Qatar, June 2017

“It is very bad,” Nahib sighed. Cupping his hands around his chin, the Yemeni shopkeeper continued nervously, “the tension between Qatar and Saudi Arabia is getting worse and worse. There is too much religious tension in the world. How does the dispute get resolved? I have no idea. I am not sure it can be.”

I was interviewing businessmen in Souq Waqif, Doha’s main outdoor trading bazaar, when I met Nahib. Normally, traders overwhelm the bustling souk (marketplace), buying and selling spices, falcons, and various foodstuffs, Nahib told me. During Ramadan, Muslims living in Qatar often flock to Souq Waqif to enjoy a festive Iftar, the meal ending their daytime fast. Usually abuzz with celebration, restaurants and outdoor cafes lining the bazaar serve feasting families as friends smoke apple and other-flavored shisha from large hookahs.

But there was little to celebrate that night. The souk’s winding pathways sat shrunken, relatively void of people. Just two weeks earlier, Saudi Arabia, Egypt, Bahrain, and the United Arab Emirates had cut diplomatic ties with Qatar—home to the world’s highest per capita GDP given the Persian Gulf state’s large natural gas reserves. In addition to launching a land and air blockade on Qatar, the Saudi Arabian-led coalition expelled Qatari citizens from their own countries, splitting apart families. Qatar’s stock market and currency plunged as investors fled.

Nahib was one of many who were nervous. Earlier that week, there had been a run on supermarkets as fretful Qataris hoarded supplies. While Turkey and Iran increased food shipments several days later, anxieties were only momentarily calmed. One manager of an American luxury chain hotel told me they were “sharing eggs and other food products” with sister properties in case they ran out. But with so many vacant hotel rooms, this was unlikely to happen. Disquieted, the manager explained that they were running on less than 10 percent occupancy, and even those remaining guests were mostly long-term residents. Their business decimated, the hotel had shut down one of its two towers altogether.

Complicating political dynamics, U.S. President Donald Trump has appeared to confuse America’s position on the matter. Causing alarm on Twitter, President Trump swiftly indicated his support of the Saudi Arabian-led coalition, despite the fact that Qatar houses America’s largest military base in the region—stationed with 11,000 military personnel. Fearful of the President’s unpredictability, many worried the U.S. might become a destabilizing force rather than a mediator in the conflict.i

Choosing Saudi Arabia as the destination of his first official visit overseas, Trump showed a bold divergence from predecessors who took less controversial routes to Mexico or Canada. Bewildered, governments in the region and throughout the world questioned whether President Trump would upend normal alliances or preserve long-term partnerships in the region. While Trump intends to keep enemies on their toes and forge better deals for the U.S., his tactics often confuse allies abroad. Alienated by the President’s unsteady maneuvers, former American allies may feel forced to seek out and shore up new relationships, as happened in Asia as nations have gravitated toward China.

At times impetuously careless and at others tactical, President Trump’s variable foreign policy moves have left traditional Middle Eastern allies unsure if they can rely on the U.S. As a result, many have looked to build stronger regional coalitions of power, as did those opposing Qatar. Having just established its first overseas military base in Djibouti, China has also caught the attention of Middle Eastern players. Several now seek expanded trade and military links with the eastern superpower.

About a week after Qatar was hit with the Saudis’ blockade, I arrived in an empty airport. Maybe four people stood in the immigration line. Outside, taxi drivers dozed at exits, waiting for clients who would never arrive. On our way into the city, my taxi driver, originally from Nepal, bemoaned the country’s losses. “Ever since the blockade, there has been no business. I wait for hours without a customer.” When I left Qatar a week later, outbound queues stretched farther than I have ever witnessed in an airport. It felt as if Qatar’s two million expatriates were all escaping to safer climes—an orderly yet nervous evacuation like that of Saigon at the end of the U.S. presence in Vietnam. No one knew what would happen next, and no one wanted to be in the country lest Kuwait fail in its diplomatic initiatives to mediate the situation.

“The Sunni and Shiite problem is getting worse. How does anyone solve this?” Nahib continued. Arriving in Qatar nearly seven years ago, Nahib had come to make his fortunes as a shopkeeper, while his wife continued to work in the UAE (United Arab Emirates). Though Nahib had previously lived in Saudi Arabia, it was only in Qatar that he earned enough money to send his children to study in the UK. But now he was apprehensive about the future. What if Qatar’s moneymaking party was over? Few other countries in the Middle East offered him the same opportunities for wealth. “We have no idea what will happen. It is just like North and South Korea. Unsolvable. I don’t know if I should stay here or go elsewhere.”

While offering no proof of its accusation, the Saudi-led coalition had enacted its blockade citing Qatar’s sponsorship of terrorism. In a tense departure from President Trump’s position, U.S. Secretary of State Rex Tillerson demanded evidence of Saudi Arabia’s indictment and a peaceful end to hostilities. The Saudi response was silence.

A few days after I met Nahib, Saudi Arabia and its allies presented Qatar with a 13-point ultimatum—Qatar’s only way out of the stranglehold. In immediate objection, Qatar called the demands unreasonable, if not impossible, protesting that they interfered with its national sovereignty and internal affairs. Among its demands, the Saudi-led coalition required Qatar to sever its alleged ties with the Muslim Brotherhood; end diplomatic relations with Iran; block Turkey’s use of Qatari soil for its military base; and shut down its Al-Jazeera television network, which had often criticized and embarrassed leaders of neighboring kingdoms.

But the true underlying cause of tension is Qatar’s closeness to Iran. A mostly Shiite nation, Iran has long been at odds with Saudi Arabia, the predominantly Sunni state. Each vying for dominance in the region, the two similarly sized nations have drawn satellite states into the conflict, seeking support on their respective sides of the schism. A clash rooted in history, Saudi Arabia and Iran’s divide—and more principally, the Sunni-Shiite divide—seems intractable to bridge.

Until recently, most American political analysts have lumped the Islamic World into one collective category (see Harvard Professor Samuel P. Huntington’s Clash of the Civilizations, 2011). In reality, however, dynamics of the region are far more nuanced.

A whole series of books can and should be written to explain the Sunni-Shiite divide, and the further subdivisions between other brands of Islam—such as that which distinguishes Salafi Islam12 (which prevails in Qatar and Saudi Arabia) from Shaykhist Islam (predominantly in Iraq). A pit of writhing anger and evershifting alliances result from the clash for religious and political dominance. Yet the issue is no longer a regional one. Given growing fears of radical Islamic terrorism and global reliance on Middle Eastern oil, clashes in the region have begun to affect the rest of the world.

Thwarting any attempts at negotiation or peacekeeping in the region, the Sunni-Shia divide prevails above all other issues in the Middle East. And any reconciliation seems far from imminent. Nearly every person I interviewed in Qatar, from Yemenis to Jordanians to Egyptians, felt the blockade was just Saudi Arabia’s first move in an attack against Iran, a Sunni-Shia power play far from letting up. Any real resolution was out of sight; the anger was simply too deep-rooted.

***

Outside the regional power struggle, another question with global repercussions concerns the U.S. and China: What roles will these two superpowers play in negotiating a resolution? And will their respective strategies undermine or bolster their global influence?

Under President Trump, America has seesawed in its position on the dispute, causing great upset in its allies who perceive a lack of support. Directly after the blockade’s enactment on June 5th, President Trump tweeted his support of the Saudi coalition. But only a week later, America sold $12 billion USD in F-15 fighter jets to Qatar. On top of this, U.S. Secretary of State Tillerson firmly cautioned Saudi Arabia, demanding an end to hostilities. Were military conflict to erupt, it is uncertain whose side America would take.

Unlike America, which has made public its oscillating position, China has yet to declare a stance in the dispute. Keeping relatively silent on the issue, Beijing seems to be upholding its practice of non-interference—staying out of other countries’ affairs and merely voicing its hope for a peaceful end to hostilities (much as it has done with regard to the Korean Peninsula). Developed under Deng Xiaoping and Marshal Ye Jianying in the late 1970s and early 1980s, China’s strategy of non-interference reflects the country’s own opposition to foreign meddling. Even today, China is wary of other nations seeking to intervene in issues of national sovereignty, particularly when dealing with Taiwan, Tibet, Xinjiang, and Hong Kong. So, in return for states’ recognition of the PRC—acknowledging the one-China principle and isolating Taiwan—China will leave them well enough alone. Veering markedly from the standard Communist ideology of expansion as observed under the Soviet Union’s Joseph Stalin (1922–1952), China consistently elects not to interfere in other nations’ internal politics, regardless of their political systems.

However, non-interference gets complicated in the Middle East. Aiming to implement its One Belt One Road initiative throughout the region, China will face great difficulty if it insists on remaining neutral between two critically important coalitions. While China has expressed interest in helping mediate the conflict, the government may need to stake out a more radical position for regional players to take the nation seriously. Without a consistent stance and demonstrated support from the Chinese, Middle Eastern nations will find it difficult to trust China sufficiently to shift toward its camp of global hegemony.

In order to assess China’s chances, we must first examine Chinese relations in the Middle East. Iran—Qatar’s main ally, and arguably a crux of the dispute— has been a Hot Partner to China for several years, as both have sought to counterbalance American might. Somewhat similar to China’s relationship with Russia, the two nations have found union more in fear of the U.S. than in any mutual linguistic, cultural, or ideological affinity.

Saudi Arabia and its coalition partners, on the other hand, have fluctuated between China’s Warm and Cold categories, depending upon their closeness to the United States. During both Bush presidencies, Saudi Arabia shared close ties with America and had a cooler relationship with China. Brought together by the hunt for Al Qaeda, Saudi-U.S. relations were particularly close in the years following 9/11. But the relationship soon grew tense during Obama’s years in office, when the administration sought closer ties to Iran and increased criticism of the Saudi kingdom. Accused of fomenting anti-American sentiment, Saudi Arabia was also associated with acts of terrorism against the U.S.— after all, fifteen of the nineteen 9/11 hijackers came from the oil kingdom, also home to Osama bin Laden. As a result of the widening gap between the two nations, Saudi Arabia sought to counterbalance American influence, thereby forging strong trade relations with China. By 2016, Saudi Arabia became China’s largest trading partner in the Middle East. Sino-Saudi trade grew from $1.28 billion USD under President Bush, Sr. to over $60 billion USD by Obama’s final year in office—a 47-fold increase.

More recently, President Xi has further accelerated trade with Saudi Arabia, moving it firmly into China’s Warm Partner category. On March 16, 2017, Saudi Arabia’s King Salman, on a visit to Beijing, signed an MoU (memorandum of understanding) for $65 billion USD of potential deals with President Xi. One of fourteen Sino-Saudi agreements, the deal included a significant partnership between giant state oil firm Saudi Aramco and China North Industries Group Corporation (Norinco), enabling projects to build chemical and refining plants in China.ii

While neither Qatar nor Saudi’s coalition members have been Hot Partners to China, both camps are critical to President Xi’s construction of a new silk road. Locked in obstructive divide, these nations have the potential to make or break China’s One Belt One Road (OBOR) initiative—a master plan for continued Chinese growth that may even surpass America’s Marshall Plan in scale and scope.iii

***

Aiming to attract one trillion USD in investment, OBOR primarily engages in mass infrastructure projects abroad. By establishing foreign dependence on China’s wallet, OBOR seeks to spread Chinese influence from nearby Indonesia in Southeast Asia, to African nations like Ethiopia, and even deep into the heart of Europe. Already, OBOR projects in Pakistan have reached a $55 billion USD price tag. With a $2.5 billion USD power plant underway in Myanmar, China has announced further plans to build gas pipelines across all of Central Asia, not to mention a 3,000-kilometer train system linking China to Singapore. Thailand agreed to a $5.5 billion USD railroad project that will connect China to Thailand via Laos.

As China’s economic growth rate decelerates, the nation faces a slowing domestic economy and overcapacity in key areas, such as construction equipment, cement, and steel making. By deploying its wallet to fund and construct infrastructure projects abroad, China will provide domestic businesses with vast new markets for trading. Focusing on 65 countries considered to benefit most from OBOR, this carrot approach will gain favor from nations most in need of Chinese investment. Furthermore, in a world increasingly troubled by President Trump’s long-term foreign policy plans, more countries have been looking to OBOR for economic growth, thus the initiative by China is continuing to counter-balance American hegemony by creating long-term steady partnerships.

In terms of China’s political benefit, OBOR is a route to power. By gaining influence abroad, China will have an upper hand in international affairs, shepherding more and more countries into its Hot and Warm Partner categories. Typically, both the builder and lead financier of its projects abroad, China plans to drive tremendous economic growth in the regions it targets. In a rapid rise to the top, China has already become the world’s largest trading partner for many nations. For a handful of others, it comes in second only to the U.S. or the E.U. For President Xi, OBOR may solidify China’s place at the top. Offering an unbeatable deal, the initiative shows promise in increasing countries’ dependency on China’s wallet for economic growth. And for countries susceptible to the West’s moral critiques, China layers icing on the cake. Promising a policy of non-interference, China serves as an excellent alternative to the West for non-democratic nations, especially those run by strong-arm dictators or hereditary rulers. Deterred by America’s almost missionary-like zeal to spread democracy, many Asian and African leaders welcome OBOR with open arms—a deal with ostensibly few strings attached.

The Middle East is a vital gatekeeper to OBOR’s success. But the question remains: Can China implement OBOR successfully in the Middle East with all the internal divides and competing demands for its political patronage or support?

In practical terms, the threat of military confrontation and chaos in the region will pose tremendous hindrances to China’s long-term, billion-dollar projects. Opportunities for investment may also face insurmountable challenges if conflict continues to spiral out of control. With nations focusing on re-armament and defensive maneuvers, private investors would inevitably seek safer economic environments, leaving the region a poor choice for China’s businesses. Most importantly, however, China runs the risk of alienating both sides of the Middle Eastern schism if it continues to stand in the middle. Feeling insufficiently supported by China, each side may grow to reject the nation’s presence, a dooming prospect for OBOR.

At the same time, taking a definitive stand flies in the face of China’s very diplomacy. In a January 2016 speech to the Arab League in Cairo, President Xi expressed, “Instead of looking for a proxy in the Middle East, we promote peace talks; instead of seeking any sphere of influence, we call on all parties to join the circle of friends for the Belt and Road Initiative; instead of attempting to fill the ‘vacuum,’ we build a cooperative partnership network for win-win outcomes.”iv

But China must consider its limitations when attempting to remain neutral. Most mediating nations—such as Kuwait in the current Qatar imbroglio and Belgium or Thailand during World War II—tend to be smaller states. Without a sizeable economy or military might, these nations are effective precisely because they don’t threaten major players in a dispute. Using their unimposing nature to disarm countries, they are much more readily embraced as mediators in conflict.

In contrast, China simply cannot play the little guy. While it might like to stay out of the fight—enjoying warm relations with both sides—its sheer size and global ambitions prevent it from claiming a status like that of Belgium or Thailand. With its imposing economic might, China seems threatening by nature, especially as it attempts to implement an initiative with massive global ramifications. In a region where divides permeate everything from interpersonal dynamics to economic trade, China might be forced to take sides even if it does not want to because its might and size are big enough to threaten any of the powers in the region, and the divides in the Middle East are so great that any significantly cooperating nation must take a side.

***

China’s insistence on neutrality in the Middle East is not without reason. In order for OBOR to succeed in the Gulf and beyond, warm ties throughout the region are essential. Even if countries are not in the Hot Partner category, China must keep them in the Warm Partner category because any countries in the Cold Partner category have the potential to become too disruptive.

In order to predict China’s moves in the region—and the lengths to which China will go for support—we must first understand OBOR, both through the lens of history and that of China’s future. Comprehending the reasons for which China has launched such a massive initiative is vital for companies to flourish when seeking profit from China’s growth.

First, let’s review some history. It is important to understand that, in many ways, China has become a superpower more by circumstance than by intention. A mere result of its size, China’s explosive economic growth was largely inevitable in the aftermath of Deng Xiaoping’s and Marshal Ye Jianying’s sweeping political and economic reforms in the late 1970s and 1980s. In combination with its economic superpower status, China’s growth as a political superpower was also largely driven by external factors. Under frequent American condemnation of its political system, China felt largely estranged from the U.S.-led system. Other countries like Vietnam and India have also felt isolated and never cozied up to America. Underpinned by vastly distinct ideological and cultural foundations, modern China felt compelled to develop institutions and initiatives that counterbalance America.

By the time President Hu Jintao assumed power in 2003, China was clearly becoming the world’s second superpower. Yet even when China started to rival the United States for supremacy, many protested it was still a relatively poor country, tormented by centuries of disorder and abject poverty. Having experienced dramatic growth as a result of its large size and economic potential, China was not strategically pursuing a rivalry with the U.S., much less global dominance.

Quite the contrary, Hu’s administration seemed to frequently dissuade other nations from the notion that China was a superpower. In reality, many political leaders, such as Zhou Yongkang,13 seemed more intent on enriching themselves—often through corruption and graft—than in building a strong Chinese state. Having neglected their duty to the nation, numerous political officials under Hu were later arrested for corruption. Among them were several former Vice Chairmen of the powerful Central Military Commission, such as Xu Caihou and Guo Boxiong. Intent on personal gains, Xu and Guo had allowed the People’s Liberation Army to fall into disarray.

In a 2010 issue of Forbes, I therefore argued that China was like a teenage boy. It had matured quickly and was therefore viewed by others as an adult. Yet its projection of superpower status to nations abroad saw little resemblance to its self-perception back home. Few within China’s borders understood that others saw it as a superpower; internally, the Chinese considered themselves a developing nation. Even as late as 2012, Prime Minister Wen Jiabao used “developing” and “poor” to describe China’s national condition. In adopting these claims, China therefore never had to foot the bill for global initiatives, such as safeguarding shipping routes from pirates or aiding in humanitarian missions. Instead, it let American-led coalitions take on the debt, shouldering both military and political risks. Lacking awareness of its perception abroad, the Chinese were largely oblivious that even small indicators of growth could be seen as a threat to neighbors.v

By 2013, however, there was no doubt of China’s emergence as an economic superpower. China could no longer fly under the radar. While America sluggishly recovered from its Great Recession of 2008, an unfazed China continued to confound experts with 8 to 10 percent growth rates. Companies from Apple to Starbucks found that Chinese consumer wallets powered their largest or second largest markets globally.

In just a few years, China shifted from an economy dependent on exports, heavy investment, and low-end manufacturing to one powered by innovation, services, and consumption. This critical shift is further explored in my previous books, The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World (2012) and The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia (2014).vi

By President Xi’s ascension to power in 2013, China had become the European Union’s second largest trading partner with $567.2 billion USD of trade, as reported by the Central Intelligence Agency Fact Book. For its neighbors in Asia, China became the giant in the room, accounting for 63 percent of Myanmar’s trade and about 34.2 percent of Laos’ trade. Even farther afield, China struck trade deals with Australia (33.7 percent), Yemen (28.3 percent), Zimbabwe (27.8 percent), the U.S. (19.9 percent), and even in Peru (21 percent). Quite simply, whether or not China had pursued the title of a superpower, by the early-to-mid 2010s, it had essentially become one.

But China’s unintentional rise became purposeful in 2013. Superseding his predecessors in global ambition, President Xi is also more secure in his position at the helm than any Chinese political leader since Mao Zedong. Assuming office at the end of 2012, President Xi has set China on a path of greater economic, political, and military dominance. From a well-connected family, President Xi has set out to strengthen China’s Communist Party and the country as a whole, crafting a place for himself and his family in China’s pantheon of great families. In contrast to past Chinese political leaders who sought personal gain, such as Zhou Yongkang and Xu Caihou, President Xi is much more interested in building a legacy and fortifying China on the world stage.vii

While demanding more say in global institutions like the World Bank and the International Monetary Fund (IMF), President Xi has also created new institutions like the Asian Infrastructure Investment Bank (AIIB), installing a mainlander, Jin Liqun, as its first president. Opened in January of 2016, AIIB has grown to 52 member states—about a third as many as the U.S.-headquartered World Bank—each with $100 billion USD in capital.

While not necessarily attempting to upend the current world order, President Xi has clearly pursued a more equal position for China given the size of its national wallet. In an arena where institutions are still controlled by predominantly racially white leadership, Xi has also attempted to shed the dominance of colonial powers. In conjunction with this goal, China’s government has made deliberate attempts to elevate Chinese heritage among its own people. In a statement by Chinese Prime Minister Li Keqiang, he underscored the importance of zhonghua minzu (that Chinese nationality transcends ethnic boundaries): “The Chinese race is a big family and feelings and love for the motherland, passion for the homeland, are infused in the blood of every single person with Chinese ancestry.” In a response by Jamil Anderlini, the Financial Times’ Editor in Chief for Asia highlighted China’s emphasis on its race, claiming that the government “very deliberately and specifically incorporates anyone with Chinese blood anywhere in the world.”

But President Xi’s carefully laid plans to seize power slowly were soon upended on November 8, 2016, when Americans voted in Donald J. Trump as the country’s next president. The businessman-entertainer turned politician holds extremely different views from his predecessors. Adopting a more isolationist approach, Trump prefers to make business deals with other nations than to criticize them ideologically for not adopting an American way of life.

Criticizing everything from America’s free trade agreements to the member nations of various IGOs (intergovernmental organizations), President Trump has made waves in the carefully tread waters of international diplomacy. Aside from leaving a vacuum of power in Asia as a result of U.S. withdrawal from the TPP (Trans-Pacific Partnership), Trump has also unsettled European nations in his criticism of NATO (North Atlantic Treaty Organization), questioning its value and claiming that Germany and others should shoulder more financial responsibility. For nations that have long relied on the U.S. for financial and ideological support, President Trump has generated both apprehension and distrust.

Seizing opportunity, President Xi has swiftly moved to occupy the global power vacuum left in Trump’s wake, accelerating China’s shift to superpower dominance. Moving swiftly, in 2017, President Xi hosted China’s OBOR Summit in May, President Xi welcomed 29 heads of state and numerous senior officials from friendly nations, promising $1 trillion USD in investments. After President Trump signaled that he would withdraw America from the Paris Climate Accords, President Xi underscored his newfound global leadership position by stating China will adhere to the accords because climate change is real and hurts the world.

In an unexpected turn of events, business leaders throughout the world are now looking to President Xi as a standard bearer for globalization and environmental protection. However, this gradually rising trend still faces China’s obstructive protectionism, a force impeding the introduction of western brands to the Chinese market. Although China indeed drives growth for Hollywood and other American industries, many Western companies and commodities—from consumer brands like Buick; to internet and technology platforms, such as Facebook and Twitter; and even financial service firms like Citigroup—are hampered by protectionist policies. Nonetheless, with China’s wallet quickly securing a grip abroad, and a well-timed vacuum left behind by America’s increasing protectionism, China may very well have a clear path to power.

With Trump’s America First rhetoric, the world is looking for a new superpower to take the lead in world affairs. This is why countries became so much more welcoming to OBOR by mid 2017 than even at the end of 2016—they see China and OBOR as a driver for economic growth despite misgivings in some quarters for China’s newly found central political power.

***

The Middle East plays a crucial role in China’s successful implementation of OBOR. In recent history, most of the Islamic world has weathered delicate relations with the United States. In previous centuries, the Middle East has experienced drawn-out wars with Christian Europe, and is well acquainted with the continent’s colonialism. Yet Middle Eastern nations have relatively new relations with China.

Presented with a fresh slate, China has the remarkable opportunity to forge strong relations with the Middle East and Central Asia, a task it must execute smoothly to ensure OBOR’s success. As we have seen above, the conflict dividing Qatar and Saudi Arabia’s coalition—and perhaps more importantly, the Sunni-Shia divide—is an intransigent knot with far-reaching implications. In its pursuit of Warm Partners in the Middle East, China walks a thin tightrope. In order to secure OBOR’s success, China will need to develop novel strategies—either remaining neutral or offering calculated support, somehow helping everyone and alienating no one.

*****

Dialogue:
Shane Tedjarati, President and CEO, High Growth Regions, Honeywell

Shane Tedjarati is responsible for driving Honeywell’s business expansion in High Growth Regions of the world: Asia, Africa, Latin America, the Middle East, and Eastern Europe. Tedjarati is an avid aviator. He has lived in China for more than 20 years and speaks six languages. He has been instrumental in engineering Honeywell’s success story, starting in China and India, and expanding globally to the High Growth Regions of the world where today Honeywell derives the majority of its growth.

Tedjarati is a Henry Crown Fellow of Aspen Institute and also the co-founder of its Middle East Leadership Initiative and China Fellowship Program; special advisor to Chongqing and Wuhan Mayors; member of the advisory board of Antai College of Economics and Management Shanghai Jiao Tong University; and industry Co-Chair of China Leaders for Global Operations (CLGO), a dual master’s degree program by MIT and Shanghai Jiao Tong University.

As much as any American company, Honeywell is poised to benefit from OBOR, so I thought it would make sense to interview Shane to hear his thoughts on how Honeywell and other foreign companies can benefit from China’s rise.

Rein: What are the greatest challenges facing China’s One Belt One Road (OBOR)? Are they political? Financial? Logistical? How do you suggest the Chinese government go about resolving some of these obstacles? How should international businesses approach these challenges?

Tedjarati: Sporadic political instabilities along the Belt and Road countries or regions do impose high risk onto the OBOR implementation, however, this is not only pertinent to OBOR initiatives, rather, regional safety, political stability, and financial system stability, etc., have always been a major intelligent-risk-taking practice for international businesses.

Rein: Critics have argued that OBOR is a tool to protect Chinese industry and that only Chinese firms will benefit from OBOR. Do you agree, or do you see a way for foreign firms to profit from OBOR? If so, how and in what categories?

Tedjarati: The One Belt One Road initiative is a terrific opportunity for companies like Honeywell.

The initiative can help drive outcomes of both our “East for East” and “East to Rest” strategies and are creating growth for Honeywell throughout the region.

Honeywell continues to strive to be the better partner with other Chinese companies in order to fully embrace all of the OBOR opportunities in front of us. Honeywell has many partner companies and is aggressively working with them to better understand their needs and supply them with solutions that will help them best serve their customers.

Rein: What do you consider to be Honeywell’s greatest opportunities in China’s implementation of OBOR? In what sectors and what regions are these opportunities concentrated?

Tedjarati: The One Belt One Road initiative promises to raise the level of connectivity, cooperation, and trade between dozens of nations that have traded with China for thousands of years. Multi-national companies like Honeywell can bring a set of technology solutions to Chinese Engineering Procurement and Construction (EPC) companies, especially in the infrastructure and energy projects, which can help Honeywell create new opportunities in high growth regions such as Asia, Africa, and the Middle East.

Since 2008, Honeywell has been supporting leading Chinese enterprises to go out, especially in the industries of oil and gas, petroleum refining, chemical, power, and paper, which has prepared us well for the later Belt and Road initiative proposed by China in 2013. Till now, Honeywell Process Solutions and Honeywell UOP have participated in more than 20 overseas EPC projects located in Central and Southeast Asia, the Middle East, Africa. Compared with 2015, Honeywell Process Solutions achieved over 70% growth in term of EPC export business in 2016.

Rein: Are there any specific OBOR initiatives that Honeywell is currently benefitting from? Please explain.

Tedjarati: World Pensions Council experts stated that the Belt and Road initiative constitutes a natural international extension of the infrastructure-driven economic development framework that has sustained the rapid economic growth of China.

Honeywell’s “Follow the Growth” (FTG) campaign was developed to help Chinese companies become more global. As part of this campaign, we began working with Asia Trans Gas to provide automation and safety technology designed to help them manage their operations and establish safer working conditions along the third pipeline of the Central Asia-China Gas Pipeline project. The pipeline became operational in 2015. The same Honeywell technology is in use in the first two pipelines of the project, which are already in operation. Asia Trans Gas is a joint venture of China National Petroleum Corp. (CNPC) and Uzbekistan national holding company UzbekNefteGaz.

Rein: A key component of China’s statecraft is its non-interference approach to other countries’ internal affairs. Do you think China will be able to continue its non-interference strategy when seeking to implement OBOR in divided regions like the Middle East, where tensions have split Qatar and Saudi Arabia—both key partners for OBOR?

Tedjarati: The initiative calls for the integration of the region into a cohesive economic area through building infrastructure, increasing cultural exchanges, and broadening trade. We believe in the Chinese government’s consistent stance of non-interference of other sovereign countries’ internal affairs, while promoting cultural, economic and trade cooperation and exchanges.

Rein: How important is it for multinationals to build up trust and warm relations with China’s government in order to succeed? How has Honeywell established these ties so successfully? What should businesses keep in mind when seeking to build trust with the Chinese government?

Tedjarati: It is very important to build trust. Honeywell is committed to long-term growth in China and has invested more than $1 billion so far. There are now more than 13,000 employees located in more than 30 cities across the country. 99% of them are local Chinese and 1/5 of them scientists and engineers.

Honeywell identifies China-specific needs and meets them with locally-developed innovations. Becoming The Chinese Competitor is the key to transform how Honeywell does business in China. It combines our strong brand, international market access and global operational excellence with local competitor’s winning attributes—leading us to becoming the better operating global company in China with better product, better quality, better value, and faster speed.

Case Study: Re-shoring and Attracting Chinese FDI

Escaping the Shanghai heat on a sweltering July Day, I dined with an old friend Mr. Xu in an ornate restaurant overlooking the Bund. While he cleverly keeps an extremely low profile, strictly avoiding media interviews of any kind, Mr. Xu is a billionaire many times over. Having made his money in real estate and manufacturing of cheap yet decent quality products, Mr. Xu is responsible for a great number of household items that populate American homes, from toys to tires to electronics.

Seeking his input and expertise, I discussed with him the central themes of my earlier book The End of Cheap China, particularly concerned with the climbing costs facing Chinese businesses. “You were right,” Mr. Xu said. “Very prescient. We are getting hit by rising labor and real estate costs.” In an effort to cut losses, Mr. Xu’s business had pushed to automate production lines and improve worker efficiency, but only so much savings could be squeezed from such efforts. Automation in China grew 58 percent in 2016—certainly a helping hand to many Chinese manufacturers desperate to preserve profits. Yet companies that gained from China’s growing automation levels were primarily limited to those at the top of the value chain, such as producers of construction, medical, and aerospace equipment.

Faced with rising costs, Mr. Xu had to determine what course to plot if he wanted to maintain his company’s profits. He had looked into relocating or building new factories in Southeast Asia, deliberating over countries like Indonesia and Sri Lanka. Deterred by fears of rising protectionism in America, however, he justly worried about getting slapped with tariffs.

Mr. Xu ultimately made a drastic decision. “I am opening my first factory in South Carolina, to be followed by others across the United States.” Mr. Xu chuckled, “I made my money relocating our manufacturing operations from the U.S. to China. Now I guess we are going back.” Somewhat puzzled, I queried him concerning his rationale.

“Well, it certainly wouldn’t have made sense a decade ago, but there are multiple encouraging factors now. First, I’m getting big tax breaks from the South Carolina government. When we calculated the costs, we found it is actually about the same price to manufacture in the U.S. as it is in China now—once you factor in all the travel costs and such. Second, I want to be closer to my customers in America. With consumer demands changing so quickly and unpredictably, we must be able to get our products into the supply chain and consumers’ hands as fast as possible. By being located in South Carolina, we’ll cut delivery time by a critical margin. And lastly, we’re increasingly worried about rising anti-Chinese sentiment among Americans, not to mention protectionism in general. Having a factory in the U.S. will do a lot to help us garner favor with American politicians and their constituencies.”

Many countries are currently focused on maximizing investment gained from China’s government-led business efforts, and from OBOR specifically. But states and companies must be careful not to discount the broad array of profitable opportunities in attracting foreign investment from private factories. While China has little risk of losing its dominance as the world’s factory, the costs of domestic manufacturing are becoming unsustainably high. As a result, many of China’s private companies are looking to relocate or take operations abroad, building new manufacturing facilities in countries such as the U.S., attracted by tax breaks and proximity to the consumer.

The trend of Chinese companies moving manufacturing facilities to Africa, Southeast Asia, and even America will continue. China has gotten too expensive and companies are seeking out preferential tax treatment, and want to be closer to their end consumers and customers in Western markets. Moreover, many American companies will re-shore operations to America as costs get too high in China. American companies like K’Nex, a toy manufacturer; Trellis Earth Products, which makes plastic bags; and bra manufacturer Handful have all announced they will re-shore back to America from China because of soaring prices in China.

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