German companies cannot do without China as a trading partner. Nevertheless, the economy is looking for new ways to slowly reposition itself.
The list of lawsuits is long: unfair competitive conditions, data and technology theft, massive subsidies for domestic Chinese corporations. Nevertheless, in the vast majority of cases, German industry cannot imagine withdrawing from China. On the contrary, investments continue to be vigorous – and not much less than in other Asian growth markets. A decoupling from the Chinese market is unrealistic from the point of view of the German economy, as Mercedes boss Ola Källenius recently said more than clearly. Such decoupling would have a massive impact over the next ten years and would set German companies back, according to industry representatives.
"Direct investment flows to China are estimated to have risen by a good eleven percent in 2022, similar to 2021, but significantly stronger than in previous years between 2016 and 2020," Jürgen Matthes of the German Economic Institute told Reuters. "Direct investment flows to the rest of East and South Asia, excluding China, increased by a similar magnitude of just over twelve percent in 2022." So far, there are no official figures on this. So there is no significant diversification away from China, the so-called de-risking. This is currently a buzzword in the industry, which wants to avoid too much dependence on certain markets in the future.
Xian in the northwestern Chinese province of Shaanxi: China is currently irreplaceable as a trading partner for German industry. © XinHua, Liu Xiao/dpa
BASF invests ten billion euros in China
The Federation of German Industries (BDI) speaks of a transitional phase. Many companies are currently strengthening their value chains in certain regions - not only in China, but also in the USA and South America. This will initially lead to higher investments, according to Wolfgang Niedermark, member of the BDI Executive Board. For example, BASF, the world's largest chemical company, is currently building a new site in the southern Chinese province of Guangdong at a cost of ten billion euros.
According to Matthes, German companies in China are increasingly relying on local suppliers and also local research. This is partly due to pressure from the Chinese government, which is waving subsidies. But it is also about competitiveness in emergencies. In the event of a potential trade war, they would then be better prepared, including a possible Taiwan conflict with mutual sanctions.
China is still Germany's most important economic partner
Mutual trade is also still running smoothly, at least on an annual basis. China remained Germany's most important partner in 2022 - for the seventh year in a row, despite the strict corona lockdowns of entire metropolises and industrial companies at the time. Foreign trade turnover - exports and imports together - totalled just under 298 billion euros, an increase of more than a fifth.
Volker Treier, head of foreign trade at the German Chamber of Industry and Commerce (DIHK), sees no real alternative to China. In the planned energy transition towards renewable energies as well as in the mobility transition away from combustion engines, decoupling from China would not proceed with the desired breadth and speed. The same applies to self-driving cars. "This is because most of the supplies and intermediate products for this come from China - inverters, solar modules and raw materials that are used, for example, in the production of semiconductors, robotics or light diodes. Digitization in Germany would then also be considerably more difficult."
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Dependence on China: Companies are looking for new suppliers
China is the second largest market in the world behind the USA and ahead of the EU single market. "No export-oriented company can afford to ignore this market," says BDI representative Niedermark. "The fact that the Chinese market will continue to play an important role in the future is undisputed and there is a consensus between the German government and German industry." Rather, it is about developing international business outside China with even more energy.
According to Treier, German companies are currently working hard to determine how strong their dependencies on certain markets are. "That's why companies are already looking for new suppliers, examining new transport routes and pricing in political risks." But that comes at a price. "For many companies, alternatives can often be found in the Asia-Pacific region. India and Indonesia are interesting as potential economic giants. Free trade agreements with them would help the German economy a lot." However, the government would have to take a pragmatic approach to this. "India, for example, is comparatively protectionist, while Indonesia has problems in the area of sustainability." Alternatives could otherwise be found in South or North America.
But China is growing stronger again after the end of the strict zero-Covid policy and, together with India, is the driving force for the comparatively sluggish global economy worldwide. "Overall, the profit and earnings situation in China is right from the point of view of German companies," says BDI lobbyist Niedermark. According to the DIHK, it is rather smaller companies that are looking for alternatives to China. Emigration only occurs in the rarest of cases, Treier said. "Less new investment is likely to be made." This is a creeping development. "Around 15 percent of German companies in China are planning investments outside the country, but in the region." But that won't happen overnight. (Reuters/row)
