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Germany is just making too much money in China to back away now
German companies are investing billions more in China, ignoring government warnings. Automakers and chemical giants are deepening ties. This strategy risks economic calamity. Germany's Vice Chancellor travels to Beijing to discuss concerns. Companies face difficult choices if China restricts access. Smaller firms are already diversifying. Berlin plans action to diversify supply chains.
Germany's business leaders have seen the flashing red warning signs that relying on China is risking economic calamity. They're just not heeding them.
From autos to chemicals, the country's biggest exporters are ignoring government pleas and pouring billions into new projects that tie their fortunes even closer to the world's second-largest economy. German corporate investment in China jumped €1.3 billion ($1.5 billion) between 2023 and 2024, hitting €5.7 billion, according to the Mercator Institute for China Studies.
Government officials, too, have done little to change the pattern. Privately, they're meeting and developing action plans, said people familiar with the discussions. But they're still reluctant to intervene in foreign investment decisions. One senior German official quipped that it's historically not in the country's DNA, according to a person familiar with the exchange.
In recent meetings, business leaders and government officials have traded blame over the situation but offered few solutions, said people familiar with the talks, who spoke on the condition of anonymity. Left untouched was the deeper question of who bears the costs of shunning China — businesses through lost profits, workers through layoffs, consumers through higher prices, or an already stretched government.
For now, China simply offers too many near-term profits to ignore, the people said, even if Beijing may ultimately throttle access to vital supplies and its massive market. Executives see little reason to change course unless Berlin forces their hand or helps foot the bill.
This weekend, German Vice Chancellor Lars Klingbeil, also the country's finance minister, will travel to Beijing to discuss Berlin's concerns as Chancellor Friedrich Merz publicly warns companies about the dangers of their exposure to China.
The consequence of inaction may ultimately be far-reaching. The more Germany tethers its industry to China now, the more influence Beijing will wield over Europe's largest economy in the long run — power China could use to tilt global competition in its favor or even constrain the continent's attempts to influence global affairs.
“De-risking is not just a commercial consideration,” said Agatha Kratz, partner at Rhodium Group. “The counter factual is a world where China can dictate Europe's foreign and economic policy.”
Deeper Ties
The automotive sector is at the heart of Germany's exposure to China, and it's doubling down.On average, car manufacturers accounted for about two-thirds of German investment in China from 2020 to 2024, MERICS found. That spending has accelerated in recent years, growing 69% between 2023 and 2024 to reach €4.2 billion.
Today, China is the most important market for BMW AG, Mercedes-Benz AG and Volkswagen AG.
BMW has committed about €3.8 billion to a battery project in Shenyang, making China the hub of its largest research and development network outside Germany. It also exports electric SUVs from China back to Europe. Meanwhile, Mercedes shifted its annual strategy summit to Beijing and is developing China-only electric vehicles.
Volkswagen, which calls China its “second home market,” has similarly signed a string of deals with Chinese firms to accelerate its technology development.
The pattern extends beyond the auto industry.
BASF, the German chemicals giant, just opened an €8.7 billion complex in China — its largest-ever investment. Last month, BASF CEO Markus Kamieth called China essential to the company's growth month, saying the market helped counter sluggish output in Germany.
Similarly, Bosch, Germany's global engineering firm, is deepening reliance on China for product development, while cutting positions in Germany.
Overall, average annual German investments in China reached €5.2 billion over the past five years, well above the €3.3 billion average recorded between 2015 and 2019, according to MERICS.
But looking elsewhere comes with a steep price. Even if companies find other sources for items like rare earth materials or chips, they'll be paying more than in China — not just for the products, but for new supply lines.
The most positive outcome is that new markets in North America, Europe and India offset these investments. But that takes time and offers no guarantee. Until then, executives are often choosing between unpalatable options: eating costs that slice into profits, raising prices that anger customers or firing workers.
Unless the government helps, that is.
“The auto industry is vigorously pursuing and implementing the necessary de-risking — but it must also be politically enabled, not merely demanded,” said a spokesperson for VDA, the German auto industry association.
Executives in talks with the government have floated domestic reforms — from cutting energy costs to slashing bureaucracy — that would incentivize operating in Germany. Berlin, however, is struggling to advance its agenda as political fragmentation deepens. And the government is already straining to cover its spending commitments on climate, defense and welfare.
“The minimum is three, four or five years to install a new kind of disentangled supply chain,” said Matthias Zink, a senior executive at automotive supplier Schaeffler AG and president of CLEPA, the trade group for Europe's auto supply chain. “We should have no illusions on this.”
Bloomberg
Trouble Ahead
Not every German company sees it the same way. Starting years ago, numerous smaller firms decided they could no longer bank on China for their economic livelihood.4Jet, a laser technology firm, is one of them. It was wary of Beijing's longstanding playbook: Use massive subsidies to rapidly grow domestic industries, then flood the global market and undercut competition.
So 4Jet, whose customers include aviation companies and glass and tire makers, began prioritizing markets like India to offset any lost revenue in China. Now, the firm could survive even if China closed off its market completely, according to CEO Jörg Jetter.
“I find politics astonishingly naive,” Jetter said in an interview. “It's very transparent what they're doing there.”
Jetter is referring to Beijing's “Made in China 2025” plan, which named 10 modern industries China wanted to dominate. It worked. China has become a market leader in solar energy, batteries, electric vehicles, and a serious competitor in machine tools and robotics.
China is now planning to extend these goals in a new five-year plan, expected early next year.
For some companies still relying on China today, Beijing is offering warnings of just how painful it might be if and when those longer-term concerns become a reality.
Last month, German automakers saw how a sudden halt in chip supplies from Nexperia, a Chinese-owned firm based in the Netherlands, could disrupt production within days — a crisis not yet fully resolved.
More broadly, German exports to China are declining just as reliance on low-cost Chinese inputs are rising, the result of production shifting to China.
Jürgen Matthes, from the German Economic Institute, a business-backed economic research firm, warned in July that the trend may create “a creeping hollowing out of Germany's industrial base.”
Business groups now want government intervention.
Bloomberg The VDMA trade association, which represents medium-sized companies in the mechanical and plant engineering field, said a survey showed more than three-quarters of its members still felt competitive against China in the European market, according to Oliver Richtberg, who handles China for the VDMA.
That figure dropped to fewer than half when asked about the outlook five years from now.
“This is a development we cannot simply accept,” Richtberg said.
Planning Begins
German officials do increasingly argue something must be done.Berlin first pledged to “de-risk” from China in 2023 under the previous government but offered more signals than action. Since entering office in May, Chancellor Friedrich Merz has created a national security council and asked it to help address the issue.
At the panel's first meeting last week, officials agreed to develop an action plan by yearend to diversify Germany's raw material supply sources, according to a person familiar with the discussions.
Berlin is also working on an economic security strategy, due next year.
Still, Merz is cautioning companies that he won't rescue them.
“I always tell them when I meet them: That's your risk if things go wrong, please don't come to us,” Merz said Thursday, noting that Chinese authorities have the power to shut off supplies or lock German companies out of their markets.
“It can happen very quickly,” he said.
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Source: EconomicTimes
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