The China adventure continues
The cash cow of the German economy is hesitant, cautious, and adorned: As Bundeswirtschaftsminister Habeck's visit to China shows, China is becoming an increasingly difficult market and location. Yet, despite all the growing caution: Germany's economy is not considering turning its back on the country.
In China, there are many losses for foreign companies. From expensive knowledge advances about their own strategic autonomy to entire production sites. But entrepreneurs would not be entrepreneurs if they did not see opportunities in addition to risks: the world's largest single market with unfathomable numbers of well-educated labor forces, access to raw materials, and economic growth itself in difficult times. During Robert Habeck's China trip, it becomes clear: The enthusiasm of German companies for innovation, dynamism, and possibilities in China is unbroken.
However, the Bundeswirtschaftsminister has been warning them for years with his warnings and demands for more independence from China through diversification. Supply chains and sales should not rely solely on the country. Germany should not fall into the trap of one-sided dependencies again, as the German economy did with energy imports from Russia. In November 2022, Habeck told ntv.de: "Germany's economic dependence on China is too great."
Meanwhile, the Green politician is reassuring the companies: The German economy has "fully and completely understood" the necessity of diversification, said the Vice-Chancellor at the end of June before his departure for Southeast Asia. A dozen representatives of medium-sized companies traveled with him, following in the footsteps of Bundeskanzler Olaf Scholz, who took the heads of the large German conglomerates to China in April. They all came to earn more in China in the future - not less. The balance sheet of the past efforts to reduce dependencies is correspondingly mixed.
Huge trade volume, growing challenges
China has become simply too important for the German economy in the past decades. The connections are tight. According to the Bundesbank, German companies had invested 122 billion Euros directly in the country at the end of 2022. More than 5200 German companies were represented there according to the Chamber of Commerce in 2022. The trade volume amounted to around 254 billion Euros in 2023, with imports accounting for roughly 157 billion Euros, which was significantly higher than the total German exports. However, many of these import products are manufactured in factories run by German-Chinese joint ventures.
At the same time, many German companies complain about growing challenges in the China business. The "factors of uncertainty" have increased in the past ten years, says Sabine Stricker-Kellerer during Habeck's China visit in a conversation with ntv. The business consultant with decades of China experience lists, in addition to legal framework conditions, geopolitical developments, a greater influence of the Communist Party under President Xi Jinping, and problems with data security as aspects of an increasingly difficult market. Chinese companies have also become more competitive. The competition pressure is high.
Mostly, the disadvantage of foreign companies alongside subsidies for domestic competition dampens the mood. Rainer Birkenbach from medical technology manufacturer Brainlab and part of the Habeck delegation told ntv, the certification and standards for medical products in the Chinese market will "always be more difficult." Birkenbach demanded: "Certificates and norms should be internationally recognized, so that the approvals for European companies on the Chinese market are as simple as they are for Chinese firms on the European market."
The discrimination of European companies in the medical sector has already called the EU Commission into action: They are investigating whether the disadvantages are systematic. If the investigation confirms this, Brussels can impose countermeasures. The EU already does this with Chinese electric cars: Compensatory tariffs are intended to offset the competitive advantage of state-subsidized electric cars from China. During Habeck's trip to China, the topic was at the center of the talks. In the end, Beijing agreed to enter into concrete negotiations with the EU Commission. A trade war, the German minister emphasized at the end of his visit, is not yet averted.
In China, Habeck visited the headquarters of e-commerce giant Alibaba in Hangzhou as well as the university there. During the two-hour journey from Shanghai, Habeck's convoy passed countless construction sites. These were not only idle because it was Sunday: The many, far-reaching skyscraper skeletons testify impressively to the extent of the construction boom in China. Beijing is trying to drive growth and the domestic question through other sectors: The state is promoting future technologies in the field of renewable energies just as much as in the automotive industry, in medical technology, and artificial intelligence.
Complain but don't leave
Western companies are feeling the effects in two ways: In addition to the complicated market access, there is increasing competition from Chinese companies - both in China and in their home markets in Europe. In a survey of 150 German companies published in April by the German Chamber of Commerce, two-thirds of the respondents complained about "unfair competitive conditions." 80% expected a rising cost pressure and no less than 70% a declining market share.
In another survey by the Chamber of Commerce, 91% of the surveyed German companies stated that they still wanted to keep their China business. Every second company even plans to expand its investments, which most consider a logical consequence of increasing competitive pressure.
In Shanghai, Economic Minister Habeck was presented with this logic by Robert Kahlenberg, Vice President for Research and Development at BMW: China is the future market, he explained to the high-ranking guest. Whoever wants to be globally relevant in the future must be there. In more and more future technologies, China is leading. The Chinese market is taking the global competition of the future one step ahead. "A tariff-free trade is very important for BMW," Kahlenberg therefore told the minister on his way. The company produces in China for the European market and in Germany for the Chinese market.
German global players like BMW are also behind the record German direct investments of 11.9 billion Euros in 2023. These investments are reportedly from profits earned in China, according to Jürgen Matthes from the Institute of the German Economy (IW). The Rhodium Group reports that 34% of all European direct investments between 2018 and 2021 came from BMW, Volkswagen, Daimler, and BASF.
"Being big in China" is a given for these corporations, as they possess the capabilities and local partners to address new hurdles and increasing volatility.
On the other hand, there have been noticeable withdrawal movements from China in the past four years, writes economist Matthes. Wolfgang Niedermark, a member of the main board of the Federation of German Industries (BDI), who also traveled with Habeck, sees the German economy on a middle ground: "China is indeed a huge market for many industries, but it's not the only one," Niedermark told ntv. "Therefore, this gradual reduction of our market shares is a valid approach without abandoning China in any way."
China expert Stricker-Kellerer also reaches similar conclusions: "We're not talking about decoupling, but about risk reduction." Every company must constantly reassess its risks. "And the risks associated with China projects have come to the forefront because they are different from just market economic, business economic, or economic risks."
Habeck's appeal only partially resonates
During a conversation with traveling journalists, several members of the economic delegation reported a noticeably growing political pressure in China. However, people have grown accustomed to the increasingly comprehensive surveillance in their daily lives. For this reason, life in China's mega-cities is characterized by a high degree of safety and functionality. Concerns about supply and value chains collapsing suddenly in the event of an attack on Taiwan were not heard. Some even dismissed Habeck's warnings and appeals as paternalistic and overbearing. Taking risks is part of a business owner's daily bread, it was deemed appropriate.
Regarding the persistent China engagement of German companies, Habeck stated during a visit to the German supplier ZF's factory in Hangzhou: "That's not my impression. The companies that are here complain that the conditions have changed in the last ten years. They've become harsher." The call from the German government to spread risks and seek suppliers and sales markets in other countries and world regions has been heard. However, the economic data are not as clear-cut.
But the numbers are not that clear-cut. It depends very much on the sector and size of the companies. However, once a company has embedded itself in the Chinese market, it usually stays. China is still the biggest adventure that the world economy has to offer - the outcome uncertain.
- Despite Habeck's warnings about relying too heavily on China, German companies like BMW, represented by Robert Kahlenberg, view China as a crucial future market for staying globally relevant in various future technologies.
- The Federal Ministry of Economics has been advocating for diversification to reduce dependencies on China, as seen during Habeck's visit to Southeast Asia with a dozen representatives of medium-sized companies. However, the majority of these companies still want to maintain or expand their China business, recognizing the competitive pressures but not abandoning the market.
- According to economist Matthes, companies like BMW, Volkswagen, Daimler, and BASF are among the significant contributors to the record German direct investments in China, evidencing their commitment to the market despite potential challenges.
- During Habeck's visit to China, issues such as the investigation of systematic disadvantages for European companies in the medical sector by the EU Commission and the negotiation of compensatory tariffs for Chinese electric cars were discussed, addressing growing concerns about unfair competitive conditions and market access.
