Germany’s Bundesbank has revealed that investments by German companies almost doubled in China in the second quarter of 2024 to €4.8bn, according to the UK’s Financial Times. The overall figure for the first half of 2024 now surpasses the €6.5bn invested in the whole of 2023, despite the German government’s efforts to reduce the country’s dependence on China – so-called ‘de-risking’.
Much of the investment has been made by German vehicle manufacturers which, rather than repatriate profits, have decided to double down on the market in order to expand production capabilities. Ironically, one of their aims is to increase their supply chain resilience through policies of localisation in China, reducing their exposure to global supply chains transiting the Suez Canal.
What many European politicians fear is that this policy will leave the German economy vulnerable to any future conflict between China and Taiwan, not only in terms of the impact on the prospects for German manufacturers but also disruption to the import of raw materials, batteries and other critical products. An article written for the Bundesbank asserted that, ‘…nearly one out of every two firms in the manufacturing sector directly or indirectly sources critical intermediate inputs from China.’
It is not just the auto sector which is increasing its commitment to the market. Chemical manufacturer, BASF, is reportedly investing €10bn in a plant in Zhanjiang, Guangdong which will be its third biggest ‘Verbund’ site in the world after Ludwigshaven and Antwerp.
There is also the impact on German exports to consider. The ‘In China, For China’ approach will reduce demand for German goods such as intermediate components which in future will be produced locally.
The problem which Germany faces is that the level of integration of the two economies is already so great, any ‘de-risking’, let alone ‘de-coupling’ is almost impossible to contemplate. Indeed, the latter term has been banned from diplomatic vocabulary given the fear it would upset the Chinese authorities, already riled over Europe’s criticism of their treatment of the Uyghur community in Xinjiang province. A study undertaken by the Kiel Institute estimated that de-coupling would cost the German economy at least €131bn, and more if the Chinese government retaliated.
Whilst German and other European politicians are aware of the systemic geo-political threat to supply chains and economies, it seems that there is little they are able – or willing – to do. Despite the rhetoric, German corporations are determined to continue with their investment plans due to the profits which can be made in such a large and growing market. To paraphrase one German chemical executive, where in Europe (or indeed the rest of the world) could these types of profits be generated? From their perspective, it would be an act of unforgivable self-harm to boycott the Chinese market, leaving it open to local competitors.
Recent history, however, provides a salutary reminder of over-reliance on a geo-political adversary. Russia’s invasion of Ukraine and the consequent rise in the price of natural gas cost the German economy about €100bn, according to the German Institute for Economic Research (DIW). Quoted in the Rheinische Post, DIW President Marcel Fratzscher said, ‘The German economy has been more affected by the crisis because it was more dependent on Russian energy, has a high proportion of the energy-intensive industry, and is extremely dependent on exports and global supply chains.’ This observation applies as much, if not more so, to Germany’s relationship with China. Germany’s European partners will also be concerned given the importance of the industrial powerhouse to the EU’s economy as a whole.
Author: John Manners-Bell
Source: Ti Insight / Foundation for Future Supply Chain
