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A turning point in China business? German companies find it difficult to reduce their dependency

2022-08-02T10:41:51.622Z


A turning point in China business? German companies find it difficult to reduce their dependency Created: 2022-08-02 12:32 p.m From: China.Table Workers moor a ship in the port of Qingdao: Can Germany's economy free itself from its dependence on China? © AFP Strong economic dependencies are dangerous. This is currently shown by the example of gas supply from Russia. But Germany's economic depe


A turning point in China business?

German companies find it difficult to reduce their dependency

Created: 2022-08-02 12:32 p.m

From: China.Table

Workers moor a ship in the port of Qingdao: Can Germany's economy free itself from its dependence on China?

© AFP

Strong economic dependencies are dangerous.

This is currently shown by the example of gas supply from Russia.

But Germany's economic dependencies on China are much greater.

  • Germany's economic dependency on China is great.

    But many companies and the federal government are now rethinking their China strategy.

  • Reasons for rethinking include China's zero-Covid policy and the Ukraine war.

    It could be the beginning of a turning point.

  • This article is

    available to IPPEN.MEDIA

    as part of a cooperation with the

    China.Table Professional Briefing -

    China.Table

    first published it

    on July 25, 2022.

Beijing/Berlin – For years, China was considered one of the preferred partners of German politics and business.

The People's Republic was the guarantor for German growth and has long since risen to become Germany's largest trading partner.

Car and machine builders make large sales in the People's Republic.

But there are many indications that the engagement of the German economy in China is about to reach a turning point.

The corona lockdowns and the Chinese focus on their own competitiveness are making the country increasingly unattractive. 

Added to this is the new fear of excessive dependencies: Germany's gas dependency on Russia will probably lead to a recession in the winter.

Against this background, Germany's dependencies on China are also being reassessed.

Foreign Minister Annalena Baerbock said recently that she was "very serious" about reducing dependency on China.

Russia shows risks due to large dependencies

It won't be easy.

"Europe's economic ties with China are much more complex" than those with Russia "and involve sectors with a deeply branched value chain," Max Zenglein, chief economist at China think tank Merics, told

China.Table

.

In the case of rare earths, magnesium and other raw materials, there are even critical dependencies.

Dependencies have also increased significantly for industrial goods.

According to Merics, EU countries are in a “critical strategic dependency” on China in 103 product categories.

This means that the states import at least 50 percent of a certain product from China, and the People's Republic also has a global market share of at least 30 percent.

These include, for example, pharmaceutical products, chemicals and electronic parts such as certain printed circuit boards, small transformers or battery cells.

Numerous industries are dependent on input from China.

The dependence of German companies on inputs from China is high.

© ifo business surveys (February 2022), graphic: Britta Weppner, Table.Media

With all these products, it would be difficult to find other suppliers in the short term.

The German economy could hardly cope with a delivery stop.

Zenglein therefore recommends: "It would be very helpful if politics and business took up mechanisms to identify the dependencies and to reduce them in critical areas - for example in renewable energies, pharmaceutical raw materials or electronic components".

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China reduces dependency on the West

China is already doing that.

Beijing has set itself the goal of becoming the world leader in terms of technology and overtaking Western suppliers.

China's companies should become more innovative and establish a tech dominance that will ensure growth in the future.

"In the event of geopolitical escalations," China would then be better prepared, says Zenglein.

In order to catch up technologically, China also uses foreign companies.

Some researchers therefore warn that German industry should not act too naively.

"Foreign investors have to realize that they should serve this goal," Rolf Langhammer from the Kiel Institute for the World Economy (IfW Kiel) told

China.Table

.

The car industry serves as a cautionary tale.

German companies "have provided Chinese companies with the necessary know-how to be able to be replaced by them in the future," explains the trade expert.

A study by the Cologne Institute for Economic Research (IW) shows what follows from this: “Germany is much more dependent on China, especially on the export side, but also on the import side, than vice versa.” And China’s imports will continue to fall in the future, how the prognosis shows.

The reason can be found in Beijing.

"The Chinese government wants to further reduce its dependency on foreign countries through the dual circulation strategy," writes the author of the study, Jürgen Matthes.

China is losing attractiveness for companies

But not all developments can be traced back to an active decision by Beijing.

China has recently become less attractive as a sales market and in day-to-day business.

Companies and associations complain about the strict zero-Covid policy and the numerous lockdowns.

According to a survey by the EU Chamber of Commerce in China, an increasing number of companies are considering withdrawing investments from China.

For 77 percent of the companies surveyed, China has become less attractive as an investment destination.

And companies in Germany also want to reduce their dependence on China.

An Ifo study from April shows that almost every second industrial company that purchases inputs from the People's Republic wants to reduce its imports from China.

However, it remains to be seen whether this change in mood will also “initiate a fundamental change in strategy among European companies,” says Zenglein.

The companies give reasons for the desire for less dependence on China.

© ifo business surveys (February 2022), graphic: Britta Weppner, Table.Media

But globally, the signs point to unbundling.

"Globalization is at the beginning of a realignment," says Zenglein.

Risk factors should play a greater role in companies' calculations in the future.

It's not about decoupling.

Instead, Zenglein advocates diversification.

This "will take time and, above all, money".

Rolf Langhammer points out that the Chinese market is currently still too important.

"Companies will only be able to reduce their focus on the Chinese market very slowly, if at all," says the IfW researcher.

But against the backdrop of the new geopolitical realities, "not responding can become even more costly," says Zenglein.

Dependence on China: challenge of competition between companies

This is where the biggest challenge might lie.

Because companies prefer short-term profits to long-term security.

After all, you are in competition.

It's the classic prisoner's dilemma: if a company gives up sales in China, opportunities open up for competitors who can penetrate the gap and take market share from the company.

The same applies to the purchase of cheap primary products and raw materials from China.

But whether this approach will bring the greatest benefit in the long term is in question after the Russia debacle at the latest.

Will German politics and business learn the right lessons and adapt to the new globalization?

A new China strategy by the Ministry of Foreign Affairs could soon provide information.

Secretary of State Baerbock recently said that because China is a system rival, we must make it clear that we are not open to blackmail, "like we were with Russia's gas dependency."

And Economics Minister Robert Habeck also wants to embark on a new course.

"We are diversifying more and are also reducing our dependency on China," said the Economics Minister recently.

The government will have to be measured by these statements.

By Nico Beckert

Nico Beckert has been the editor for the

Table.Media Professional Briefings

 since January 2021 

.

His main topics are German-Chinese relations, economy and finance, the New Silk Road and Chinese climate policy.

Previously, Beckert wrote as a freelance author for the 

Tagesspiegel

 and the 

Freitag

.

China.Table Logo © China.Table Professional Briefing

Source: merkur

All news articles on 2022-08-02

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