— — The development of Germany-China economic cooperation and China’s potentials
Amidst the wave of de-globalization and the intensification of geopolitical games that are pushing more countries to decouple with China, Germany has instead strengthened its willingness towards economic cooperation with it on multiple levels.
The recent strengthening of Germany-China economic cooperation is reflected in both business and political circles. In the business world, on October 13, Volkswagen announced an investment of EUR 2.4 billion to jointly establish a new company with Chinese intelligent computing platform specialist Horizon Robotics, focusing on technology development in the field of autonomous driving. On October 16, BMW also announced that it would relocate its MINI electric vehicle production line from Oxford, England to China, and acknowledged that it would strengthen its cooperation with Great Wall Motors on electric vehicles. Meanwhile, German taxi company SIXT announced on October 3 that it will cooperate with BYD Auto to purchase 100,000 electric vehicles in batches over the next six years. In addition, German chemical giant BASF announced earlier this year that it would invest EUR 10 billion in Zhanjiang by 2030 to build a production line for engineering plastic compounds.
In politics, although the German Federal Ministry of Economic Affairs under the leadership of the Greens has repeatedly asked to reduce its dependence on China, the current ruling Social Democrats have different views on this. On October 11, German Chancellor Olaf Scholz publicly stated that decoupling with China is “the wrong answer” and stressed that Germany “must continue to do business with China”. German media also confirmed that Scholz may visit China with an economic delegation on November 4 this year, becoming the first G7 leader to do so since the outbreak of the COVID-19 pandemic.
It is apparent that despite various obstacles, the overall willingness of various sectors in Germany to cooperate with China is still relatively strong, and there are multiple reasons for this.
First of all, the energy crisis caused by the Russia-Ukraine conflict is the direct reason for European companies to get closer to China.
Of the major European economies, Germany is the most dependent on Russian gas, according to Brussels-based think tank Bruegel. The natural gas that Germany obtains from Russia accounts for 13% of its total energy consumption and 52% of its total natural gas acquisition each year. At the same time, due to the high proportion of heavy industries and energy-intensive industries such as chemical, non-ferrous metals, steel, and motor vehicles in Germany, after the outbreak of the Russia-Ukraine conflict, soaring natural gas prices hit Germany’s economic development hard. In June 2022, European gas prices rose 3.4 times year-on-year, resulting in a 10.9% drop in gas consumption. Under the dual impact of rising energy costs and natural gas restrictions, Germany’s industrial output (excluding energy and construction) fell by 1% month-on-month in July.
A number of recent surveys in Germany have confirmed that some of the country’s industrial giants, especially the chemical industry and other industries that are heavily dependent on natural gas, have begun to shift production or purchase from other regions. As the era of cheap energy comes to an end, dramatic structural adjustment and relocation of manufacturing in Germany and Europe are imminent. Some analysts pointed out that this adjustment may not be limited to the relocation of high-energy-consuming industries. As the supply chain moves out, upstream and downstream enterprises in the industry will also be affected, Europe may even experience a process of “de-industrialization”.
Secondly, the dual pressures of the energy crisis and inflation have caused Germany and the EU as a whole to experience an economic recession.
In May this year, Germany’s exports shrank by 0.5% month-on-month, which was also the first trade deficit in nearly three decades, with a shortfall of nearly EUR 1 billion. Economists at the German research institute DIW Berlin pointed out that the huge damage to the German economy caused by factors such as the energy crisis is likely to continue for several years and lead to a loss of nearly 3 percentage points of German economic growth in 2022. Under such circumstances, on the one hand, German companies are bound to pay more attention to China’s market and investment environment. On the other hand, the German manufacturing industry cannot bear the risk of further losing the supply of raw materials and commodities from China. Data from the IFO Institute shows that 70% of the rare earth and other metals required by German industry come from China. In addition, China also provides Germany with a number of basic early-stage products, to the point where 46% of the overall German companies are highly dependent on Chinese suppliers. This supply relationship could fuel concern among German companies, yet at the same time, this could also drive German companies to cooperate with China.
The current situation determines that the German government needs to change its previous views on economic and trade relations between the two nations.
Recently, Scholz made it clear at the German Mechanical Engineering Summit held in Berlin that he supports globalization and opposes any form of “decoupling”. He stressed that Germany should trade extensively with various countries, including China. At the same time, the European Commissioner for Trade Valdis Dombrovskis expressed that what the world needs today is not isolation and protectionism, but that the EU and China are deeply integrated economies, and that decoupling from China is not an option for EU firms.
In addition, pressure from the business world is pushing back government officials who are determined to stay away from China. Recently, business leaders from BASF, Deutsche Bank, Siemens, and other companies were in conflict with the Federal Minister for Economic Affairs and Climate Action Robert Habeck at a meeting. Habeck’s previous plans to review corporate investment in China were firmly opposed by the German business community and were therefore shelved.
It is obvious that the new trend of German industrial relocation and its foreign investment has taken shape, while the attitude of the German government and industry towards cooperation with China is becoming more and more pragmatic. It should be pointed out that this development trend is actually in line with the “1+3” pattern previously suggested by researchers at ANBOUND. The fundamental part of this pattern is that, in the face of the United States ( “1”), which is opposed to globalization, China should form economic and trade partnerships with Germany and Japan (“3”) to support globalization. Additionally, all these three major manufacturing powers can jointly cope with the pressure of anti-globalization as Germany, Japan, and China have an endogenous pursuit of globalization and trade liberalization. Although the current geopolitical environment is different from the time when ANBOUND first proposed the “1+3” pattern, China and Germany can still find common ground in the economy, which is why the latter is currently strengthening its cooperation with China.
The investment and trade demands between Germany and China are mutual. When the German business community and government show their willingness to cooperate with China, China should also attach the same importance as well. Considering that it would be difficult to alleviate the current situation facing Germany and Europe in the short term, Germany-China’s economic and trade cooperation is likely to usher in a valuable window period. On the one hand, more German capital may enter China in the future; on the other hand, Chinese companies will also have the opportunity to enter the European market through Germany. To cite an example, the recent Chinese new energy vehicle companies have been actively expanding the German and European markets. The industrial investment scale of German companies in many places in China is considerable, and China should fully explore the value of this window of opportunity.
In this regard, the Chinese government needs to actively track the changes in the macro situation of Europe and grasp the changes in the industrial environment in Germany. There should also be an increase in the promotion of China, emphasizing its stable policy, as well as investment and market environment for German industries. Another important step is strengthening the stability of China’s supply chain and boosting the confidence of foreign investment in the country. China’s innovation market space too should play a role, so as to attract German investment in some new industrial fields. Finally, due to European investment in China being mostly based on investment in large enterprises, China can consider using major German enterprises as the leader to attract supporting small and medium-sized companies, and promote investment in the industrial chain in the construction of industrial ecology.
Researchers at ANBOUND are of the opinion that, with the current geopolitical turmoil and changes in the economic environment of Europe, the Chinese government needs to consider the state of affairs from a macro perspective and focus on attracting German companies and the relocation of industries. If the focal point is only on the immediate interests based on short-term investment and project implementation, this will not form medium- and long-term layouts in attracting German and other European investments.
Factors such as geopolitical turmoil and the energy crisis have resulted in German industries and investments showing signs of overseas relocation. In addition, the German government’s attitude towards cooperation with China has become increasingly pragmatic. This may provide a rare window of opportunity for both countries. Therefore, China needs to play an active role in turning such macro-opportunities into real micro-benefits.
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