chinese who now only supervise the work in the factory.

In one such factory, which began operating in December 2006, Chinese engineers are helping Venezuelans develop the first homemade computer.

Venezuelans hope Chinese technology and know-how will be transferred to them in the future so they can design their own computers and locally manufacture the parts in future socialist companies.

Ideology and strategy

When Chavez came to power 10 years ago, trade with China had peaked under $200mn but since then it has jumped to nearly $10bn.

It is no surprise then that Chinese officials say that Venezuela has now become the biggest recipient of its investments in Latin America.

While the Chinese community has existed here for decades, the presence of Chinese companies is increasing and being felt in several sectors of the economy: housing, agriculture, industry. The relationship serves China's commercial interests.

But for Venezuela, it serves ideological and strategic purposes.

Since becoming president, Chavez has travelled to China six times, making him its most frequent visitor among Latin American leaders.

He says the growing ties with Beijing are part of his stated aim to build a new multi-polar model of international relations "to break" US hegemony.

He has also embarked on a programme of cultural and scientific exchange with China.

By having Venezuelans study and benefit from Chinese technological expertise, Chavez is hoping to create a strategic partnership which merges China's socio-economic experiment with Latin American socialism.

Source: Al Jazeera

Wednesday, August 12, 2009
15:04 Mecca time, 12:04 GMT

China's 'going out' buying spree

By Frank Sieren and Andreas Sieren

The brand-new Porsche just made it to the 97th floor by being transported in an upright position. The doors of the service elevator at the Shanghai World Financial Centre, the second highest building in the world, barely closed.

At the top of the building, the new Panamera, the four-door Porsche, was presented to the world for the first time. Never before has a vehicle premiere in China been celebrated like this.

Not only is the car new, but so is the Chinese market which is one of the few in the world that is growing without a "scrapping premium" - a popular purchasing scheme in the US and some countries Europe.

While other automobile shows struggle with cancellations, the Shanghai Auto Show in April enjoyed strong presence of the international car manufacturers.

Car markets in the US, Europe, Japan and Russia may have plummeted by double-digits recently, but during the same period China reported growth rates of 4 per cent, to 2.7 million vehicles.

That means that during the first quarter of 2009 China sold more cars than the US; which has never happened before. China also has an increasing number of consumers with cash to spare to buy cars.

The government owns about $2.2tn in treasuries and foreign bonds. China's foreign reserves are the largest in the world.

Chinese buying spree

Much of the world closely follows US policies and wonders if Washington's economic plans will be misguided and result in a weakened US dollar.

Facing the danger of becoming exposed to inflation and therefore running the risk of jeopardising the value of its assets, the Chinese government has decided to use the dollars to invest in natural resources, land, real estate and companies.

In the second quarter of 2009, Chinese imports of iron ore rose 41 per cent, copper by 140 per cent, coal by 300 per cent and aluminium by a whopping 400 per cent.

These are astounding and, even in historical terms, unique numbers regarding natural resources.

These imports are parallelled with attempts to invest in foreign companies such as the state-owned Aluminium Corp. of China bid for Rio Tinto, the Australian mining giant.

But negotiations derailed in June when Rio rejected the $19.5 billion offer.

Wen Jiabao, China's premier, calls this new buying wave the "going out" strategy, aimed at accelerating Chinese investment in the world, in particular by big state-owned enterprises.

"We should hasten the implementation of our 'going out' strategy and combine the utilisation of foreign exchange reserves with the 'going out' of our enterprises," Wen told Chinese diplomats in July.

China will combine expansion of domestic demand with stabilising foreign demand, continue to use foreign investment, and accelerate the pace of the 'going out' strategy, Wen said.

Targeting automotive industries

Looking at the car industry one can observe various forces at play.

China is aiming at a more dominant role in the global car market by preparing acquisition bids of foreign car companies.

It has also been strengthening its domestic markets - foreign car manufacturers now see in China an important market for their vehicles.

The Volkswagen AG, with about 17 per cent market share in China, recently set a new record. The German car manufacturer has never sold as many cars in a month as in March 2009, which marked an increase of nine per cent (six per cent for the entire first quarter of 2009).

Volkswagen entered the fray early and held a 50 per cent share of the market, with its joint venture partners, at the beginning of this decade. This will likely change, however.

Japanese and even South Korean manufacturers have a market share of about 30 and eight per cent, respectively.

But that is not the only pressure exerted on Volkswagen and other Western manufacturers.

Overtaking Japan

In 2009, local Chinese companies grabbed a market share of over 30 per cent for the first time – edging out the Japanese.

The Chinese government makes every effort to prop up local car manufacturers whose smaller, more economical and cheaper cars fare better than their foreign-engineered counterparts, which are usually big and expensive.

A strategic plan published in March 2009 sets 40 per cent of market share as a target. The government is pumping $730mn into its automotive markets in the mainland's interior, where 64 per cent of the Chinese population live and where Western companies are underrepresented.

Local car maker Geely announced that it will introduce 32 new models into the market in the next 18 months.

Geely is also part of the Chinese government expansion plan to acquire foreign car companies.

In June,, the Chinese industry journal, reported that Geely had prevailed against its local vehicle competitors BAW, Chery and Chang'an, and had struck an agreement with Sweden's Volvo to take over the Scandinavian car maker.

Volvo had been formerly owned by US car giant Ford.

"It's the right time for Chinese firms to make overseas acquisitions during the slowdown in the economy," said Jia Xinguang, chief analyst with the Chinese National Automotive Industry Consulting and Development Corporation.

Volvo: Made in China

While details of the deal are still sketchy, it is clear that it will include substantive technology transfer.

Manufacturing of Volvo cars will be relocated to Dongguan City in Guangdong province.

The first Volvo to come off the assembly line under Geely's leadership will be the second generation of best-selling luxury SUV Volvo XC90. It will allow Geely to expand into the medium and high-level markets.

"Chinese automakers are getting stronger by the day," says Yu Bing, an analyst with Pingan Securities Co.

"Foreign automakers will see some real competition coming from Chinese rivals as they are growing in sales volume and also making progress in technology and brand recognition," he says.

Along with Canada's Magna International Inc. and RHJ International SA, a Belgium-based investment group, China's Beijing Automotive Industry Holding Co (BAIC) also put a bid forward for GM-owned Opel.

Beijing Auto was offering about $924 million in equity for a 51 per cent stake in Opel, with GM retaining a 49 per cent stake. The Chinese company also wanted 2.6bn Euros in German government guarantees.

Acknowledging that China, India and South Korea will be important markets in the future for GM, Nick Reilly, the new executive vice president of GM international operations, immediately downplayed the bid.

"BAIC would have a bigger presence, but I don't see it as being any major difference in terms of competition," Reilly said.

Zhu Xuedong, an analyst at Industrial Securities in Shanghai was more direct: "The centre of gravity in the industry is shifting to China."

Poor car quality

The German ministry of economics, however, raised concerns in an internal document because it believed that Opel would become too reliant on the Chinese government and get into a "difficult dependency".

A successful bid would have given China full access to Opel's technologies and a strong say in their use. Differences in intellectual property rights brought the deal down in the end. BAIC stated that it would continue to seek international co-operation opportunities.

Beijing has also been encouraging co-operation with Western car makers; some believe the poor quality of Chinese manufactured cars is a reason why China wants to learn expertise and technologies from foreign companies.

Western engineers, however, remain dismissive of Chinese vehicles.

Recently a car made by Brilliance failed the crash test of the German Automobile Association.

"We are making fun of the cars," says J├╝rgen Kracht, the founder and director of the Hong Kong-based Management Consultancy Fiducia, which has been specialising in the Chinese market for decades.

"But we should not underestimate them," he added.

While the Chinese car industry is still taking shape, it is likely that global markets will be influenced by Chinese brands such as SAIC, FAW, Dongfeng, Chang'an and Geely.

True, Chinese vehicles may lack quality, but in some technologies, such as alternative propulsion, the Chinese are already trying to play a market leader role.

The manufacturer BYD, successful in cell phone batteries, is making progress in the area of electric vehicles.

Questioning emerging markets

It is this competition that is often underestimated, since there are sentiments that emerging markets would not be able to develop these technologies, says Kracht. "In my opinion, that's a big mistake."

The technologies may not be well-engineered, but the Chinese are able to develop them much faster.

"And the government is quick to creating markets to absorb these technologies," Kracht said.

Audi, for example, is strong in the Chinese market. But Rupert Stadler, chair of the board of Audi, is on the alert. He is continually impressed by the way the Chinese government influences the psyche of the market.

With recently introduced tax reductions for smaller cars, Beijing managed to improve consumer confidence so that even the buyers of luxury cars left their hesitations behind and resumed purchasing vehicles.

"By doing this, China has indicated to the world that they are capable of responding to crises decisively," says Stadler.

He believes it is in Audi's advantage to have been present in China for many years.

Chinese competition in China and abroad is strong, though.

The Chinese, as highlighted by Wen Jiabao's "going out" policy, intend to acquire a lot more foreign assets in the future.

They may not be in for a smooth ride. While the Chinese are free to decide what and when to bid for, they are unable to direct the pace of their acquisitions.

Political agendas, as in the case of Rio Tinto, will continue to interfere and pose serious hurdles.

It may be that many major corporations are challenged by dire economic prospects. Yet they will always be able to say no to foreign - Chinese - take-over bids.

Frank Sieren is author of The China Code - What's left for us. He has been living in Beijing for the past 15 years and is regarded as one of the leading German experts on China.

Andreas Sieren is a specialist in international relations and development aid. He worked for many years for the UN in Asia and Africa.

The views expressed in this article are the authors' own and do not necessarily reflect Al Jazeera's editorial policy.

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