Ger­many faces a China prob­lem

Viet Nam News - - WORLD BUSINESS -

SCHROBENHAUSEN — Bauer, a big pro­ducer of con­struc­tion equip­ment, is bet­ter placed than many Ger­man com­pa­nies that in­vested heav­ily in China over the past few decades.

The Bavaria-based firm, which traces its roots back to 1790, does not have to worry about keep­ing a Chi­nese joint ven­ture part­ner happy be­cause it is the sole owner of its two plants in Shang­hai and Tian­jin.

And the spe­cial­ist en­gi­neer­ing ma­chines Bauer pro­duces there are sold in coun­tries across Asia, shield­ing the group from swings in the volatile Chi­nese build­ing mar­ket.

Even so, CEO Thomas Bauer, the sev­enth gen­er­a­tion in his fam­ily to run the firm, is wor­ried about his com­pany’s place in China and a broader eco­nomic re­la­tion­ship that un­til re­cently was seen by Ger­man cor­po­ra­tions and politi­cians as a lu­cra­tive one-way bet.

“Ger­many has put too many eggs into one bas­ket, and that bas­ket is China,” Bauer, a jovial 62year-old with a thick Bavar­ian ac­cent, told Reuters at the com­pany’s head­quar­ters in Schrobenhausen, an hour’s drive north of Mu­nich.

Bauer’s con­cern points to a grow­ing fear in Ger­many. For more than a decade, the coun­try has been the growth lo­co­mo­tive of Europe, its econ­omy weath­er­ing global fi­nan­cial tur­moil, the eu­ro­zone debt cri­sis and a record in­flux of refugees.

That re­silience was based on two key driv­ers: Ger­many had in­no­va­tive firms that pro­duced high­end man­u­fac­tured goods that fast­grow­ing economies needed; and the coun­try was bet­ter than oth­ers at prof­it­ing from an open, rules­based global trad­ing sys­tem that re­warded com­pet­i­tive­ness.

China has been cru­cial on both fronts. Over the past decade, it bought up Ger­man cars and ma­chin­ery at an as­ton­ish­ing pace, as it grad­u­ally opened up to for­eign firms. Last year alone, Ger­man man­u­fac­tur­ers sold nearly five mil­lion cars in China, more than three times as many as in the United States.

But even as the good times roll on, a rad­i­cal shift is tak­ing place in how Deutsch­land AG views the vast Chi­nese mar­ket.

Not only has the open­ing of China shifted into re­verse under Pres­i­dent Xi Jin­ping, but Chi­nese firms have moved up the value chain far faster than many in Ger­many ex­pected.

Ger­many’s China co­nun­drum is part of a broader chal­lenge fac­ing Europe: Years of in­ward-fo­cused cri­sis fight­ing have left the bloc po­lit­i­cally di­vided and ill-pre­pared to re­spond to loom­ing geopo­lit­i­cal and eco­nomic chal­lenges. Now the con­ti­nent risks be­ing squeezed be­tween a more assertive Bei­jing and the “Amer­ica First” poli­cies of Don­ald Trump.

In pri­vate, some ex­ec­u­tives liken the sit­u­a­tion of Ger­man in­dus­try in China to the prover­bial frog in a pot of slowly heat­ing wa­ter which ends up boil­ing to death be­cause it won’t or can’t jump out.

Ger­many’s am­bas­sador to China, Michael Clauss, warned at a meet­ing with in­dus­try chiefs in Ber­lin last month of “tec­tonic changes” in the re­la­tion­ship, ac­cord­ing to par­tic­i­pants.

“We need to pre­pare peo­ple here for a new era in our part­ner­ship with China,” an of­fi­cial at Ger­many’s pow­er­ful BDI in­dus­try fed­er­a­tion said. “These are still golden times. But there is a huge amount of con­cern about what lies ahead.”

Role of the state

Ger­man com­pa­nies were among the first in the West to set up shop in China, giv­ing Ger­many an ad­van­tage as the Chi­nese econ­omy took off.

Bi­lat­eral trade be­tween the two coun­tries hit a record 187 bil­lion eu­ros last year, dwarf­ing China’s trade with France and the UK, both around 70 bil­lion eu­ros. In 2017, Ger­many ran a trade deficit with China of 14 bil­lion eu­ros, tiny com­pared to the US deficit of $375 bil­lion, or about 346 bil­lion eu­ros.

Bauer AG, which em­ploys 11,000 work­ers in 70 coun­tries, built its first pro­duc­tion fa­cil­i­ties in China in the mid-1990s. At the time, not a sin­gle Chi­nese firm could make the so­phis­ti­cated drilling ma­chines it pro­duces – tow­er­ing yel­low struc­tures used to build the foun­da­tions for sky­scrapers, power sta­tions and air­ports.

By 2013, Bauer counted 36 Chi­nese com­peti­tors able to make such ma­chines, a shift the CEO says was ac­cel­er­ated by Euro­pean sup­pli­ers sell­ing co-de­signed parts to the Chi­nese.

A decade ago, the com­pany’s Chi­nese plants gen­er­ated rev­enues of 109 mil­lion eu­ros. Sales slumped to less than half that amount in five of the nine years that fol­lowed.

To­day, what Bauer and other Ger­man firms say they are most wor­ried about is the role of the Chi­nese state in the econ­omy.

Last year, China in­tro­duced a cy­ber se­cu­rity law which tight­ened state con­trol over in­ter­net ser­vices, in­clud­ing se­cure VPN con­nec­tions that are used by for­eign firms to com­mu­ni­cate con­fi­den­tially with head­quar­ters.

More re­cently, some Ger­man com­pa­nies have com­plained of pres­sure to ac­cept Com­mu­nist party of­fi­cials on the boards of their joint ven­tures.

The Bauer boss fears that Xi’s “Made in China 2025” strat­egy, which iden­ti­fies 10 key sec­tors, in­clud­ing robotics, aero­space and clean-en­ergy cars, where China wants to be a leader, rep­re­sents a di­rect chal­lenge to Ger­man man­u­fac­tur­ing dom­i­nance.

To keep its edge Bauer says his firm is fo­cus­ing in­ten­sively on dig­i­tal­i­sa­tion.

“It will not be a con­test against copiers. It will be one against in­no­va­tive en­gi­neers who are in­tent on over­tak­ing us,” he said. “If we don’t start find­ing an­swers soon, this can end very badly.”

The Ger­man angst over China mir­rors that which has prompted Trump to threaten Bei­jing with tens of bil­lions of dol­lars in trade tar­iffs.

But be­cause Ger­many’s top firms have be­come so de­pen­dent on the Chi­nese mar­ket, the gov­ern­ment in Ber­lin has avoided con­fronting China head-on. — REUTERS

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