EU, China ready to settle on vendor dispute

The EU and China appear to be close to a deal to settle their dispute over state support for Huawei and ZTE.

Reuters, the Financial Times and the Wall Street Journal are carrying reports that agree on the outline of a deal expected to be sealed before trade commissioner Karel De Gucht steps down on October 31.

According to the Journal, the two parties will set up a body to “review the market-share of Chinese equipment manufacturers in the EU and European companies – Ericsson, Nokia and Alcatel-Lucent – in China.” It adds:

China has also committed to further discussions on the hefty loans and loan guarantees that the government gives to Huawei and ZTE to finance their exports, mostly to the developing world, the official said. That represents a modest victory for the EU in an area that is highly sensitive for the Chinese government.

An attempt by De Gucht to launch an anti-dumping probe into subsidies last year was scuppered after opposition from EU member governments.

The Chinese government seemed to respond indirectly to the concerns through a China Mobile 4G tender last year in which the three European companies each won exactly 11% of the total – several points higher than the market share of the Chinese firms in Europe. Yet the apparent stage-managing of those contracts - the two big Chinese firms won 26% each - also reinforced concerns about fair access to the China market.

Reuters reports that a successful telecoms agreement could pave the way for a wider free-trade accord between Europe and China in the future.

It also provides some revealing background into De Gucht's case agains the Chinese firms:  

According to an EU document seen by Reuters, the Commission says Huawei's swift rise in the European telecoms equipment market -- from a 2.5% market share in 2006 to a 25% share today -- could only have been achieved with state aid that global trade rules say are illegal.

The document said Huawei and ZTE have prices that are 18% below those of EU producers, hurting the profitability of European manufacturers.

The book China's Superbank, on the China Development Bank, reveals that its backing for Huawei began after a meeting between CDB chief Chen Yuan and Huawei’s Ren Zhengfei in 2004. CDB shortly after signed for a $10 billion credit line to aid Huawei win contracts abroad - the first of many such deal to help Chinese comapnies "go global." It increased the credit line to $30 billion in 2009.

Hard data on the impact of this hefty financing is rare, but the book reports a deal in 2010 with Brazil telco Tele Nort Lese Participacoes in which Huawei offered financing at 4%, two percentage points lower than the local commercial rate.