German exporters rethink 100 billion euro ‘love affair’ with China

For more than 20 years, Oliver Betz has produced sensors for Chinese engine manufacturers from its base in Munich. But in recent months, Systec Automotive’s sales in China have collapsed, falling by three-quarters.

“Expansion in China is not a subject under consideration. It’s about how we can limit the damage,” said Betz, who added that 65% of his company’s exports last year were destined for the country. He attributes the drop to slowing growth, Beijing’s zero Covid strategy and a growing preference for buying local as Chinese manufacturers catch up with foreign brands.

Betz’s experience is increasingly common among German small and medium-sized businesses, which are seeing their relationships with their Chinese partners tested after years of increased sales.

German companies in the Mittelstand are increasingly realizing that they cannot rely on Chinese profits as they once did, according to Jörg Wuttke, chairman of the influential business lobby EU Chamber of Commerce in China. “It’s a lost love story,” Wuttke said.

The rift threatens to unravel what has become one of the world’s most mutually beneficial business relationships, in which German companies have thrived by selling Chinese exporters the machinery that has enabled the latter to become key players in supply chains. global supply.

Since the turn of the millennium, China has gone from just over 1% of German exports to 7.5% of foreign sales, which puts it in second place behind the United States. In 2021, more than 100 billion euros of German goods were sold there.

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Thorsten Benner, director of the Global Public Policy Institute in Berlin, described the ties as the main factor in the “golden age of the German economic model”, observed during the last stages of Angela Merkel’s 16-year reign in as chancellor, which ended last. year.

Alicia García-Herrero, senior economist at the Bruegel think tank, said the buoyancy of ties between the two exporting powers had been replaced by a sense of sinking in Berlin as exports plummeted. “Germany is losing its trade surplus and part of its competitiveness, partly because China has moved up the value ladder so quickly,” she said.

This comes at a sensitive time for the wider relations between the two countries. Russia’s large-scale invasion of Ukraine has fueled Beijing’s German critics, who argue that Germany’s economic ties trump foreign policy goals and lead to collaboration with potential geopolitical rivals .

Olaf Scholz, who will travel to Beijing next week for his first meeting with Chinese leaders as German chancellor, is expected to unveil his new China strategy next year. He is under pressure from his coalition partners, the Greens and the Liberal Democrats, to loosen ties.

Scholz courted controversy when he asked government departments to back an investment by Cosco, a state-owned Chinese shipping conglomerate, in a container terminal at the port of Hamburg. The deal was approved this week, although Cosco took a smaller-than-expected stake, which would limit its ability to influence decisions.

“China’s strategy will include clear messages about the need to reduce dependencies and diversify supply chains and trading partners,” Benner said.

Berlin has signaled that it will offer fewer guarantees to insure companies against political risks in China. Its due diligence law, which comes into force in January and makes big companies responsible for monitoring human rights abuses by their suppliers, could further deter German investment in China, which is increasingly focused on car manufacturers Volkswagen, BMW and Daimler, as well as on chemical products. giant BASF.

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Responses to atrocities in Xinjiang, China’s western border region where the government has interned more than a million Muslims, have already hit sales. Sportswear maker Adidas suffered a 15% drop in sales in Greater China for two consecutive quarters last year after a boycott of the company’s decision not to source cotton from the border region.

The war in Ukraine has drawn corporate attention to the risk of sanctions if China invades Taiwan. The decoupling between the United States and China has led many companies to already seek alternative suppliers. Just over a third of members surveyed by the German machinery association VDMA in 2021 said decoupling prompted them to rethink their business relationships.

Magnetec, a Hesse-based electrical component maker that has operated a factory in China for 13 years, backed out of building a second factory in the country due to the risk of sanctions. “When our customers order our products, they give as a precondition that they are not made in China,” said managing director Marc Nicolaudius. Instead, it will expand to Vietnam.

Noah Barkin, editor at consultancy Rhodium Group, said recent German investments in China had become “more defensive” and were devoted to localizing production and supply chains to protect against the risk of duties. customs.

Competition, fair or not, remains a problem. “Our members know that every technology they bring to China, in a relatively short time, will become part of the Chinese market,” said Ulrich Ackermann, head of foreign trade at VDMA. “We say, know that you can be kicked out in no time.”

Ackermann spoke of a German construction machinery maker whose state-owned Chinese rival sent machines to customers and gave them away for free for the first year. “How can we compete with that?” he said.

Column chart of greenfield FDI in China (USD billion)

Amid the sour atmosphere, Chinese diplomats pressured industry association leaders to refrain from criticizing Beijing. A lobbyist recounts being told by a Chinese government official that his consumers could wield great influence “if Western companies don’t behave”.

Despite all the tensions, many are not ready to give up. “China is a very important market for all our members,” said Andreas Rade, managing director for government and society at VDA, the association of German automobile manufacturers. “The output cannot be the answer.”

But Barkin said the days of China being a “one-sided bet” for German companies are over. “They’re not pulling out yet, but they’re looking for ways to insulate their operations from geopolitical headwinds,” he said. “And some are now preparing for the day when they may have to go.”

James R. Rhodes