End of the German export model
German companies face stiff competition from China in more and more markets. Market shares are shrinking for Germany’s three largest industries.
BERLIN/BEIJING (own report) - Economists are warning of a “China shock” for German industry. Increasing numbers of German companies are not only losing market share on the Chinese market to their Chinese competitors but also struggling to compete with Chinese companies in their other export markets. This pattern of decline can be seen in the Germany’s three most important industries. German automotive companies have fallen behind their Chinese competitors in the electric vehicle sector. Mechanical engineering companies from Germany are now languishing in the People’s Republic, while facing burgeoning Chinese competition in third markets. The chemical industry, too, is floundering, badly affected not least by the sharp rise in gas prices. Chemical giants like BASF are hardly able to keep up with Chinese companies, especially in the basic chemicals segment. Plants are being forced into closure. “Germany’s biggest customer is turning into its biggest competitor,” concludes Yanmei Xie, an expert from Hong Kong-based business analysists Gavekal. Specialists have been voicing “concerns about the German export model” as such, as German companies increasingly fail to keep pace with Chinese producers in previously attractive markets.
Trouble in the basic chemicals segment
Significant parts of Germany’s major chemical sector, the third largest industry in the Federal Republic, are feeling the squeeze. This applies, according to a report in the Handelsblatt newspaper, above all to basic chemicals, such as the production of mass plastics like polypropylene and polyethylene. One reason for this is the rise in natural gas prices. Although energy is no longer at the record highs of 2022, companies are still dealing with considerably higher prices than the long-term average over the period to 2020. Liquefied natural gas (LNG) is simply much more expensive than the pipeline gas previously sourced mainly from Russia. There will probably be no return to such low energy prices for German industry.[1] Another reason is that China has massively ramped up its production. While Chinese demand for polyethylene, for example, rose considerably faster than supply between 2015 and 2019, the Chinese responded swiftly. The construction of new Chinese plants increased supply so rapidly that it soon significantly outstripped demand, although partly due to the Covid-19 pandemic dip, so the new capacity could increasingly be exported. German companies have also been involved in constructing production sites in China, most notably BASF’s new Verbund site in Zhanjiang in southern China. In fact it is the largest single investment by BASF, at ten billion US dollars,[2] producing primarily thermoplastic polyurethane.
Closures across Europe
Chinese chemical products, with their lower production costs, are evidently taking market share away from the more expensive output of German companies, even in Europe. Between 2017 and 2023, chemical imports into the EU increased in volume from 107 billion euros to 238 billion euros. A rapidly growing share comes from China, with the rise particularly sharp in basic chemicals.[3] The profit margins for producers of basic chemicals are shrinking in Europe, as some companies are driven out of the market by the low Chinese prices. BASF, for example, has already shut down considerable production capacity, and reports indicate that, “further plants are now facing closure.” The market research agency ICIS estimates that almost forty sites worldwide making basic chemicals are threatened with closure or have already been shut down. “The focus,” it says, “is clearly on Europe.” More than half of the closures are in the EU and the UK.[4] According to ICIS, the US plastics manufacturer Trinseo plans to shut down its site in Stade in northern Germany, while the US company Celanese is targeting production cuts in Hamm-Uentrop. There are also reports of closures in France, Spain and the Netherlands.
“Giving up third markets”
Germany’s second largest industrial sector has also signalled growing difficulties. Mechanical engineering was for a long time one of the biggest beneficiaries of business with China. The People’s Republic is still the second largest export market for German mechanical and process engineering companies, but the value of German sales to China has stagnated at around 19 billion euros per year since 2018. Chinese engineering companies have progressively grown in strength as the economy matures. Serving the huge Chinese market, they have built up “enormous production capacities”, and it is this potential that enables them in the long term to conquer international markets with their competitively priced exports, explains Karl Haeusgen, President of the German Engineering Federation (VDMA).[5] Not only in China but also in third markets have they emerged as increasingly dangerous competitors for German companies. Haeusgen notes from survey among VDMA members shows that round 61 per cent of companies find their situation over the last five years has been, at best, mediocre or become even worse.[6] He warns that German machine makers can no longer afford to engage in price wars “in the less important third markets” and may well be forced into a major setback, “giving up such markets all together”.
“China shock”
German producers are increasingly recording heavy losses on export markets due in part to the successful export push by Chinese companies. For example, Germany’s market share of global exports of industrial machinery fell from 16 per cent in 2013 to 15.2 percent in 2023. This is clearly a consequence of the fact that China’s share rose from 14.3 percent to 22.1 per cent over that period.[7] As for automotive field, Germany’s share of global vehicle exports still stood at 22.3 percent in 2013 but had slipped to just 20.7 per cent in 2023, while China’s share grew from almost zero to nine percent, marking just the start of a strongly upward trend, especially in electric cars. The automotive sector, now being eroded by Chinese competition, is Germany’s most important industrial sector, ahead of mechanical engineering and chemicals. As Germany sees its export share in all three of its leading sectors hit by the success of Chinese exports, observers are already speaking of a “China shock” across the board.[8]
“No miracle cure for third markets”
In order to at least safeguard the position of the German and European automotive industry within the European internal market, the EU Commission is currently preparing punitive tariffs on the import of electric cars from China.[9] As for mechanical engineering, VDMA President Haeusgen has criticised a reluctance to take protective measures: the “fear” of China’s reaction, he says, has caused the engineering sector to refrain from seeking tariffs for too long. German industrial policy has, it is argued, been “naive”.[10] There are also reports that the S&P rating agency anticipates a similar response from the German and European chemical industry: “calls for protective tariffs for the European market could grow louder.”[11] However, even if protection succeeds in stabilizing the shares of German and European producers on their home market, the problem remains that China will be superior on third markets. According to Noah Barkin, an expert at the Rhodium Group, there is “no miracle cure in terms of policy” to ensure the competitiveness of German companies in third markets. German companies are, he writes, threatened with being “squeezed out of many of these markets in just a few years’ time”.[12] “We are worried about the German export model,” recently conceded Rolf Langhammer, an expert from the Kiel Institute for the World Economy (IfW). “The possibility that this model, as we have known it from the past, will come to an end in the next few years cannot be ruled out.”
[1] Bert Fröndhoff: Chinas Exporte verschärfen Krise in der Chemie-Industrie. handelsblatt.com 29.08.2024.
[2] See also: Kollateralschäden im Handelskrieg.
[3], [4] Bert Fröndhoff: Chinas Exporte verschärfen Krise in der Chemie-Industrie. handelsblatt.com 29.08.2024.
[5], [6] Sven Astheimer, Uwe Marx: Der Maschinenbau steckt in der China-Falle. faz.net 13.07.2024.
[7], [8] Dana Heide: Deutscher Industrie droht der China-Schock. handelsblatt.com 22.08.2024.
[9] See also: Tariffs: on the road to a trade war.
[10] Sven Astheimer, Uwe Marx: Der Maschinenbau steckt in der China-Falle. faz.net 13.07.2024.
[11] Bert Fröndhoff: Chinas Exporte verschärfen Krise in der Chemie-Industrie. handelsblatt.com 29.08.2024.
[12], [13] Dana Heide: Deutscher Industrie droht der China-Schock. handelsblatt.com 22.08.2024.
