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Guy de Jonquieres: Amid Brexit debate, bitter lessons for UK in Asian investment fiascos

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A worker walks inside EDF Energy's Hinkley Point B nuclear power plant in Bridgwater, southwest England.   © Reuters

When Chinese President Xi Jinping paid a state visit to London last October, George Osborne, the powerful and ambitious U.K. Chancellor of the Exchequer waxed lyrical about a dawning "golden era" in bilateral ties and declared the U.K. to be "China's best partner in the West." Now Osborne and the rest of his country are discovering that "partnership" with China comes with a hefty price tag.

     More than any other European Union member, Britain has wooed Beijing assiduously in the hope of being rewarded with trade deals and inward investment. Osborne's determined pursuit of that goal has infuriated officials at the Foreign Office, who have warned that kowtowing to China in the hope of economic gains is unlikely to earn many big favors and will only diminish whatever influence London still wields in Beijing. Those warnings have gone unheeded.

     Barely six months after Xi's visit, London's faith in the new partnership is being put to the test by a crisis engulfing the U.K. operations of Tata Steel, which acquired them from Corus, the Anglo-Dutch group, in 2007. After heavy losses, due partly to reduced Chinese steel demand and fierce competition from cut-rate Chinese steel exports, Tata has had enough. Declaring the heavily indebted business to be nearly worthless, the Indian company has put it up for sale.

     With no obvious bidder in sight, Britain's government is engaged in a desperate struggle to prevent the closure of the company, which is by far the country's biggest steel producer and employs 15,000 people, mostly in struggling regions offering few alternative jobs. The government faces unenviable choices. It has ruled out nationalization, but propping up a business that is losing 1 million pounds ($1.42 million) a day would strain already stretched national finances and could violate EU subsidies rules.

     That leaves trade protection as the only obvious option. However, the U.K. may have limited the scope for action on that front. EU officials claim London has been in the forefront of opposition to proposals -- targeted mainly at China -- that would strengthen the EU's powers to impose anti-dumping duties or special tariffs on cheap exports that harm producers in importing countries. Though the U.K. government denies trying to block duties on Chinese steel, its stance has been assailed by other EU members and their steel industries as well as by British trade unions and opposition politicians.

     On April 1, Beijing further inflamed the dispute by slapping stiff dumping duties on imports from the EU, Japan and South Korea of the type of special steel produced by Tata in the U.K. Although Tata exports little to China, the tariffs are an embarrassing slap in the face for Osborne and British Prime Minister David Cameron and dash their hopes that they could win big rewards by cozying up to Beijing.

     The Tata affair is also affecting the political debate in the U.K. in the run-up to a referendum in June on whether to remain an EU member. Somewhat illogically, supporters of withdrawal are seeking to bolster their case by blaming Brussels for not penalizing cheap Chinese steel imports, even though the U.K. is partly responsible for EU inaction.

     Perhaps the U.K. is, as the government claims, boldly sticking up for free trade and avoiding measures that would raise prices for steel users. If so, it has yet to convince its critics, who argue that the government really fears that supporting barriers to Chinese exports would harm its relations with Beijing. Diplomats also say that in EU discussions on a range of other issues affecting China, London has increasingly adopted positions closely aligned with Beijing's interests.

     That may of course be pure coincidence. However, China has long been expert at playing at "divide-and-rule" in Europe, ruthlessly using its economic clout and promises to reward EU governments if they adopt policies that favor its interests and threatening to punish them if they refuse. European trade policy experts say they would be surprised if such tactics were not being deployed now in an effort to ward off the EU's dumping proposals.

Running into trouble

To make matters worse, another high-profile product of London's new "partnership" with Beijing is also running into trouble. This is the planned Hinkley Point nuclear reactor, intended to supply 7% of Britain's electricity by 2025, in which China will have a substantial financial stake.

     From the outset, the 24 billion pound project has been controversial. Widely criticized as far too expensive, it has also aroused concerns in the U.K. that China could use its stake to undermine national security by controlling a vital part of the country's infrastructure. Now, problems with the unproven design being used by Areva, the French state-owned company in charge of construction, are causing indefinite delays and have raised doubts about whether it will go ahead at all. Cancellation could threaten the solvency of Areva and EDF, its parent company, both of which are massively indebted.

     This time, China looks more like a hapless and perplexed bystander than a puppeteer pulling the strings. It could never have expected when it agreed to help finance Hinkley Point that it would become implicated in such a complex, confusing and politically charged affair. However it ends, the experience hardly seems calculated to enhance Beijing's confidence in future dealings with Britain, or, indeed, France.

     The Tata Steel and Hinkley Point sagas both point to a broader lesson. Ever since the global financial crisis, European politicians, bankers and businessmen have been in thrall to an inspiring "Asia rising" narrative. The West might be on its knees and economically enfeebled, but now it could look east for regeneration, investment and opportunities provided by the booming Asian economies. Indeed, some versions of this story portrayed Asia's -- and above all China's -- rulers almost as supermen.

     Since Tata Motors, a sister company of the steelmaker, acquired Britain's Jaguar Land Rover luxury car group in 2008, its success has fitted that narrative rather well. Pumping in 11 billion pounds in fresh investment, it has doubled the number of employees, launched a succession of highly regarded new models, rapidly increased exports and moved the group from losses to handsome profits.

     But the Corus takeover was a bridge too far. A sagging global steel market and high British energy prices undoubtedly contributed to its problems.

     However, the deal always looked risky. Tata was widely faulted at the time for paying far too much for a company in a notoriously cyclical industry and for taking on a crippling $13 billion debt.

     Today, Tata is being criticized at home for succumbing to a hubristic exuberance that gripped many leading Indian companies at the time, leading them to pursue overambitious foreign expansion strategies that have come to grief. Others paying the price and now retrenching include steelmaker Arcelor Mittal, wind turbine supplier Suzlon Energy, telecoms group BhartiAirtel and conglomerate Aditya Birla.

     China, meanwhile, originally envisaged its involvement in Hinkley Point not just as a financial investment, but as an important first step toward becoming a global leader in the nuclear power plant industry. Today, its policymakers must be wondering what kind of an imbroglio they have blundered into.

     That is not to say that Asian companies and investors are incompetent or poorly managed. They can boast a number of success stories, while there is a long list of U.S. and European companies that have also ventured boldly abroad, only to see their dreams turn into nightmares. But neither are Asian companies the near-infallible, all-conquering global forces that they are sometimes made out to be.

     Those who view Asian capital and corporate dynamism as the solution to the West's problems need to think again. The problems in the West are often homegrown and demand homegrown solutions. Foreign investment and cross-border flows of technology and skills can make important contributions to support host economies. But they can never be substitutes for putting one's own house in order and sorting out the mess in one's own back yard.

Guy de Jonquieres is a senior fellow at the European Centre for International Political Economy, a Brussels-based think tank, and a former Financial Times journalist.

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