Dusseldorf German companies are once again relying more on China for their procurement than they did half a year ago. This is the result of a survey by the purchasing manager association BME, which is available exclusively to the Handelsblatt.
Purchasing managers from corporations such as ABB, Bosch, ZF Friedrichshafen and DeTeWe Systems are organized in the BME. 45 of them, who together have a procurement volume of 10.8 billion euros, commented extensively on their purchasing policy in China in long-term interviews.
As late as September 2022, just 34 percent of the buyers surveyed said they wanted to further expand procurement activities in China – about half as many as in January 2022. The zero Covid policy in China, but above all the geopolitical upheavals caused by the Ukraine war and the impending invasion of Taiwan drove German companies to caution last fall. The number of those who were considering at least a partial withdrawal from the Middle Kingdom doubled to 16 percent.
Skepticism about China is fading
But many of the worries are apparently taking a back seat this spring. Caution towards the People’s Republic seems to have vanished. Currently, only 13 percent of the buyers surveyed want to buy less in China. On the other hand, 56 percent are already planning to expand their activities in the second largest economy in the world.
“The companies are dealing with scenarios and strategies in order to reduce dependencies in the future,” explains BME China expert Riccardo Kurto. “However, a complete reversal from China is not an option for most.”
However, the majority of German companies are opposed to the declared policy of the federal government. The latter has already taken initial measures to reduce Germany’s dependency. At the end of May, Berlin refused the VW group guarantees for investments in the People’s Republic, with which the Wolfsburg-based company wanted to renew plants there.
>> Read about this: The federal government wants to significantly limit investments by German companies in China
A total of 14 applications from German companies worth around four billion euros that sought Hermes guarantees to protect their investments from political risks such as war or expropriation were not approved. The reason is the government’s more restrictive procurement practice, which is aimed in particular at China.
In a paper from the Economics Ministry, Green Minister Robert Habeck allegedly followed suit in December. According to media reports, Berlin wants to exclude Chinese companies from orders for critical infrastructure. German companies exposed in China could therefore be subject to separate notification obligations.
There are also safety concerns. Interior Minister Nancy Faeser (SPD) announced that she would check by the summer whether network components already installed by the Chinese manufacturers Huawei and ZTE pose risks for the 5G mobile network.
Many prefer more extensive warehousing
Until recently, the federal government had expressed the hope that the domestic industry would increasingly stock up on other markets with goods and primary products due to government pressure. But this hope has so far been disappointed.
Just four out of ten German purchasing managers told the BME that they were thinking intensively about new procurement regions. Instead, more than a fifth rely on simply increasing inventories as a precautionary measure.
>> Also read: Is the federal government making a mistake with its ban on China?
The answer to the question of where to shop instead of China also divided the German economy. Around 60 percent see Southeast Asia as a strong winner, above all Vietnam and at some distance Malaysia and Thailand – countries that purchasing managers regard as politically unstable.
India is also among the favorites, with 45 percent mentioning it. 40 percent trust Eastern Europe to play a leading role as a procurement region, while Turkey is just 20 percent.
Huawei technology should no longer be used in critical infrastructure.
(Photo: AP)
There are several reasons for the reluctance. On the one hand, the dependency on imports of rare earths, preliminary products for the pharmaceutical industry or for photovoltaic systems cannot be shaken off from one day to the next. On the other hand, there is a risk of significantly higher costs when changing procurement markets.
Ifo President Clemens Fuest explained how high they could get at the ITB in Berlin in early March. According to his calculations, nearshoring, i.e. relocating company purchases back to Turkey, North Africa or neighboring European countries, would reduce gross domestic product (GDP) by 4.17 percent. An exclusive supply by German suppliers even by 9.68 percent.
Automakers are pushing ahead
It is therefore not surprising that many German companies are continuing to push their engagement in China despite the political risks. The German Economic Institute (IW) already calculated around ten billion euros in German investments in China for the first half of 2022 – after 5.7 billion euros in the corresponding period of the previous year.
And there could be more. In October, VW announced that it would invest 2.4 billion euros in a joint venture that will enable autonomous driving in China. Mercedes announced in December “a mid-single-digit billion amount” earmarked for China. At the same time, BMW announced that it was planning around 1.4 billion dollars for the expansion of the battery site in Shenyang.
>> Also read: China is important for the German economy – the key figure remains under lock and key
Germany’s car manufacturers are not the only ones who are undeterred in their important China business. The Ludwigshafen chemical group BASF alone will invest ten billion euros in new production facilities there by the end of the decade. “I’m not saying that investments there are risk-free,” said CEO Martin Brudermüller at the end of February. “But the opportunities we see outweigh the risks.”
Siemens announced in the fall that it intends to relocate parts of the company to the People’s Republic. Ironically, the sensitive division “Digital Industries”, supplier of industrial software and factory automation systems, is to be more strongly geared towards the country.
The goal remains cut-throat competition
With all of this, however, Western companies are falling into a trap, believes Charles Parton of the London think tank Council on Geostrategy. “The Chinese Communist Party has a well-defined strategy for promoting companies to become global champions in key future areas,” he warned in a study last week. This is achieved through state subsidies, but also through espionage. “The aim is to undercut the foreign competition in terms of price and to force them out of the market.”
But even breaking with Chinese suppliers harbors dangers, as has recently been shown. After branded companies such as Nike, Puma and H&M canceled contracts in the western border region of Xinjiang, where Beijing is believed to be detaining more than a million Muslims in labor camps, western companies became the target of Chinese calls for a boycott.
With serious consequences: After Adidas refused to continue processing cotton from the Uyghur region, Chinese consumers turned their backs on the brand with the three stripes. In the first half of 2022, it lost a third of its sales in China.
More: End of quarantine in China: what business travelers need to know now.