By Matthew Dalton
PARIS -- For decades, France's Valdunes SAS charged premium
prices for the wheels it made for high-speed trains and other rail
systems around the world. That strategy changed after a Chinese
state-owned industrial conglomerate bought the company in 2014.
The new owner, Maanshan Iron & Steel Co., or MA Steel,
slashed prices in a bid to dominate the market.
"We were told that we shouldn't miss a single order. That was
explicit," recalled Jérôme Duchange, Valdunes's former top
executive in France. "They have an appetite for economic
The French firm was now in the service of the steel company's
larger strategic goals -- to give its it the know-how to make
wheels for high-speed trains in Chinese factories, and to gain
access to Europe's highly-regulated rail sector and other markets
world-wide. For that, Valdunes received low-cost credit from
Chinese government banks and EUR150 million from MA Steel to stay
Over the past decade, China has provided billions of dollars of
subsidies to state-owned companies to acquire Western manufacturing
rivals and to build factories beyond its own borders. Now, these
overseas factories are roiling global markets with low-price goods
in sectors ranging from automotive tires and rail equipment to
fiberglass and steel.
"Chinese companies are expanding. They are investing
everywhere," said Luisa Santos, deputy director of BusinessEurope,
the region's main business association. "This means that the flaws
we see in the Chinese market are now being exported to other
The European Union this week proposed legislation to rein in
companies in Europe that are subsidized by foreign governments, one
of a series of measures that aim to counter the global expansion of
Zhang Ming, the Chinese ambassador to the 27-nation bloc, has
said Europe's stance has worried Chinese investors in the region
and undermined the EU's historical openness to foreign investment.
"We often see the EU as our professor for building our market
economy," Mr. Zhang said. "So we don't want to see our professor
and our partner have any hesitation when it comes to these
The U.S. and nations in Europe and elsewhere also subsidize
their own industries, often through tax breaks, export financing
and research-and-development funding. What makes China different is
the outsize role state-controlled companies play in its economy,
and its willingness to support their expansion abroad.
Daniel Gros, an economist at the Centre for European Policy
Studies, a think tank in Brussels, said those differences shouldn't
lead the EU to penalize China for investing abroad. "Sorry, we
cannot export our own model," he said. "And we have lots of other
subsidies. The footprint of our governments in our economies is
very, very large."
The U.S. and Europe have long relied on the World Trade
Organization and tariffs to penalize China for subsidizing exports
with grants, tax breaks and credit from state-owned banks, measures
that helped the country grow rapidly. But the WTO rules weren't
written to constrain subsidies that a government gives to its
The result: Chinese-owned factories outside of China usually
face lower tariffs than those imposed on factories inside the
country -- or escape them altogether.
Western officials and executives say financial support from the
Chinese government allows Chinese-owned manufacturers overseas to
operate on razor-thin margins or at a loss, while they grab market
share or serve the strategic objectives of the government. The
problem, they say, is particularly difficult to address when the
manufacturer in question is operating inside a Western market.
"China may never care about a profit because it's a nonmarket
economy," said Michael Wessel, a member of the U.S.-China Economic
and Security Review Commission, which advises Congress on China
policy. "We have to assess whether as a market economy we view that
The commission is recommending Congress give the Federal Trade
Commission the authority to block acquisitions by foreign companies
that receive government subsidies, particularly if those funds are
used to execute the transaction. It also says U.S. authorities
should have the power to screen plans by Chinese-owned companies to
build factories in the U.S. for potential threats to national and
The EU's proposed legislation would allow the European
Commission, the bloc's executive arm, to stop acquisitions by
companies subsidized by a foreign government or impose restrictions
on them to stop distortions of the European market.
EU rules restrict how much aid member states can give the
private sector. The bloc's officials say the subsidies legislation
aims to level the playing field: Chinese companies in Europe
wouldn't be allowed to benefit from Chinese government subsidies
when European companies are forbidden similar support from their
China says the West's criticism of its practices amounts to an
attempt to stifle its economic development. "Major Western
countries formulate most of the rules of world trade," Hua
Chunying, spokeswoman of China's foreign ministry, said last month.
"It is their customary practice to maintain their hegemony."
To maintain access to the European market, the Chinese
government is offering to remove restrictions on investment by
European companies in China's domestic economy, part of a
preliminary investment deal struck with the EU in December. The EU
says it is moving forward with the foreign-subsidies legislation
regardless of the investment agreement.
The U.S. in January imposed antidumping tariffs on tires from
Thailand, South Korea and Vietnam after Chinese companies set up
production in those countries to escape Western tariffs on tires
imported from China. The Chinese investments helped transform
Thailand into the world's biggest exporter of tires. Chinese
companies also are building tire factories in Algeria, Serbia and
elsewhere to export to the West without antidumping tariffs.
The EU last year levied tariffs against Chinese glass fiber
manufacturers that built factories in a Chinese-run industrial zone
in Egypt. EU investigators found that the Chinese companies in
Egypt had received hundreds of millions of dollars in loans and
funds transfers that were either provided directly by China's
state-controlled banks or funneled through the Egyptian
subsidiaries' parent companies in China. The Chinese companies are
challenging the tariffs at the European Court of Justice.
In February, the EU opened a probe into Chinese government
subsidies for building one of the world's largest stainless-steel
smelters in a special zone in Indonesia.
China Railway Rolling Stock Corp., or CRRC, a state-controlled
rail giant, has built two factories in the U.S. The investments
helped CRRC win over local politicians and satisfy rules that
require a minimum percentage of goods purchased by public-transit
agencies to be made in the U.S. CRRC underpriced the nearest
competitors by as much as 20%, securing contracts with Boston,
Chicago, Los Angeles and Philadelphia, according to U.S. government
In 2019, Congress passed a law that forbids using federal
transportation funds to purchase passenger railcars and buses made
by Chinese-owned firms. But CRRC won a grace period that allows the
company to receive funds for new contracts for two years, thanks to
allies in Congress such as Rep. Richard Neal, chairman of the House
Ways and Means Committee, whose Massachusetts district is home to
one of CRRC's U.S. factories. Rep. Neal said he wants to extend the
grace period indefinitely.
Marina Popovic, general counsel of the CRRC subsidiary that is
building the cars for Chicago, said the company is determined to
stay in the U.S. passenger rail market.
When MA Steel bought Valdunes for just EUR13 million, the French
company was in financial trouble. MA Steel saw the acquisition as a
way to expand its overseas sales channels -- Valdunes's brand is
well-known in the industry -- and to acquire know-how to make
precision wheels for high-speed trains.
The company, renamed MG-Valdunes, got support from state-owned
banks such as the Bank of China and China Construction Bank,
according to corporate documents, receiving credit at interest
rates of 1% to 2%.
After observing Valdunes for a year, MA Steel told the company's
French executives to ensure that its order book was filled,
regardless of the price and the cost of production, former
That strategy caused losses to balloon, they said. Mr. Duchange,
the former CEO, said MA Steel officials told him Valdunes could
raise prices again after taking market share. Mr. Duchange recalled
that one MA Steel executive explained the strategy with a Chinese
saying: "There is no such thing as barren land, only farmers who
don't work enough."
Valdunes and MA Steel didn't respond to requests for
Valdunes began to export low-price wheels to Australia for
mining operations. The surge of imports from both Valdunes and MA
Steel's plants in China led Australia to impose antidumping tariffs
against the two companies.
The same year, as losses mounted, MA Steel's board approved
another EUR70 million in capital for the French company. "Valdunes
is a bridge for the company to further penetrate into Europe and
other overseas markets," MA Steel said at the time.
MA Steel has used Valdunes to navigate the procurement rules of
big European wheel purchasers such as Deutsche Bahn, Germany's
state rail company. Chinese rail-wheel exports to the EU have
nearly quadrupled since Valdunes was purchased by MA Steel.
MA Steel sent Valdunes engineers to help its factories in China
make wheels for high-speed trains. Those wheels require far more
precise engineering than the ones MA Steel already makes for
freight trains. China's vast high-speed train network still uses
wheels made in partnerships with European manufacturers.
Deutsche Bahn is now testing high-speed-train wheels made by MA
Steel in China. MA Steel has increasingly used Valdunes to finish
and package wheels for customers in Europe and elsewhere that were
made in China.
"The fear was that, little by little, we wouldn't produce in
France anymore," said Mr. Duchange, who left Valdunes in 2019. "But
for certain products, we couldn't resist."
Toward the end of 2019, MA Steel was absorbed into China Baowu,
the country's largest steel company, which is owned by the central
government. Under the new ownership, MA Steel said its rail
business is continuing the strategy of global expansion using
"The Biden administration shows great interest in the
development of rail transportation," said MA Steel chairman Ding Yi
when discussing the company's results in March, "which provides us
with a great opportunity."
Write to Matthew Dalton at Matthew.Dalton@wsj.com
(END) Dow Jones Newswires
May 06, 2021 11:30 ET (15:30 GMT)
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