The political-economic principle of “change through trade” has failed. At least in connection with Russia. Things are different with China. German industry is too closely intertwined with the communist dictatorship. The dependency is cemented. German politics has a problem.
Yesterday Germany was still the child prodigy of the global economy, thanks in particular to its strong economic ties with China. We were the new economic powerhouse’s partner of choice while America’s export industry was being crushed.
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The new geopolitical situation sheds a different light on the same issue. Suddenly, what was admired yesterday is considered suspicious. Wall Street no longer acknowledges that you Germans are great. Now it is said that you Germans are careless because you are dependent. The balance of success has turned into a loss, at least from the point of view of many American investors.
And in fact: Germany is no longer just the men’s outfitter of the Chinese, but also their servant at the same time. China and Germany are interwoven, soldered and wired together; Exports and imports fuel each other. Kurt Tucholsky guessed it:
“As for the global economy, it’s intertwined.”
So this morning let’s take a cool look at German dependency. Five points stand out that limit our strategic options:
1. Without China, its largest customer, the German automotive industry would be just a shadow of itself today. For Volkswagen alone, trade with China accounts for 40 percent of total sales. Today, more cars are sold in China than in Europe and the USA combined. At BMW and Mercedes, a third of profits come from China.
2. At the same time, the local auto industry is dependent on so-called “rare earths” in the field of memory chips. China has a dominant market position here, which is relevant for the production of hybrid and electric motors, among other things. According to a current ifo study, 46 percent of all companies in the manufacturing sector say they are urgently dependent on advance payments from China.
Gabor Steingart is one of the best-known journalists in the country. He publishes the newsletter The Pioneer Briefing. The podcast of the same name is Germany’s leading daily podcast for politics and business. Since May 2020, Steingart has been working with his editorial staff on the ship “The Pioneer One”. Before founding Media Pioneer, Steingart was, among other things, CEO of the Handelsblatt Media Group. You can subscribe to his free newsletter here.
3. The majority of the tech industry in Germany now relies on primary and intermediate products “Made in China”. “Germany is in danger of losing the ability to master important digital key technologies,” says the recently published annual report for 2022 by the “Expert Commission for Research and Innovation”, which was set up by the federal government in 2006.
4. The close supply relationships have long since found their counterpart on the capital side. BASF is currently building the largest plant in its company history in Zhanjiang for around ten billion euros. This means that decoupling, as is being discussed in America, is not possible without massive write-downs that are relevant to the balance sheet.
5. China, in turn, has made itself at home in German industry. The former icon of Germany AG, Mercedes-Benz, is now 20 percent owned by two Chinese shareholders. Midea, a Chinese manufacturer of household appliances, has completely taken over the robot manufacturer Kuka from Augsburg. The dissolution of this cross-linking of both economies is de facto only possible through expropriation.
Conclusion: The companies in Germany and China will not be divided by the politicians’ war games. They supported the sanctions against Russia. A similar approach to China, however, touches the core of the German business model. The statements made by Herbert Diess at the VW general meeting can be understood by the political class as a polite form of declaration of war:
“The premature swan song to the ‘change through trade’ model does not go far enough. Block building cannot be our answer.”
