Responding to the German government's call to "de-risk" China, much of Europe's largest industry remains reluctant to leave the world's largest market.
As evidence, German direct investment in China reached a near-record level in the first half of 2023, German imports from China increased by 34% in 2022, and Germany's three largest carmakers – Mercedes-Benz, BMW and Volkswagen – continued to sell more than a third of their total cars to the Chinese.
Businesses believe that in order to “minimize risk”, they must first understand where the risks lie, something the German government has yet to fully grasp.
Change your perspective
A glowing finger at the end of a robotic arm works on a strip of aluminum, welding holes in one of the 2,000 elevator parts that will be processed on an assembly line run by the Munk Group in the southern German city of Günzburg.
Factories like these dot the Bavarian countryside, home to hundreds of Mittelstand companies – the private, family-owned businesses that form the backbone of Europe's economic powerhouse.
Ferdinand Munk's family has been making ladders here for 120 years, long enough to know who's worth doing business with.
“We started doing business with China two decades ago,” said Mr. Munk. “Back then, the German government encouraged us to cooperate with Chinese companies. They told us it would be a win-win situation.”
Car assembly line at FAW-Volkswagen plant in Qingdao, China, January 2023. Photo: Getty Images
Twenty years later, the German government has changed its stance on China. Foreign Minister Annalena Baerbock, at a national security strategy meeting last June, warned: “The German government cannot afford to bail out German companies investing in China.”
The warning signals a new German government strategy toward China, called “de-risking,” echoing a new term used by the European Union (EU), which considers China an “economic competitor and systemic rival.”
In its first “China Strategy,” a 40-page document published last July, the German government reaffirmed its definition of “risk reduction.”
Europe's largest economy wants to maintain trade and investment ties with China, while reducing dependence on key sectors by diversifying supply chains, the document said.
“In important areas, Germany and the EU must not become dependent on technology from countries that are not European and do not share our fundamental values,” the document states.
China's foreign minister was quick to respond, warning his German counterparts that “risk reduction” could mean “lost opportunities, lost cooperation, destabilization and no development.”
But much of German industry remains reluctant to leave the world's largest market.
No viable way out yet
An hour’s drive south of Mr. Munk’s elevator factory, workers on one floor of another factory are working with steel cables. This factory, part of the Pfeifer Group, is located in the medieval town of Memmingen. Before cables, the factory started with rope hundreds of years ago.
“We are one of the oldest companies in Germany, with a 440-year history,” said Gerhard Pfeifer, CEO of the Pfeifer Group.
Pfeifer says his family’s business dates back to 1579, when his ancestors made rope. After World War II, the company switched to making steel cables. Today, Pfeifer’s cables can be found at SoFi Stadium in Inglewood, California; used to pull elevators to the top of the Burj Khalifa in Dubai; and inside thousands of buildings in China, where Pfeifer started his business in 2004.
Visits to China in the early 2000s convinced Mr. Pfeifer that the country was key to his company’s future. “And to this day, I believe that avoiding contact with China is impossible,” he said.
Mr Pfeifer said China was too big to ignore and that most Western politicians misunderstood the country. He said the Chinese approach the issue very differently from people in many Western countries.
“When we talk about doing business with the Chinese, we need to be very clear about the benefits,” he said.
The Zhanjiang plant - part of BASF's manufacturing complex in China - produces 60,000 tons of engineering plastic compounds annually. Photo: Nikkei Asia
Furthermore, he said, due to a number of structural problems, Germany still lacks internal consensus on its own interests. And Mr. Pfeifer said that is why German businesses are largely ignoring official calls to “de-risk.”
The numbers seem to back up Mr. Pfeifer’s assessment: German imports from China rose 34% in 2022, German direct investment in China was near record levels in the first half of 2023, and Germany’s three biggest automakers — Mercedes-Benz, BMW, and Volkswagen — continue to sell more than a third of their cars to the Chinese.
At a recent event, Mercedes-Benz CEO said that “de-risking” means not reducing the company’s presence in China but rather increasing it.
“To be honest, I think for the German auto industry, they are so heavily involved in the Chinese market, I can't see an economically viable way out for them,” said Norbert Röttgen, a member of the German parliament and former chairman of the German parliament's foreign affairs committee.
Germany's past dependence on Russia for energy, now widely seen as a strategic mistake, was a fraction of the western European country's dependence on China, Mr. Röttgen said.
“If a conflict were to occur and we had to withdraw or we would see retaliatory sanctions from China against Germany, the damage would be catastrophic and devastating for a part of German industry,” Mr. Röttgen warned.
Not fully grasped
Both part of Germany's ruling coalition, Chancellor Olaf Scholz of the center-left Social Democratic Party (SPD) has a different approach to China than Foreign Minister Baerbock of the Greens. Mr. Scholz does not seem to put China in the same group as Russia.
In November 2022, Mr Scholz became the first Western leader to visit Beijing during the pandemic, accompanied by a delegation of CEOs from Germany’s biggest companies. “Risk mitigation” was not on their agenda.
“There are some differences between the political rhetoric you see in Europe and Germany today and what entrepreneurs have been doing up until now,” said Michael Schumann, president of the German Association for Economic Development and Foreign Trade. “If you are an entrepreneur, you are always dealing with risk and what is today called risk mitigation.”
German Chancellor Olaf Scholz and German Foreign Minister Annalena Baerbock during a rally in a Berlin suburb, January 14, 2024. Photo: Yahoo!News
Despite his “hawkish” views on China, “quite a few members of parliament in Germany have very little knowledge of China. They have never been there. All they know is what they read in the media, and of course that often polarizes,” Mr. Schumann said.
He said that if politicians in Berlin, their advisers and the German media had more knowledge about China, “the discussion probably wouldn't have gone this way.”
He said that real China “experts” in Germany can be found among the hundreds of German companies that do business in China every day, such as the Pfeifer Group, which is active in the construction sector.
Mr Pfeifer said the idea behind risk reduction was good, but it had to come from understanding where the risks lay, something he said the German government had not yet fully grasped.
“Being sensitive to China is absolutely necessary, there’s no doubt about that,” Pfeifer said. “But if risk reduction starts with less exposure, I think that’s the wrong way to do it, because then we miss the opportunity to understand China.”
And taking time to understand China, according to Mr. Pfeifer, is the best thing Germany can do to help “minimize risks” from China .
Minh Duc (According to NPR, CNN)
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