Germany and China are drifting apart. Chancellor Scholz is holding the flag high on his trip to China with a large business delegation. But it is overshadowed by disagreements: about the Russian invasion of Ukraine, the human rights situation in China and the future of Hong Kong and Taiwan. Scholz has to take a lot of scolding for his inaugural visit in the run-up to his trip. He is the first Western leader to visit China since the pandemic began. Is it the right signal – to China and the German economy? Shouldn’t the government show more hard edge? Can Germany even afford that? Gregor Sebastian from the Mercator Institute for China Studies (MERICS) weighs up the risks and opportunities of the China connection for Germany. It’s “complicated,” he says ntv.de. With its focus on China, the economy is making a “dangerous bet”. At the same time, the China expert came to a different, surprising conclusion: “China can’t afford to mess things up with Germany either.” ntv.de talks to him about a stalemate situation with an unknown outcome.
ntv.de: Chancellor Scholz flies to China. He will be accompanied by representatives of German business, for example from the automotive industry. The Chancellery acts as if it were business as usual. Isn’t it more like riding a razor blade?
Gregor Sebastian: The government could have done some things better in terms of scheduling and optics on this trip. Scholz signals to companies in Germany that measures for investments in China will continue to be supported. I doubt whether it is the right signal at the right time. The Indo-Pacific strategy presented by the government in 2020 places more emphasis on diversification.
Then why this big show?
Among other things, this has to do with the difficult economic situation in Europe. The federal government always has an interest in the German economy doing well because that creates jobs. Germany is one of the few EU countries that has been able to maintain its manufacturing sector over the past decades. We have Hermes credit for exports and investment guarantees. This helps German companies to open up new markets and to deal with economic problems in Europe. China has always played a major role. Think of Sigmar Gabriel, who traveled to China in 2017 to at least delay the production quota for electric cars in China. Daimler, BMW and Volkswagen were not competitive at the time and were given more time to improve their range of electric cars. Such a commitment gives the economy security.
Is the economy so dependent on this security or could the federal government afford to take a harder line against China? How much would that damage Germany as an industrial location?
You have to distinguish between the interests of the federal government and those of companies. Some companies are very dependent on the Chinese market. But even then you have to differentiate. Look at the German auto industry. Over 90 percent of German cars bought in China are produced locally. This means that there are hardly any German jobs attached to this car production in China. If China does something about Volkswagen, the Chinese would hurt themselves because tens of thousands of Chinese jobs would be affected! Especially in the structurally weak north-east of China, German companies are important taxpayers and employers. So China can’t just afford to mess things up with Germany. We are still researching how many jobs and profits depend on investing in China.
Aren’t car manufacturers also financing jobs in Germany with their China business?
That too is complicated. Because China does not make it easy for companies to return profits to Germany. We therefore see high reinvestments in China, so the profits of the corporations remain there for the most part. On the other hand, it is of course also true that the VW course would not be where it is if the China market did not exist. But there is no data to assess more precisely how many of the gains are relevant for Germany as an industrial location. It is correct: a lot stays in China.
Then the German government could put more pressure on the government in Beijing?
Naturally. Certainly jobs in this country depend on China, partly through exports, partly through engineers who develop and research here in Germany for China. But it wouldn’t all fall apart if relations cooled down. I would say that the overall dependency is significantly lower than for individual companies.
Political backing for the German auto industry has the same effect as parents behaving in helicopters with children. China recently overtook Germany as the world’s second largest auto exporter. When it comes to e-mobility, the People’s Republic has been ahead for a long time. The German car industry is perhaps simply no longer the best in its class and is only desperately looking for a connection – with the help of politics. Should we maybe admit that?
I wouldn’t go that far yet. The German auto industry in China is certainly facing major challenges and is lagging behind by a few years, especially when it comes to e-mobility and autonomous driving. But it’s not a set race yet. Many Chinese manufacturers are in the startup phase. It remains to be seen whether this will still be the case in three years.
And how could the balancing act between economic and political interests look like?
For the car manufacturers, it certainly boils down to splitting off the China business from the world market. What is already being done is producing in China for China. In addition, local research and development facilities are being built for the Chinese market. That’s an understandable strategy. Some German-Chinese cooperations that are now being entered into are certainly aimed at building a closed ecosystem in China if access – for example through sanctions – is cut off.
What risks does such a parallel economy hold for Germany as an industrial location?
That’s not a good thing, because fewer components and know-how will flow from Germany to China. Volkswagen has its own China Board to bundle the China business. Above all, I see one risk: Despite the volatile global environment, car manufacturers believe that they can also use innovations from China globally. While this enables economic economies of scale, it also increases dependence on China, not only for sales there, but also for technology.
That doesn’t sound like a future-oriented strategy. Instead, wouldn’t rapid diversification be rational, as recommended by the Indo-Pacific strategy?
It is true that not enough has happened in the area of ??supply chains outside of China. When it comes to certain raw materials, we are still very dependent on China. The German car manufacturers in particular are taking great risks because they rely much more on China than other international car manufacturers. It is indeed a dangerous bet.
President Xi Jinping has said, “If you contribute to innovation in China, China will give you full support no matter where you are from.” Can you trust his words?
The automotive industry is in an extremely difficult situation, one could also speak of a lose-lose situation. That said, no matter what decision she makes, there will be downsides. If she stays in China, she is taking a huge geopolitical risk. If it doesn’t dig deeper, it may be crushed between Chinese competition and Tesla over the next decade. You also have to think about the future. If you are not stronger in China, what is the rest of the world doing? We can build Fortress Europe, with high tariffs, and let no one in. But the rest of the world, one has to be clear, will not isolate itself as much. Other countries will welcome the Chinese e-car manufacturers.
Speaking of which: China’s e-car manufacturers are once again rehearsing entering the German market. What chances do you give it? Should that be allowed to happen – from a geopolitical and economic point of view?
That shouldn’t seem unnatural to us. We’ve already seen that with Japan and South Korea. It can help us as consumers. Greater competition means lower prices. On the negative side, we have huge state support in the Chinese market for Chinese and other manufacturers in China. That means we have the first distortions of competition here, which could have negative long-term consequences for Europe. And we have a lack of reciprocity. The e-car market still needs subsidies, and China has them. But only for models produced in China. It’s different in Europe. With us, the e-car bonus is independent of the manufacturer location. This is a huge problem because it tempts manufacturers to produce in China for the European market.
Bottom line, do the benefits outweigh the risks in China?
From the automaker’s perspective, it’s important to be nuanced. I think it is right to do more local development and research in China. For the simple reason that the market shares are decreasing and the Wolfsburg or Stuttgart model with a world car that is sold in China is no longer up to date. So, from a business perspective, saying we’re staying in China is definitely not wrong. On the other hand, I would caution against using China as a global development hub. This strategy may have potentially high rewards, but the risks outweigh the risks. The car manufacturers should slow down here. From the point of view of the federal government, I would say: we have to rethink our previous support measures and investment guarantees for car manufacturers. To see whether they also benefit the German economy. Because that was the purpose of the measures.
Diana Dittmer spoke to Gregor Sebastian
