The US-China Business Council (USCBC) has issued a report that details the growing challenges faced by U.S. companies in participating in procurement by Chinese government entities and state-owned enterprises (SOEs). The primary challenges include China’s substitution of domestic products for foreign products, its lack of clear domestic content requirements and its use of broad security criteria in evaluating bidders. USCBC points out that these challenges “are exacerbated by both deteriorating US-China relations and by China’s failure to join the [WTO] Government Procurement Agreement (GPA).” This post highlights key elements of the USCBC report, including its dismal assessment of the prospects for China’s accession to the GPA.
In September 2021, the USCBC issued “Government Procurement and Sales to State-Owned Enterprises in China: Challenges and Best Practices.” The report is based on interviews with 30 U.S. companies across the information and communication technology (ICT), health care, energy and manufacturing sectors. In delving into the challenges faced in select sectors, it is more narrowly focused than a 2020 report by BUSINESSEUROPE, which also criticized China’s procurement practices.
Domestic substitution: According to the USCBC report, Chinese government entities and SOEs are replacing foreign products and components with those of majority Chinese-owned companies. This practice is particularly prevalent in sensitive sectors. In some cases, entities explicitly state their rejection of foreign products, while in others, their preferences for domestic products only becomes clear during the procurement process. Amid deteriorating U.S.-China relations, government entities and SOEs are uncertain whether buying U.S. products “is politically in their best interest” and whether they will have continued access to those products “given fluctuating US sanctions and export control policies.”
According to Reuters, China’s Ministry of Finance and Ministry of Industry and Information Technology issued new procurement guidelines (“Auditing guidelines for government procurement of imported products”) in May. They set local content requirements of 25% to 100% for 315 items purchased by public hospitals, SOEs and government agencies. The list includes medical equipment and testing machinery, as well as ground-based radar equipment, seismic instruments and marine, geological and geophysical equipment.
Unclear domestic content requirements: China’s Government Procurement Law (GPL) requires the purchase of domestic goods, construction and services. However, China has not specified what constitutes a “domestic product.” As USCBC pointed out, in 2010, Chinese agencies proposed an administrative measure that defined “domestic products” as products that are manufactured in China and whose domestic production costs exceed 50% of the total costs. China has not released a final version of this regulation. As a consequence, government entities vary in what they consider domestic, which range from goods manufactured by foreign-owned companies in China to only goods manufactured by firms that are majority-owned by Chinese and headquartered in China.
Sensitive Sectors: The report focuses on the procurement challenges faced by the ITC, health care and technical equipment sectors. It points out that the ICT sector has been the hardest hit by U.S.-China tensions. For ICT and specialized equipment suppliers, “security factors weigh heavily in procurement decisions” and often to their disadvantage as they are considered to “carry inherent security risks.”
USCBC is also concerned with reports of China’s nonpublic plans to replace foreign products with domestic alternatives in sectors related to national security, including aerospace, health care and energy. Another challenge is security requirements for ICT products, which are often not clear.
The report pointed out that USCBC members in the health care sector are encountering discrimination against imported products. For example, a growing number of cities and provinces, including Beijing, Shanghai, Zhejiang, Guangdong and Sichuan, urge hospitals to purchase Chinese-made medical equipment.
According to USCBC, China’s GPL generally does not apply to the procurement of pharmaceuticals and high-value medical consumables. Instead, these goods are subject to China’s Primary Healthcare and Health Promotion Law and regulations issued by the National Healthcare Security Administration. The report details China’s pursuit of “an aggressive strategy of price cuts for these goods through centralized and provincial volume-based procurement (VBP) schemes.”
USCBC also reported that some large SOEs employ “unconventional payment methods.” They insist that, as a condition for doing business with them, foreign firms “accept commercial bonds as partial payment” for the SOE’s purchases. In some cases, firms do not receive full payment until the bonds reach maturity.
GPA Prospects: In considering the prospects for improvements in China’s procurement environment, the business group cites three factors. They are: “whether China joins the GPA with meaningful concessions, how China pursues a strategy of technological self-sufficiency, and whether US-China relations improve.” USCBC is not hopeful that China’s accession to the GPA will succeed. It suggests that China may be reluctant to make the concessions sought by the GPA parties (such as greater access to SOE procurement and equal treatment for foreign firms) because that “could disrupt” its domestic priorities of using government procurement to support innovation and technological self-sufficiency.
The USCBC report outlines strategies employed by foreign firms to avoid exclusion or discrimination during government procurement. They include forming joint ventures in which the local Chinese partner is the majority owner, merging with local firms and developing a “strong local presence,” including manufacturing locally.
Jean Heilman Grier
September 9, 2021