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Challenges for German Businesses Amid China’s Turmoil

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China’s economic changes are significantly affecting German companies, notably Volkswagen, which struggles with declining sales in its key market. As local competitors in China grow stronger, German manufacturers face challenges in understanding consumer preferences. Despite China’s robust GDP growth projections, economic hurdles persist, including an aging population and stagnant consumption. The Chinese government is responding with fiscal and monetary policy adjustments, while German firms must adapt to shifting market dynamics and potential trade tariff changes.

The Impact of China’s Economic Shifts on German Companies

The moderate growth of China’s economy is having significant repercussions for German firms, including industry giant Volkswagen. As Chinese businesses adapt more swiftly to market demands, they pose increasing competition in Europe. Economist Julia Haes, speaking at a ‘Sino-German Centers’ event hosted by the Frankfurt School of Finance, cautions that “the conditions for German companies remain challenging.” According to Haes, who leads the ‘China Institute for the German Economy’ in Tutzing, “In various sectors, German manufacturers are struggling to keep pace with the preferences of Chinese consumers compared to their local counterparts.”

Volkswagen’s Struggles in a Competitive Market

Volkswagen is facing notable challenges, as gains in smaller markets and the United States do not compensate for the declining sales in China, which is VW’s second-largest market. Once a frontrunner in the Chinese auto industry, the Wolfsburg-based company sold only 2.9 million vehicles in 2024, a drop of over 300,000 units compared to the previous year.

China has emerged as the world’s foremost car manufacturer, placing European companies under immense pressure. The International Monetary Fund reports that China’s economy has been rapidly expanding; it outstripped Germany’s economic output back in 2007. By the end of 2024, the IMF projected China’s GDP to reach 18 trillion US dollars, more than four times that of Germany. Haes notes, “China possesses the potential to become a global leader in innovation.”

Despite this growth, the Chinese economy has faced hurdles since the pandemic. In 2024, growth was recorded at 4.8 percent, a figure that falls short of meeting the needs of its 1.4 billion citizens. The population has not grown in five years and is aging at an alarming rate, leading to prolonged weak consumption levels. Haes highlighted concerning reports of officials going unpaid for six months, which undermines public confidence in the government.

On a positive note, China’s exports surged in 2024, reaching a record value of approximately 3.4 trillion euros.

Government Intervention and Future Projections

In response to various ineffective state programs, the Communist Party’s Politburo, as reported by the official news agency Xinhua, has initiated a “proactive fiscal policy and a suitably loose monetary policy.” Yi Xiong, chief economist at Deutsche Bank in China, describes this as a crucial shift, stating, “The current situation is not ideal, but improvements are anticipated.” Yi predicts potential subsidies for Chinese consumers purchasing domestic vehicles. Haes adds that enhancing economic performance could also involve increased childcare support.

Moreover, the Chinese internet satellite operator SpaceSail is emerging as a formidable competitor to Musk’s SpaceX.

As for trade dynamics, Haes emphasizes the need for adaptability among German businesses, using the pig farming industry as an illustrative example. European breeders once exported vast amounts of pork to China, but as local investors developed China’s pig farming capabilities, imports plummeted. “One must stay vigilant,” warns Haes, “even in industries perceived as less innovative.”

Looking ahead, both Yi and Haes foresee the possibility of heightened tariffs on Chinese imports from the US under the new administration. Haes remarks, “China will seek to redirect goods that cannot be exported to the US to other markets.” This could lead to price reductions for certain products, such as solar panels, due to a lack of buyers. “Why don’t we leverage Chinese subsidies to bolster our energy sector?” Haes suggests, highlighting the need for strategic thinking in the face of changing economic landscapes.

This analysis was reported by Deutschlandfunk on January 14, 2025, at 11:38 PM.

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