German business chiefs clash with Berlin over China policies
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[October 13, 2022] By
Andreas Rinke, Victoria Waldersee and Sarah Marsh
BERLIN (Reuters) - When German business
chiefs got wind last month of an economy ministry proposal to screen all
company investment going into China as part of a raft of new measures,
there was uproar.
The investment proposal was soon shelved, a source in the ministry and a
business leader told Reuters.
Annoyed they hadn't been sufficiently consulted on proposals to make
business with China less attractive that could have big repercussions
for German firms, senior business leaders later pushed back in a meeting
with Economy Minister Robert Habeck.
While no conclusions were drawn during the video call on Sept. 21, the
meeting, recounted by two of the participants, shines a light on the
angst within German boardrooms about the government's push to
recalibrate its relationship with China.
Executives who attended the meeting included the chief executives of
chemicals giant BASF, Deutsche Bank and industrial group Siemens, the
two sources said. The companies declined to comment.
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The economy ministry declined to comment when asked about the meeting.
The Green Party, which runs the ministry, has long advocated taking a
harder line on China and Habeck said last month that Germany would adopt
a tougher approach on trade.
The investment screening proposal floated by the ministry was driven by
a desire to limit transfers of certain technology and to avoid
increasing dependencies in some sectors, one of the people at the
meeting and a government source said.
"We can only warn against Germany turning away from China," said Markus
Jerger, head of the Mittelstand Association, part of an alliance
representing over 900,000 of the small and medium-sized firms that form
the backbone of Europe's biggest economy.
"To put a break on the German economy's China activities, as the economy
ministry would like, or is trying to do, is the wrong way," said Jerger,
who also attended the meeting with Habeck.
Politicians and executives in Germany have broadly come to agree that
the country needs to lessen its economic dependence on China, given
their concerns about industrial espionage, unfair competition or human
rights violations - concerns that Beijing has strongly rejected as being
unfounded.
Russia's invasion of Ukraine has also been a blow to the long-held
German maxim that economic interdependency would help open up
authoritarian states and sharpened Berlin's focus on how it should weigh
profit against risk in its relations with them.
But when it comes to China, businesses say the sticking point is how
Germany can reduce its dependence without inflicting more harm on an
economy already facing a recession next year - and without provoking a
backlash from Beijing.
'LOCAL FOR LOCAL'
Cracks are also emerging within the three-way coalition government that
took office in December and is due to publish Germany's first China
strategy document next year.
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The junior parties, the Greens and Free Democrats, are more hawkish than
Chancellor Olaf Scholz's Social Democrats (SPD), who want to avoid
triggering a U.S.-style Cold war with China.
"Decoupling is the wrong answer. We don't have to decouple from some
countries," Scholz, who plans to visit China later this year, said on
Tuesday. "I say emphatically we must continue to do business with
China."
German investment and trade in China hit record levels in the first half
of 2022 and big business says there's no question of pulling back from
the world's second-biggest economy.
Instead, corporate giants such as BASF and carmakers BMW, Mercedes-Benz
and Volkswagen are ploughing more money into China to create independent
local supply chains, in part to ring-fence their operations from
geopolitical disputes and trade wars.
"With the 'local for local' strategy, we stabilise our regional
portfolio against external influences in the best possible way," a BASF
spokesperson said.
Mercedes-Benz, Volkswagen, BMW and BASF were together responsible for a
third of all European investment in China in 2018-2021, according to a
study by Rhodium Group, a research company based in New York.
"It is impossible to completely disentangle China and Europe," said
Tobias Just, spokesperson for Mercedes-Benz, which sells three times as
many cars in China than the United States and counts two Chinese
entities as its biggest shareholders.
"Our strategy is local for local, not just for geopolitical reasons, but
for natural hedging, proximity to core markets and cost benefits as
well," Just said.
BMW and Volkswagen also told Reuters they were standing by plans to
invest more in their long-standing Chinese operations.
The Rhodium study said, however, that smaller European companies were
becoming more reluctant to accept the growing risks of investing in
China.
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![](../images/101322PIX/busine3.jpg)
German Economy and Climate Minister
Robert Habeck, German Foreign Minister Annalena Baerbock and German
Chancellor Olaf Scholz attend the weekly German cabinet meeting at
the Chancellery in Berlin, Germany October 12, 2022. REUTERS/Annegret
Hilse/File Photo
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A spokesperson for the economy ministry said it was closely
following the investment behaviour of German companies as part of
its strategic considerations on how to deal with China.
'STEEP LEARNING CURVE'
During their meeting with Habeck, big business leaders tried to make
clear they were not naive about China and were looking to diversify,
at the same time as doubling down on existing operations, the two
participants who declined to be name said.
Habeck promised to continue the dialogue with the business community
and another meeting has been arranged for the first quarter next
year, the two people said.
"He has a steep learning curve, he is very open," one of them said.
"The problem is that he is starting right at the bottom."
The economy ministry declined to comment when asked about a meeting
next year, or the remarks about Habeck.
Some of the measures Berlin has said it wants to pursue to reduce
its dependency on China are uncontroversial, like seeking new
sources of some key commodities such as rare earth metals.
But other proposals have raised alarm bells in the business
community as it fears the measures would put them at a competitive
disadvantage in what is still the world's fastest growing major
economy, despite an expected slowdown next year.
Reuters reported last month that the economy ministry was
considering curbing export and investment guarantees as part of its
new China strategy.
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Germany's Mittelstand companies warn this would hit them hard - and
much harder than the corporate giants with more financial firepower.
"If governmental support for exports were to be cancelled, then I
estimate that 50% to 70% of our members would probably no longer be
bold enough to enter the market," the Mittelstand Association's
Jerger said.
Business leaders said Berlin should liaise more closely with them on
any China measures and they were relieved to finally discuss the
matter in person with Habeck.
Some executives said they were lobbying Berlin to encourage firms to
find new markets, for example through new free trade deals, rather
than seeking to curb their business in China.
"Instead of punishing companies for doing business with China, the
right approach would be to incentivise business with other
countries," said Ulrich Ackermann, head of the trade department at
Germany's VDMA engineering association.
REPUTATIONAL RISK
Business leaders told Reuters they were concerned that even the
debate about possible policy changes was already affecting their
relations with China, which has urged Berlin not to politicise
trade.
Agatha Kratz at Rhodium said German companies may also be
underestimating the reputational risk of doubling down in China,
particularly in terms of how their actions were perceived in the
United States, which is now Germany's biggest export market.
"They are still a little too hopeful about being able to resist
Chinese pressure, but also U.S. pressures in terms of barriers to
trade," Kratz said.
China became Germany's biggest single trading partner in 2016 and
accounted for nearly 10% of the country's 2.6 trillion euros ($2.5
trillion) in trade last year.
But even under former Chancellor Angela Merkel, who took big
business delegations on her many trips to China, the honeymoon was
fading as the ruling Communist Party tightened its grip over society
and the economy under President Xi Jinping.
The surge in Sino-U.S. tension over Taiwan has been another wake-up
call for Berlin this year.
While government officials say Germany's economic ties with Russia
did not stop Berlin pushing for sanctions over Ukraine, some
lawmakers fear it might be harder to get tough with Beijing in the
event of any conflict over Taiwan.
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"If the unthinkable were to happen, right now, we would not be able
to impose sanctions, we would only be able to wag a finger and say,
'you can't do that'," said SPD lawmaker Markus Toens.
($1 = 1.0245 euros)
(Reporting by Andreas Rinke, Victoria Waldersee and Sarah Marsh in
Berlin; Additional Reporting by Ludwig Burger in Frankfurt,
Alexander Huebner in Munich and Eduardo Baptista in Beijing; Editing
by David Clarke)
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