As US tries to isolate China, German companies move closer

BERLIN -

As Washington seeks to throttle economic ties with Beijing,

two powerful engines of the German economy, Volkswagen and the chemical company BASF, are broadening their huge Chinese investments.

Volkswagen, which has more than 40 plants in China, announced a new effort to tailor models to Chinese customers’ wishes, with features such as in-dash karaoke machines, and will invest billions in local partnerships and production sites.

It is part of a theme unveiled by the German carmaker in 2022: “In China for China”.

BASF, with 30 production facilities in China, is pushing ahead with plans to spend €10 billion (S$14.6 billion) on a new chemical production complex that would rival in size its headquarters complex in Ludwigshafen, which covers about 10 sq km.

Throughout Germany, executives are aware such investments run contrary to efforts by the United States to isolate China economically. They counter that revenue from China is essential for their businesses to thrive and grow in Europe.

Mr Martin Brudermuller, BASF’s chief executive, said earnings from China allowed the company to effectively offset losses from Europe’s high energy costs and stringent environmental rules.

“Without the business in China, the necessary restructuring here would not be so possible,” Mr Brudermuller told reporters at his company’s annual earnings conference in February. “Name me just one investment in Europe where we could make money.”

Executives at Volkswagen privately concede the carmaker is in a similar quandary. High energy and labour costs have left the company heavily reliant on sales from China to help underwrite operations in Europe.

Now, ever-closer business ties are coming under scrutiny in Berlin. For months, at the urging of Chancellor Olaf Scholz, a policy proposal has been making the rounds of German ministries aiming to reset the country’s relationship with China, its largest trade partner.

The aim is to strike a balance between diversifying Germany’s ties throughout Asia to avoid dependence on Chinese imports, while acknowledging the importance of doing business with China.

The Biden administration has pledged to make the United States more competitive with China by expanding American infrastructure and manufacturing, rather than negotiating new trade deals.

German lawmakers and business leaders have made clear that their relationship with China is more nuanced: open to vigorous trade, while trying to diversify into other Asian markets.

It is a policy being developed after a bruising year when Russia shut down natural gas shipments to Germany, a move that reminded lawmakers of the costs of relying on autocratic nations for materials essential to its industrial backbone.

In the case of China, a big problem is Germany’s dependence on its imports.

Germany depends on China to provide essential technology products, including mobile phones and LEDs, as well as raw materials, including lithium and rare earth elements.

These are critical to Germany’s plans to make a transition to cleaner energy and transportation.

Such a reliance must be carefully considered as Germany thinks strategically about its future dealings with China, said Ms Katrin Kamin, a director of the Kiel Initiative in Geopolitics and Economics. Reducing its ties anytime soon is not a reasonable option.

“Germany will not be able to simply relax its relations with China in the short term,” Ms Kamin said. “The dependencies are too great for that.”

With foreign trade sales of €297.9 billion in 2022, China has been Germany’s biggest trading partner for seven years in a row.

But Germany’s trade deficit with China has grown increasingly lopsided, a trend that worsened during the supply chain disruption caused by the coronavirus pandemic.

In 2022, imports from China expanded by a third, to €191 billion, while exports grew only 3 per cent, to €107 billion.

One area where Germany has long dominated ties with China is the automobile industry. German carmakers, including BMW and Mercedes-Benz, sell roughly a third of all vehicles they produce in China – exceeding sales in all of Western Europe.

But recent data shows that Germans appear to be losing their grip on the Chinese market, especially as the popularity of domestically produced electric vehicles surges.

In a clear sign of his priorities, within months of taking over as CEO of Volkswagen in September, Mr Oliver Blume spent weeks touring China and returned vowing to strengthen his company’s partnerships there.

“We have to cooperate much more closely with our local partners in order to listen to the customers in the Chinese region,” Mr Blume told reporters at the company’s annual earning meeting in March. “This will be part of a strategy for 2030.”

A study by the Kiel Institute showed that decoupling from China would be very costly for all of Europe, but especially Germany, given the strength of its economic ties.

Calculations by the institute, based on gross domestic product from 2019, showed that Germany could lose income worth more than €31 billion. And it could be even more if China retaliated.

Berlin would like to avoid another round of the upheaval it experienced after Russia launched its full-scale invasion of Ukraine, leading to an energy war that cost Germany its affordable supply of natural gas.

That will mean continuing to balance economic interests with security concerns, Mr Jorg Kukies, an economic adviser to Mr Scholz, told a gathering of German and US trade leaders.

“We want to have a positive approach to China,” Mr Kukies said. “Not an anti-China approach.”

NYTIMES