A Dec. 7 article by the German News Information Services website reports that German firms are no longer just outsourcing to escape high production costs, but they are moving lock, stock and barrel to China as they fear consequences of decoupling. Better survive through producing in China for China, than dying at home.
“A few days ago Volkswagen announced that it would be developing a new platform for electric car models at a new center in Hefei in eastern China, where the vehicles are then to be manufactured,” the website reports. “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.”
Interestingly, plans were being drafted already two years ago. “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. 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 organize its China operations autonomously so that they can be spun off at any time in the event of ever tighter economic sanctions. Other [small and medium enterprises] 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 market. 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. 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.
“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.’ 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 endeavoring 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.”
The emigration of German industry to China is measured also in the growth of German FDI (foreign direct investments), at a yearly pace of 16.4%. As Matthes explains, “the country has never been so important in relation to the rest of the world.”
In 1989, East German citizens “voted with their feet” against government efforts to keep them captive in a collapsing system. Now German corporations are doing the same.