Ideals vs. Reality - Obviously, given the importance of the Chinese chemical industry, multinational companies are highly interested in participating in the future growth of the industry. However, executives of Western chemical companies active in China sometimes question whether the playing field for Western and domestic companies really is level or tilted in favor of local players. What this means is that domestic companies are given preferential treatment by means of both formal, written regulation and unwritten rules and practices.

How Serious Is This Issue?

Most CEOs of multinational companies (MNCs) in China feel that the issue does not make it impossible to have profitable domestic operations. On the other hand, they feel it is the most difficult issue that is exclusive to the MNCs - other issues also affect private and state-owned chemical companies. In addition, it is an issue that is hard to deal with proactively.

What Are Formal Differences in the Regulations?

Some of the regulations applicable to the chemical industry differ for foreign and domestic companies. For example, in an implementation measure of the 12^th Five-Year Plan, the 2011 Foreign Enterprise Investment Catalogue, foreign-owned and domestic companies are treated differently. It is one of the suggestions of the Petrochemicals, Chemicals and Refining (PCR) Working Group of the European Union Chamber of Commerce in China (European Chamber) to change these to equal investment rules. In addition, the Chinese government provides substantial R&D funding for domestic chemical companies but not all of these are also accessible or even known to foreign companies. Also, for hazardous chemicals, MNCs importing toxic chemicals to China must register these at cost of $10,000 per certificate, while domestic importers do not have to do this.

In particular, state-owned entities (SOEs) get preferential treatment over both foreign companies and domestic privately owned companies in a number of ways. Some of these are direct subsidies paid by the state and local governments, e.g., for refining losses. Others work indirectly via state-owned banks which provide preferential financing to SOEs at the expense of other companies or by SOEs getting land at preferential prices. There are also some areas (particularly petrochemicals) in which multinational companies are not allowed to do business independently, restricting their stake to 50% of mandatory JVs with state-owned entities.

What Are Informal Disadvantages of MNCs?

Most of the perceived preferential treatment of domestic companies is in more grey areas, taking the shape of unwritten rules and practices and thus both more difficult to prove and easier to defend despite China being a member of the World Trade Organization:

• For state-run projects, multinational companies are usually not selected as suppliers. "Indigenous innovation" considerations favor government procurement of products with Chinese IP.
• For the oil import and wholesale market, the grant of import licenses of some important raw materials for the chemical industry is intransparent. Generally, access to raw materials can be a bigger issue for MNCs than for SOEs.
• Existing environmental laws, e.g., regarding environmental protection and transportation safety, are often applied inconsistently, favoring domestic companies. While both MNCs and local companies are subject to the same (sometimes very strict) regulation, almost all managers of Western chemical companies feel that the enforcement is much stricter for foreign companies.
• According to the Chemicals working group of the European Chamber, the evaluation criteria applicable to chemical projects are often not clearly communicated, often changed on short notice and the selection of experts for the reviews is not transparent. There are examples of local direct competitors of a foreign applicant being requested to join the advisory panel, thus giving the competitor direct access to proprietary information.

Altogether, these different practices certainly represent a disadvantage for foreign chemical companies doing business in China. To quote Martin Kraemer, the chairman of the PCR working group of the European Chamber, "China is in principle on a good way in terms of regulatory issues. On the other hand, readily available international standards and best practices are often not adopted which leads to distortions in the competitive landscape of the chemical industry in China and generally favor domestic companies."

Are All Areas Equally Affected? 

Generally, the playing field is tilted primarily in favor of SOEs rather than toward domestic companies in general. This means that the chemical industry is one of the more affected industries as it has a number of strong state-owned companies. However, it also means that areas such as petrochemicals with established SOEs are much more affected than specialty chemicals, where there is no substantial SOE presence. It remains to be seen whether this will change if state-owned enterprises can enlarge their presence in specialties. As for the regional impact, again provinces with strong SOE presence seem to more strongly favor SOEs. And in general, the higher level of education and experience of government staff in the Eastern provinces compared to Central and Western China allows MNCs to deal with them more pragmatically, though on the other hand some Western provinces are in principle very open to foreign investment.

What Do MNCs Do About This Issue?

Multinational companies engage in a variety of activities to level the playing field, both on an individual level (e.g., via governmental affairs departments of the companies) and via associations such as the AICM and the European Chamber. Their focus is on pointing out the damage some of the local regulation does to Chinese consumers and to the Chinese environment, e.g., by demonstrating the advantages of environmental protection measures utilized in MNC production plants. According to industry participants, these activities have some gradual success, though some of the major disadvantages (e.g., regarding complete foreign ownership of petrochemical assets) are probably too much based on Chinese principles of self-sufficiency to be changed.

When discussing this issue, it is worth noting that China is by far not the only country favoring local companies despite paying lip service to free markets and free trade agreements. It is hard to imagine for example the police force of a German city buying Chinese or Japanese cars for fear of political fall-out. "Buy American" campaigns such as the one started a few months ago by Wal-Mart also cater to similar sentiments. In addition, while SOEs certainly benefit from government support, the government expects the SOEs to also support government goals such as preventing unemployment, even if these goals have been a reason for the extremely low profitability of the SOEs in the past. In total, it is therefore far from certain that SOEs really gain a competitive advantage from their close connections to the Chinese government.