“In China for China”
German companies – from car giant Volkswagen to SMEs – are making their plants in China independent of bases in Europe. Immunising operations against new Western sanctions raises German investment in China to record levels.
WOLFSBURG/BEIJING (own report) – In the run-up to the EU-China summit, which begins today, the trend towards relocating German corporate activities to the People’s Republic is gaining momentum. A few days ago Volkswagen announced that it would be developing a new platform for electric car models at a new centre in Hefei in eastern China, where the vehicles are then to be manufactured. This departs from VW’s previous practice of keeping vehicle development mainly in Germany. The company also plans to source almost entirely from domestic Chinese suppliers for its electric car manufacture in the People’s Republic. This will, the company claims, mean faster, cheaper and better production. But it also means that operations in Germany will be lost. Moreover, VW China will be in a position to split off from the German headquarters – again, to the detriment of the group’s base in Germany – should the West’s economic war on the People’s Republic escalate. Similar preparations are also being made by medium-sized enterprises operating in China. This is reflected in the recent sharp upturn in German investment in China, where the overall German investment portfolio is at a record level. Economists concede that this is a “paradoxical and unintended consequence” of the West’s economic war.
Faster, cheaper, better
The Volkswagen Group is advancing its strategy of comprehensive restructuring in the electric car segment. It will not only be manufacturing but also developing a new platform for several EV models in China. There are immediate economic reasons for the move. On the one hand, China is now a leader in electric vehicles, so it makes sense to fully leverage Chinese experience for VW’s own electric car production. On the other, the work can be done more cost-effectively and more quickly in China. Volkswagen is currently building a development centre (Volkswagen China Technology Company, VCTC) at its plant in Hefei, 500 kilometres west of Shanghai, where the new electric car platform is to be designed. It will be completed in two-thirds of the time required in Europe and cost only two-thirds as much. For EV assembly, the company is also switching as far as possible to Chinese suppliers, who charge lower prices. In future, 95 per cent of all upstream components are to be sourced domestically. The aim is to roll out competitively priced electric cars costing between €18,000 and €22,000 in just a few years’ time.[1] In this way, Volkswagen intends to catch up in China, after having fallen dramatically behind in EV sales.[2]
Ready for the spin-off
Alongside the economic grounds for restructuring production there are also political reasons. By relocating vehicle development to China and maximising the use of Chinese parts suppliers for production, Volkswagen’s Chinese factories will operate independently of Germany and Europe. As VW China boss Ralf Brandstätter confirms: “We are striving for an autonomous, controllable value chain.”[3] The group’s Chinese plants will be in a position to continue working independently in the event of an escalation of the West’s economic war on the People’s Republic, i.e. in the event of tighter sanctions or even decoupling: “in China for China”, as Volkswagen puts it.[4] The VW group will then be able to maintain its presence in the world’s largest car market under any circumstances. If required, VW can spin off its Chinese business divisions and run them separately. It would then leave Germany with the headquarters of a considerably smaller group, for recent figures show that Volkswagen is selling around 40 per cent of its vehicles in China. It is already clear that Germany will lose wide-ranging development activities as they are shifted to the VCTC in Hefei. Consequently, the West’s economic war on China, which is forcing Volkswagen to set up autonomous production in the People’s Republic, is damaging German industry.
The paradoxes of economic warfare
Around two years ago, the influential Bertelsmann Foundation reported on plans being hatched in the headquarters of large German corporations to spin off their China operations in an emergency (german-foreign-policy.com reported [5]). Medium-sized German companies are now also making similar preparations. For instance, ebm-papst, a manufacturer of electric motors and fans says it is thinking about “worst-case scenarios” and wants to organise its China operations autonomously so that they can be spun off at any time in the event of ever tighter economic sanctions.[6] Other SMEs are reported to be taking identical measures. Costly investments are often required. Thus, ebm-papst is currently investing around €25 million in its China plants – a worthwhile outlay because doing business in China appears extremely attractive in the huge Chinese. Indeed, China is now “attracting more and more investment” because companies feel that they “need to be able to insulate their business in China,” says Jürgen Matthes, an expert at the Cologne-based German Economic Institute (IW).[7] In view of the fact that the German government aims to persuade businesses to relocate their activities away from China, this trend is “paradoxical and not what is actually desired”. Moreover, everything that is manufactured in China thanks to new German investment is “not exported from Germany” – to the detriment of the German export sector.
Record investment
This is not the only reason why German investment in China is currently growing so rapidly. By 2021 German direct investment in the People’s Republic had already skyrocketed to €102.6 billion, exceeding the €100 billion mark for the first time.[8] A further €11.5 billion were added in 2022, bringing the total to €114 billion. In the first half of 2023, the new investments came to €10.3 billion, the second-highest figure ever recorded.[9] “Although the German economy is investing much less abroad overall, new direct investment in China remains almost as high as ever,” notes IW expert Matthes. This means that China accounts for a rapidly rising share of German direct foreign investments, calculated most recently at 16.4 per cent. As Matthes explains, “the country has never been so important in relation to the rest of the world.”
An indispensable supplier
If the economic war continues to intensify German companies will face further disadvantages. The West German bicycle manufacturer Rose Bikes, for example, reports that China as a supplier has long been “indispensable for the bicycle industry”.[10] If imports from China fall victim to sanctions or become much more expensive due to punitive tariffs or other measures, there is a risk of serious losses. The bicycle company is already endeavouring to find alternative suppliers from Europe, but says it takes time to source components at “the standard of quality we are used to from Asia and China”. Pricing is also a problem, since shifting to parts manufactured in Europe “initially costs more money”. Without Chinese suppliers, Rose Bikes predict they will not be able to produce at competitive prices until “eight to ten years at the earliest”. The situation is similar for numerous other companies that source upstream products from China for their German manufacturing sites. Despite trade obstacles, there was a huge rise in Germany’s imports from the People’s Republic last year, reaching a volume of over €191 billion – not only much more than ever before but also more than imports from any other country.
[1] Mehr Hefei, weniger Wolfsburg. tagesschau.de 24.11.2023.
[2] See also: Paradebranche unter Druck.
[3] Lazar Backovic, Sabine Gusbeth: Volkswagen plant das 20.000-Euro-Auto in China schon ab 2026. Handelsblatt.com 28.11.2023.
[4] VW entkoppelt China-Geschäft von Deutschland. n-tv.de 24.11.2023.
[5] See also: The Business Foundation of German Industry (I) and The Business Foundation of German Industry (II).
[6], [7] Julian Gräfe: China wird zum Risiko für den Mittelstand. tagesschau.de 30.11.2023.
[8] Jürgen Matthes: Deutsche Direktinvestitionen in China: Kaum Diversifizierung. IW-Kurzbericht No. 35. Cologne, 17.05.2023.
[9] “Deutsche Konzerne investieren verstärkt in China” spiegel.de 20.09.2023.
[10] Julian Gräfe: China wird zum Risiko für den Mittelstand. tagesschau.de 30.11.2023.
