Excerpt
Table of Contents
List of Figures.
1) Introduction
2) Current situation of Chinese-EU trade and Chinese FDI coming to the EU
3) Huawei Overview
4) What is the fifth generation 5G infrastructure and how does it differ from previous generations of telecommunication infrastructures?
5) EU perspective
5.1) Threats from Huawei conducting FDIs in the European Union
5.1.1) Security Concern
5.1.2) Detrimental impact for EU companies if cheap Chinese Huawei comes with competition
5.1.3 EU’s trade deficit with China creates a strong dependency on China for trade
5.2) Opportunities from Huawei conducting FDIs in the European Union
5.2.1) With Huawei, the 5G infrastructure comes sooner, cheaper and boosts EU competitiveness
5.2.2) Job creation in the EU
5.2.3) Contributing to economic growth, labour market receives more know-how through CHN investment
6) Chinese perspective
6.1) Threats from Huawei conducting FDIs in the European Union
6.1.1) Increasing Capital flight and the increasing regulation thereof
6.1.2) The uncertainty of EU member states’ policies concerning Chinese FDI in 5G telecomunication infrastructure and lack of common security framework creating additional costs
6.2.3) Liability of foreignness
6.2) Opportunities from Huawei conducting FDIs in the European Union
6.2.1) China’s potential to attain a stronger competitive advantage through R&D
6.2.2) “Science diplomacy” as an opportunity for more trade with the EU and for more deconstruction of the liabilities of foreignness
7) Conclusion and recommendations
Bibliography
Abstract
In today’s international markets, border-crossing FDIs flowing into the European Union (EU) from non-EU member states are bowing to the pressure of the uncertain economic situation. In 2017, FDI inflow to the EU from non-EU member states have declined rapidly by circa 89.2%1. China, surprisingly, only contributed to around 6.19% of the inflow of FDI from non-EU member states[1]. According to data from a report “Chinese FDI in Europe: 2018 Trends and Impact of New Screening Policies” by Rhodium Group and the Mercator Institute for China Studies (MERICS), this stagnation is also mirrored in the flow of FDI from China to the EU, which fell from EUR 29.1 billion in 2017 to EUR 17.3 billion in 2018, which corresponds to a 40% decrease in FDI inflow to the EU2. Whilst taking the current trends of Chinese FDIs into account, I plan on discussing the threats and opportunities on Chinese FDIs in the race to construct the 5G infrastructure network in Europe.
List of Figures
Figure 1: Chinese FDI transactions in the EU by sector, EUR billion
Figure 2: Value of Completed Chinese FDI Transactions in the EU by Target Country
Figure 3: Key Performance Indicators for companies in the telecommunications industry
Figure 4: Huawei’s Global 5G Footprint
Figure 5: The Risks of 5G
Figure 6: Global 5G value chain output and employment in 2035
Figure 7: Key patent holders for 4G and 5G technologies
Figure 8: EU Framework for Screening Investments
Figure 9: percentages of the world’s R&D investments for the USA, EU & China
Figure 10: Tax incentives for R&D as % of GDP, 2006-2014
1) Introduction
In the course of this bachelor’s thesis, an intricate analysis on the threats and opportunities of Chinese investment in the European Union will take place. Aspects taken under consideration in the analysis will range from the political economy aspect to macroeconomic aspects of the threats and opportunities in order to properly understand the effects of Chinese investments in the European Union. As a case study, the threats and opportunities of the Chinese conglomerate Huawei investing in the Fifth Generation (5G) telecommunication infrastructure will be used, in order to understand some of the specific threats and opportunities of Chinese FDIs in strategic sectors such as the telecommunications sector in the European Union.
As the general effects of FDIs are already well analysed, I will be concentrating on the effects of China investing in industries that are crucial to EU security and have a large impact on EU macroeconomic development in the near future. For my bachelor thesis, I will display the arguments on whether China should be allowed to join the race/competition to build the new fifth generation (5G) telecommunication infrastructure by analysing the threats and opportunities that might arise if Chinese companies such as Huawei actually build the 5G infrastructure in the EU. Reasons for me choosing the topic of the effects of China potentially conducting FDI in the EU telecommunication industry, is due to the actuality of the theme and to be able to understand the risks of Chinese FDIs in the EU, in addition to the timely nature of the research question
I plan on using empirical data of previous FDIs that show similar characteristics and opinions from researchers and experts of the field of FDI political economy to understand the effects of Chinese FDIs in the 5G infrastructure as well as highlighting the opportunities and threats for the European countries originating from Chinese FDIs in the 5G infrastructure.
2) Current situation of Chinese-EU trade and Chinese FDI coming to the EU
As seen in the abstract, the economic trade between the EU and China has decreased around 40% from 2017 to 20183. In spite of this recent stagnation, we have observed an increase of Chinese FDI to the EU from 2.1 EUR billion in 2010 to 37.2 EUR billion in 2016, with the only stagnation in this time frame (2019 to 2016) occurring from 2012 to 2013[3]. The changing course of the total value of Chinese FDI to the European Union discussed in the sentences above are largely due to fluctuations in the value of M&A transactions, whereas the value of the Greenfield investments remains largely stable from 2010 to 2018. Hence the more volatile course of the values of M&A transactions, the ratio of Greenfield investments to M&A transactions also act accordingly. In spite of the decrease in Chinese FDI in the EU in recent years, as seen in Figure 1, there have been a more equal and diverse investment in a broader number of sectors in the European Union, instead of proportionately large FDIs in a few sectors as seen through years 2015 to 2017 in Figure 1. This recent decrease in Chinese FDI abroad which includes a 20% decrease in Chinese mergers and acquisitions (M&A) in the first six months of 2017, is likely to be as either direct or indirect effect of the Chinese regulatory tightening on Chinese FDI4.
Figure 1: Chinese FDI transactions in the EU by sector, EUR billion5
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On an aggregated view at the imports and export of the European Union from and to China, the EU has historically had a trade deficit with China, since 2010 this trade deficit for the EU with China has increased slightly, measuring 170.5 EUR billion in 2010 and 184.8 in 20186. With this negative trade deficit, meaning that the European Union imports more from China than it exports to China, also signifies a stronger dependency of the EU on China as it presents a larger relative size of the total economy. Looking at the individual product groups that are most traded between the EU and China, we can observe that telecommunications equipment is by far the most imported goods into the EU, with 60 EUR billion worth of telecommunications equipment being imported into the EU from China[6]. This is one of the reasons for the use of Huawei and the telecommunications industry a case study, as the industry has the largest impact on Sino-European trade.
On the level of EU member states, it is not surprising to observe that the larger economies such as Germany, the United Kingdom and France conducting proportionately more trade with China than the EU member states with smaller economies such as Croatia, Cyprus and Malta. This is, for example evident in the comparison of the export of goods from EU member states to China in 2018, where Germany exported 93,715 EUR million (which corresponds to 17.3% of German extra-EU-28 exports going to China), whereas Malta only exported 32 EUR million worth of goods to China in 2018 (corresponds to 3% of Maltase ex-EU-28 exports going to China)[6]. A report named “CrossBorder Monitor” from Rhodium Group, reporting on the Chinese FDI to the EU, listed the following recipient countries for Chinese FDI as highest in the EU, namely the UK ($4.9 USD billion), Sweden ($4 USD billion), Germany ($2.5 USD billion), Luxembourg ($1.9 USD billion), and France ($1.8 USD billion) for the full year of 20187. As seen in Figure 2 below, the value of completed FDIs per EU member state country can vary considerably on short notice, in this case we observe drastically differing figures on a quarterly basis.
Figure 2: Value of Completed Chinese FDI Transactions in the EU by Target Country[7]
(USD billion)
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Based on the all the empirical data given on Chinese FDIs in the European Union, we can observe the volatility of the willingness to invest in the European market. This volatility will no doubt be affected by the decision whether to allow Huawei to invest in the European 5G telecommunications infrastructure or not.
3) Huawei Overview
Huawei, a Chinese multinational company based in Shenzhen, China, currently totals 188,000 employees worldwide8 and provides customers primarily with telecommunications solutions. Concerning the ultimate ownership of Huawei, through the Employee Shareholding Scheme, 96,768 employees own 100% of the private company Huawei Investment & Holding Co., Ltd9. The products that Huawei offers across the world range from smartphones, tablet, and watches to providing “cloud computing, collaboration, enterprise networking, and cloud powered digital services”10. On top of this, Huawei provides hardware for networking products and telecommunication solutions11.
Concerning the corporate governance structure of Huawei, the Shareholders’ Meeting consisting of Ren Zhengfei (founder and CEO of Huawei) and the Representatives’ Commission, through which the union of Huawei “fulfils shareholder responsibilities and exercises shareholder rights”12. This Commission is made up of 115 representative who exercise the rights of all shareholding employees. The Shareholders’ Meeting acts as the highest authoritative body of the firm with decisions such as “capital increase, profit distribution and selection of the members of the Board of Directors (BOD) & Supervisory Board”13. The Board of Directors are responsible for the operative side of the firm, with decision-making authority on “corporate strategy and operations management, and [also] ensures the protection of customer and shareholder interests”(Huawei, (e)) and is led by a rotating chairman. The supervisory board, on the over hand, overseas the fulfilment of the Board of Directors’ responsibilities as well as “monitoring the company’s operational and financial status, and supervising internal control and legal compliance”(Huawei, (e)).
For this thesis, understanding the plans of Huawei in the EU is crucial to analysing the threats and opportunities for both the Chinese and the EU-perspective. According to the company website, Huawei has already invested 10 USD million in 5G test beds & trials in Europe as well as becoming the first company in the European Union to receive the TÜV quality certifications for its 5G products14. Currently, Huawei describes its research for 5G as being completed and expects to roll-out its 5G telecommunications infrastructure in 2020[13]. To fully understand why Huawei would like to invest in the EU 5G telecommunications network, one simply has to understand that 5G is highly likely to have a positive effect on every industry sector and “that, by 2035, 5G has the potential to stimulate $12.3 trillion in global sales activity across a broad spectrum of industries and use cases, will support a global value chain ecosystem that generates $3.5 trillion in output, will supports 22 million jobs, and will make long-term sustainable contributions to the growth of global GDP”15. It is therefore critical for Huawei to gain access to the EU market as one of the first companies to offer a 5G telecommunications network, as it has been estimated that 5G will make up 30% of mobile connections in Europe by 202516.
Figure 3: Key Performance Indicators for companies in the telecommunications industry17
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When comparing Huawei to other companies in the telecommunications sector, we can observe that Huawei has a substantially larger revenue than similar companies such as Nokia, Ericsson and ZTE, see Figure 3 for the Key performance indicators of 2017[16]. As seen in Figure 3, it is apparent that Huawei is the player with highest profitability, with the two largest European players lagging behind, with Nokia ($3,260 USD million) only attaining a third of the operating profit of Huawei ($8,645 USD million). With Huawei’s success still rising, Huawei is reaching new targets. According to The Economist, Huawei even overtook Apple as the second biggest producer of smartphones after Samsung18. Together with fellow Chinese competitor, ZTE, Reuters estimates a combined market share larger than 40% in the European Union with Huawei19. Huawei’s 5G footprint, with 40 secured commercial contracts to build and operate the 5G telecommunications infrastructure, has become truly global, as visualised in Figure 4 by Kewalremani & Kanisetti (2019). In comparison, Nokia was able to confirm 42 commercial 5G commercial contracts globally in a press release in June 201920.
Figure 4: Huawei’s Global 5G Footprint21
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4) What is the fifth generation 5G infrastructure and how does it differ from previous generations of telecommunication infrastructures?
With up to nine billion mobile subscriptions by 2023, and twenty billion connected to IoT devices, the need for a faster and modern generation of telecommunications infrastructure is inevitable(Ericsson). Global revenues from 5G are likely to reach up to 225 EUR billion in 2025 and is viewed as a “key asset for Europe to compete in a global market”, according to the European Commission22. From every technical aspect, the new fifth generation infrastructure will improve communication, being able to be used in industries such as “manufacturing, automotive, energy and utilities, healthcare” according to Ericsson23, with the benefits of the usage of 5G networks reaching up to 114 EUR billion per year[20].
On the technical perspective, the bandwidth for 5G– which is used to transport data virtually from one internet connected device to another – is much wider than the lower bandwidth in the 4G infrastructure24. This higher bandwidth available for 5G enabled devices ultimately allows for a higher data transfer rate, as well as a lower latency. The definition - latency - is described as “the time taken by radio signals to travel from base station to the mobile devices and vice versa”(Rajiv, n.d.). With improved responsiveness (latency) and being able to transfer data faster as well as being able to connect to more devices simultaneously, there is a much larger number of targets and potential for espionage25.
Huawei as a Chinese company stands out of the crowd of other companies in the 5G competition (such as ZTE and Hytera) due to its dominance of the market, as shown in Figure 3, and advanced 5G capacity[23]. For the next two chapters of my thesis, I plan to analyse threats and restrictions to Chinese companies conducting FDIs in the European Union, as well as analysing opportunities and motivations of Chinese companies conducting FDIs in the EU. Using empirical evidence and journals to back my points of interest for both points of view, I will discuss the threats and opportunities of Huawei investing in the 5G infrastructure in the European Union, out of the perspective of both the European Union and China.
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2 Hanemann, T., Huotari, M., & Kratz, A. (2019). Chinese FDI in Europe: 2018 Trends and Impact of New Screening Policies. Berlin: Rhodium Group.
3 Hanemann, T., Huotari, M., & Kratz, A. (2019). Chinese FDI in Europe: 2018 Trends and Impact of New Screening Policies. Berlin: Rhodium Group.
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21 Kewalramani, M., & Kanisetti, A. (2019). 5G, Huawei & Geopolitics: An Indian Roadmap. The Takshashila Institution.
22 Vandystadt, N., & Grammenou, M. (2019, March 26). European Commission recommends common EU approach to the security of 5G networks. Retrieved from European Commission - Press Release Database: https://europa.eu/rapid/press-release_IP-19-1832_en.htm
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24 Rajiv. (n.d.). RF Page. Retrieved from What are the difference between 4G and 5G technology: https://www.rfpage.com/what-are-the-difference-between-4g-and-5g-technology/
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