The industry has to be honest

Volkswagen in Shanghai

In the future, the federal government wants to know how much of the business German companies do in China.

(Photo: Bloomberg)

The federal government’s draft China strategy is tough: the state wants to support companies in their China expansion less, they should reduce their dependency. Above all, however, politicians are demanding transparency: How high are the proceeds from the China business, how high are the profits?

The government paper even includes a stress test. Industrial groups such as BASF or Volkswagen would then have to prove whether they could survive a loss of business in China economically. During the financial crisis, for example, the state dealt with banks threatened with bankruptcy that had speculated on mortgage securities.

China is still a long way from such a crash scenario – and nobody really knows if it will ever happen. But China supports Russia in the Ukraine war, and the annexation of Taiwan by whatever means is a declared political goal.

The US government is pursuing decoupling from the People’s Republic – and is increasing the pressure on its partners to do the same. This is a problem for German industry, the dependency is great. The sporting goods manufacturer Adidas generates 21.6 percent of its sales in China, the chemical group Covestro comes to 22.3 percent, Volkswagen is over 40 percent. While sales and turnover can still be quantified well, there is little to be found about the actually relevant variable: the profit from the China business.

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BMW is becoming more and more dependent on China

Example BMW: In 2021, the Munich company sold 847,000 cars in China, which is a third of global sales. Based on sales, China is twice as important to BMW as the US and ten times more important than France.

And the dependency keeps growing. At the beginning of the year, BMW announced the expansion of its production capacity in Shenyang. In addition, the group has taken over the majority in the joint venture with Brilliance and is planning another joint venture for the group subsidiary Mini with Great Wall.

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So while the sales share is approaching 40 percent, one can only guess at the profit contribution from the China business. The 1.6 billion euros from the production joint venture specified for 2021 will rise sharply this year due to the majority takeover.

A clean bill includes the massive car exports from the USA and Germany, but they are not booked through the joint venture. Half of all the highly profitable top models in the seven series produced in Dingolfing go directly to China. How high these profits are is nowhere to be found. One thing is certain: Without China, BMW could hardly operate its largest German plant economically.

How much China is in the Mercedes profit is a mystery

There is also a concentration of risk at Mercedes: the Stuttgart-based company is expanding local capacities and aligning its model policy with the Chinese upper class. The A and B class models sold in Europe will be discontinued in the medium term.

>> Read also: Before the Chinese take over, the German state should step in – SPD politicians are demanding a new fund

S-Class and Maybach luxury limousines have the right of way. They are still built in Sindelfingen, but are sold in bulk to China. How much profit Mercedes makes with the export of luxury cars is not found in the annual report.

Mercedes S class

The luxury car will continue to be built in Germany.

(Photo: dpa)

Anyone who puts China’s contribution to the entire Mercedes profit at 50 percent will not get much opposition in Stuttgart. The share of Chinese investors can be specified more precisely. With 9.9 percent, the state-controlled joint venture partner BAIC is the largest single shareholder. Number two is Geely owner Li Shu Fu with 9.7 percent. Together, the Chinese would effectively have a blocking minority at the Mercedes Annual General Meeting if they voted in a coordinated manner.

Nobody is demanding that German companies should withdraw from China tomorrow. But the extent of the China business bears no relation to the transparency of the corporations.

This rightly generates the distrust of the federal government, but above all it should provoke criticism from investors. The control of corporate risks is not the task of the state, but the duty of the owners. It is high time that investors oblige German companies to be honest when it comes to China.

More: Steinmeier warns of China’s new course in unusually sharp words

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