Triple Win? China and Third-Market Cooperation

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Resident Senior Fellow and Director of International Studies

Can foreign companies profit from Chinese infrastructure projects overseas? Do they need political support? The two questions irrigate the third-market cooperation discussion that takes place in several capitals and in many company headquarters. China has signed third-party market cooperation agreements with France, the Netherlands, Belgium, Spain, Austria, Japan, Singapore and Australia. So far however, these agreements have not changed the basic fact that Chinese infrastructure projects offer few opportunities to foreign companies. In January 2018, a CSIS report noted that of known Belt and Road Initiative (BRI)-projects, only 3.4 percent had a "third-party" involvement of foreign companies. While there is a lack of updated consolidated statistics, the available information suggests that nothing fundamental has changed since January 2018.

States that have signed third-party cooperation agreements with China have two things in common: they are advanced economies with a strong infrastructure basis; and they are relatively skeptical regarding the BRI, which they tend to perceive as a geopolitical project with strings attached. For several signatories, third-party cooperation agreements mean shifting the focus of their interactions with China away from not endorsing the BRI. They signal to their interlocutors in Beijing that skepticism does not necessarily mean confrontation or obstruction when it comes to the BRI. In other words, "third-market cooperation" creates space for ambiguity.

It is also clear that most signatories of such agreements aim to level up the international behavior of Chinese companies so that they converge with the best Western practices on Corporate Social Responsibility norms, environmental standards and debt sustainability. At the same time, these agreements also reflect requests coming from the corporate sector that states should provide political support to companies so that they can seize a share of China’s global infrastructure projects.

China’s goal can be reached through market forces if foreign companies see an interest to contribute technology to infrastructure projects as subcontractors.

China’s goals are much narrower. "Expanding third-party cooperation" (拓展第三方市场合作) only gets a quick mention in the work report of the State Council presented last March to the National People’s Congress, suggesting low priority. At the same time, the goals of third-party cooperation are articulated with great clarity: access to technology and management skills. The official website of China’s State Council describes a "triple-win" model (三方共赢) that "effectively brings together the superiori production capacity of China, the advanced technologies of developed states and the needs of most developing nations" (将中国的优势产能、发达国家的先进技术和广大发展中国家的发展需求有效对接).

There is therefore a mismatch in the goals pursued by China and other parties. China’s goal can be reached through market forces if foreign companies see an interest to contribute technology to infrastructure projects as subcontractors. On the contrary, the goals of the states that have sought third-party cooperation with China are more ambitious and political in nature. Inevitably, China’s goals are easier to reach.

The France-China third-party cooperation is a good case in point. The June 2015 agreement with France was the first of its kind signed by China. The idea was backed very strongly by French President Macron during his January 2018 visit to China. As made clear in a Silk Road report published by DG Treasury, France seeks "punctual cooperation in third markets" rather than an MoU on the BRI, and attaches great importance to "governance principles" for connectivity projects. The 2015 agreement covers a wide scope, with an emphasis on a green agenda. The priority is on renewable energies and all projects that contribute to the fight against climate change, green agriculture and food security, railway projects, infrastructure and energy.

In practice, it has not been easy for the two sides to agree on a joint list of projects. During the French Prime Minister’s June 2018 visit to China, a list of 12 areas/projects was proposed to the Chinese side. China responded with an alternative list of 12 initiatives. Today’s list has five projects and reflects the French resistance to China’s insistence that Africa should be prioritized for third-market cooperation, that nuclear energy should be included, or that projects inside the EU (an internal market from the perspective of all its members) should be considered.

What is on the list? Although it was not published online by the French Treasury and the Chinese National Development and Reform Commission, the content is known.

Two projects are being conducted in the energy sector.
- EDF and China Datang Corporation aim at an overseas expansion of their partnership on the Chinese domestic market.
- ENGIE and Tsinghua University’s offset Tusholdings have an agreement under which ENGIE will contribute to the optimization of smart energy services (storage, distribution) in Egypt and in Thailand.
Three projects in the maritime economy have also been added to the list.
- Bolloré builds the Tibar Bay Port in Timor Leste with China Harbor Engineering Company, a very rare example of a Chinese subcontractor to a European-led infrastructure project.
- Bolloré Ports is in a consortium with China Merchants Group to manage the operations of the Tincan Island Container Terminal of the Port of Lagos in Nigeria.
- On the list is also the Lekki port in Nigeria, whose container terminal, constructed by China Harbor Engineering Company, will be operated by CMA-CGM.

Ambitions have had to be scaled down when it comes to joint financing. In 2016, the two sides created the Sino-French Third-Party Investment Fund, jointly managed by the Chinese sovereign fund CIC and the French Public Investment Bank BPI. During Xi Jinping’s visit to France, a quadripartite cooperation agreement was signed between BPI, CIC, Shanghai SUS Environment and Quadran International to direct the funds to solar, wind and waste-to-energy projects in third markets.

In practice, it has not been easy for France and China to agree on a joint list of projects.

The political difficulties of working third-market cooperation with China should not hide the fact that European companies are involved as subcontractors in several Chinese infrastructure projects, providing niche technologies outside any policy framework. Alstom has contracts with Sinohydro to provide turbine generators to plants built on the Nile River in Uganda and also in Nigeria. Each contract is worth approximately 50 million Euros. This results in an international expansion of the activities carried by Alstom Hydro China on China’s domestic market. A similar pattern is followed by German companies. Siemens is involved in BRI projects in third countries, such as in Pakistan or Indonesia. Some sources mention a 3 billion EUR turnover from BRI projects since 2017.

Many companies use the political agenda to conclude their own MoUs with Chinese partners. On the list of 52 "third-market" projects agreed between China and Japan in October 2018, 21 are MoUs between companies. During Xi Jinping’s state visit to France last March, FIVES and China National Building Materials Group established a cooperation framework for energy savings in infrastructure projects in developing countries. Schneider Electric signed an MoU for the modernization of the factories of China’s Power Construction Corporation (PCC) in China and abroad, a deal valued at 6 billion EUR that covers digitalizing energy management, automation, and integrating the IoT into industrial processes. But MoUs are only broad cooperation frameworks, and each deal still needs to be negotiated on commercial terms.

When European companies are willing to become the subcontractor that brings technology, third-market cooperation can rely on market forces and does not need political support. This limited market-driven involvement of European businesses in Chinese infrastructure projects is more in line with China’s terms of cooperation as defined by the State Council than with Europe’s ambitious goals to promote standards and norms. Projects supported and endorsed politically by the two sides also exist, but not as strategic initiatives spearheaded by political authorities. Rather, they reflect a rare convergence of companies’ market interests and states’ priorities.

Copyright : Yoan VALAT / POOL / AFP

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Triple Win? China and Third-Market Cooperation