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    Home»Business»German exporters rethink €100bn ‘love affair’ with China
    Business

    German exporters rethink €100bn ‘love affair’ with China

    October 27, 2022Updated:October 27, 2022No Comments6 Mins Read
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    For more than 20 years, Oliver Betz produced sensors for Chinese engine-makers from his base in Munich. But in recent months, Systec Automotive’s sales to China have collapsed, falling by three-quarters.

    “Expanding in China is not a topic under consideration. It’s about how we can limit the damage,” said Betz, who says 65 per cent of the company’s exports last year were to the country. He blames the slump on slower growth, Beijing’s zero-Covid strategy and an increasing preference for buying local as Chinese manufacturers catch up with foreign brands.

    Betz’s experience is becoming increasingly common for Germany’s small and medium-sized enterprises, which, following year after year of surging sales. are finding their relationships with Chinese partners tested.

    Germany’s Mittelstand companies are, according to Jörg Wuttke, president of the influential trade lobby EU Chamber of Commerce in China, increasingly realising that they cannot rely on Chinese profits as they once did. “It’s a lost love affair,” said Wuttke.

    The breakdown is threatening to unravel what has become one of the world’s most mutually beneficial trading relationships, in which German companies prospered by selling the machinery to Chinese exporters that enabled them to become the key player in global supply chains.

    Since the turn of the millennium, China has gone from accounting for just over 1 per cent of German exports to commanding a 7.5 per cent share of sales abroad, making it second only to the US. In 2021, more than €100bn worth of German goods were sold there.

    You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

    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”, seen during the latter stages of Angela Merkel’s 16-year reign as chancellor, which ended last year.

    Alicia García-Herrero, a senior economist at think-tank Bruegel, said the buoyancy of the links between the two export powerhouses had been replaced by a sinking feeling in Berlin as exports slide. “Germany is losing its trade surplus and part of its competitiveness, partially because China has moved so rapidly up the value ladder.”

    It comes at a sensitive moment for the broader relationship between the two countries. Russia’s invasion of Ukraine has given fuel to German critics of Beijing, who argue the country’s economic ties are trumping foreign policy goals and leading to collaboration with prospective geopolitical rivals.

    Olaf Scholz, who will fly to Beijing next week for his first meeting with Chinese leaders as German chancellor, is set to unveil his new China strategy next year. He is under pressure from his coalition partners, the Greens and the Free Democrats, to loosen ties and courted controversy when he asked ministries to back an investment from Cosco, a state-owned Chinese shipping conglomerate, in a container terminal at the Port of Hamburg. The deal was approved earlier this week, though Cosco took a smaller-than-planned stake, which will limit its capacity to influence decision-making.

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

    Berlin has signalled 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 larger companies responsible for monitoring human rights violations by their suppliers, could further dissuade German investment in China, which has increasingly become concentrated among carmakers Volkswagen, BMW and Daimler, as well as chemicals giant BASF.

    You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

    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 manufacturer Adidas suffered Greater China sales declines of 15 per cent in two successive quarters last year after a boycott over the company’s decision not to source cotton from the border region.

    The war in Ukraine has focused companies’ minds on the risk of sanctions should China invade Taiwan. US-China decoupling has led many companies to already look for alternative suppliers. Just over a third of the members at VDMA, the German machinery association, surveyed in 2021 said the decoupling was prompting a rethink of their business links.

    Magnetec, a Hesse-based electrical components manufacturer that has operated a factory in China for 13 years, decided against building a second plant in the country because of the risk of sanctions. “When our customers order our products, they give as a precondition that they are not built in China,” said Marc Nicolaudius, Magnetec’s chief executive. Instead, it will expand in Vietnam.

    Noah Barkin, managing editor at consultancy Rhodium Group, said recent German investment in China had become “more defensive” and was being spent on localising production and supply chains to protect against the risk of tariffs.

    Competition — fair and otherwise — remains a problem. “Our members know that every technology they bring into China, in a relatively short time, will be part of the Chinese market,” said Ulrich Ackermann, head of foreign trade at the VDMA. “We say, be aware you can be kicked out in a short time.”

    Ackermann spoke of a German manufacturer of construction machinery, whose state-owned Chinese rival sent machines to customers, free for use for the first year. “How can we compete with that?”

    Column chart of greenfield FDI into China ($bn), four-quarter rolling sum showing  German direct investment into China tailed off during Covid

    Amid this souring atmosphere, Chinese diplomats have pressured industry association leaders to refrain from criticising Beijing. One lobbyist recounts being told by a Chinese government official that its consumers could exert a lot of influence “if western companies don’t behave”.

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

    But Barkin said the days of China being a “one-way bet” for German companies were done. “They are not pulling out yet, but they are looking at ways to shield their operations from geopolitical headwinds,” he said. “And some are now preparing for the day when they might have to leave.”

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