T HE CONCEPT of “political modification through trade” has lost its appeal throughout much of the West as China has grown more, not less, authoritarian under President Xi Jinping. That has not stopped Karl Haeusgen, chairman of Hawe, a maker of hydraulic pumps, from thinking in the long-lasting success of its German variation, Wandel durch Handel

Mr Haeusgen has a self-centered factor for optimism. China accounts for about one-quarter of Hawe’s sales. This will grow substantially as soon as a 25,000- square-metre factory in Wuxi near Shanghai is completed. On January first Ye Jiang, an engineer who has worked for the household firm since 1999, joined its management board as its first Chinese member.

Lots of German employers are in a similar scenario. Product trade between the EU and China grew eight-fold between 2000 and 2019, to EUR560 bn ($626 bn). In 2019 Germany represented 37%of that, or EUR206 bn. In the very first seven months of 2020 German business assisted China edge out America as the EU‘s largest trading partner. Between January and September China’s share of German exports rose by one-eighth, year on year, to almost 8%. China is also Germany’s top supplier; its share of German imports rose to more than 11%in the same period, from less than 10%in 2019.

Although the most China-dependent American companies, like its gambling establishment operators and chipmakers, get more of their earnings from the Asian giant than the most discovered German firms, German Sino-dependency is focused in its most significant and most powerful markets (see chart). Of Germany’s 15 most important listed companies, 10 derive at least a tenth of incomes from China, according to The Economic Expert‘s rough estimates; in America, less than half do.

That is why German service applauded the hasty conclusion last month, in the last days of Germany’s turning presidency of the EU Council, of an investment treaty between the bloc and China. The deal is implied to approve European companies much better access to the Chinese market by, for instance, removing the requirement that they form a joint venture with a local firm and creating a more level playing field for investors.

Deutschland AG‘s strange reliance on China likewise assists discuss its unwillingness to follow the German federal government’s pleas to diversify markets and supply chains away from the Asian giant. Many German companies, from medium-sized Mittelstand stalwarts like Hawe to its bluest chips, are doubling down on the Middle Kingdom. Hahn Automation, that makes commercial robots, plans to invest countless euros in brand-new Chinese factories and improve its incomes in China from 10%of the total to 25%in the next five years. BASF is constructing a big $10 bn plastics factory in the southern province of Guangdong, the biggest financial investment in the chemicals giant’s 155- year history. “We need to play ball with the Chinese,” states Joerg Wuttke, the German head of the EU chamber of commerce in China. “If you are not at the table, you are on the menu,” he alerts.

The loudest cheerleaders are in Germany’s car market. “China is today and the future of German carmakers,” says Noah Barkin of Rhodium Group, a research firm. As the world’s most significant market, China represent two in 5 automobiles the Volkswagen Group sells internationally. Without China it would have been hit harder both by the “Dieselgate” emissions scandal and by the pandemic. China is the greatest foreign market for BMW, a Bavarian rival, whose sales there increased by 31%in the 3rd quarter, year on year. In December Ola Källenius, employer of Daimler (in which two Chinese carmakers hold an integrated 15%stake) hailed a “exceptional” recovery in China, the biggest and most financially rewarding market for its Mercedes-Benz brand name, whose sales grew by double digits for 6 straight months.

German carmakers are likewise ending up being more reliant on China for their capacity to innovate, notes the Mercator Institute for China Researches, a think-tank. In September the brand-new i X 3 electrical car rolled off the assembly line in Shenyang, where it was likewise completely established by BMW and its Chinese state-run partner, Sparkle Automobile. The joint venture likewise opened a new battery factory in the northeastern city. Volkswagen and its Chinese partners vowed to invest EUR15 bn into e-mobility in China by2024 VW recently purchased a stake in Gotion High-Tech, a maker of batteries, to strengthen its “electrification method in China”. Daimler’s most current annual report calls China “a significant market for brand-new innovations”.

No surprise carmakers are genuflecting before China’s Communist Party. According to the Süddeutsche Zeitung, a paper, in 2012 Volkswagen opened a loss-making plant in the western city of Urumqi, in exchange for authorizations for new, lucrative factories on the eastern coast. VW denies the accusation. It has kept its Urumqi plant running, in spite of pressure from activists and political leaders in America and Europe to stop doing service in Xinjiang province, where the authorities have been maltreating the Uyghur Muslim minority (see short article).

Some voices in corporate Germany are concerned that this is short-sighted. Two years ago the BDI, one of the two main German market associations, published a paper outlining its concerns about high barriers to entry, state subsidies to regional firms and other distortions in the Chinese market. It now praises the new investment treaty, the BDI alerted that its members ought to be under no illusion: even once the pact is validated by the European Parliament and implemented, German firms will not have truly totally free access to the Chinese market.

Chinese firms are also progressively competing with German ones, particularly in the sort of professional machinery produced in the Mittelstand China is currently the world’s second-biggest exporter of such set. With high labour expenses in the house, “innovation is our only competitive benefit”, says Ulrich Ackermann of the VDMA, an association of machinery-makers. And that benefit is being worn down as more Chinese companies follow its electric-car industry in becoming more advanced.

German firms’ relationship with China has therefore become “a consistent walk on a tightrope in between systemic competition and business collaborations”, says Friedolin Strack of the BDI Nobody believes in “political change through trade” in the foreseeable future, admits Wolfgang Niedermark, who until last year headed the German chamber of commerce in Hong Kong. But, it appears, German managers still think in trade, through all the political change.

This post appeared in business section of the print edition under the heading “Riding high”

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