Insight: "Boiled frog syndrome" - Germany's China problem
15/04/2018 06:00
* Mounting angst in Germany over relationship with China
* Berlin faces growing pressure to get tough
* Some big firms still wary of provoking Beijing
* Others are paring back their China exposure
By Noah Barkin
SCHROBENHAUSEN, Germany, April 15 (Reuters) - Bauer, a big
producer of construction equipment, is better placed than many
German companies that invested heavily in China over the past
few decades.
The Bavaria-based firm, which traces its roots back to 1790,
does not have to worry about keeping a Chinese joint venture
partner happy because it is the sole owner of its two plants in
Shanghai and Tianjin.
And the specialist engineering machines Bauer produces there
are sold in countries across Asia, shielding the group from
swings in the volatile Chinese building market.
Even so, CEO Thomas Bauer, the seventh generation in his
family to run the firm, is worried about his company's place in
China and a broader economic relationship that until recently
was seen by German corporations and politicians as a lucrative
one-way bet.
"Germany has put too many eggs into one basket, and that
basket is China," Bauer, a jovial 62-year-old with a thick
Bavarian accent, told Reuters at the company's headquarters in
Schrobenhausen, an hour's drive north of Munich.
Bauer's BSAG.DE concern points to a growing fear in
Germany. For more than a decade, the country has been the growth
locomotive of Europe, its economy weathering global financial
turmoil, the euro zone debt crisis and a record influx of
refugees.
That resilience was based on two key drivers: Germany had
innovative firms that produced high-end manufactured goods that
fast-growing economies needed; and the country was better than
others at profiting from an open, rules-based global trading
system that rewarded competitiveness.
China has been crucial on both fronts. Over the past decade
it bought up German cars and machinery at an astonishing pace,
as it gradually opened up to foreign firms. Last year alone,
German manufacturers sold nearly 5 million cars in China, more
than three times as many as in the United States.
But even as the good times roll on, a radical shift is
taking place in how Deutschland AG views the vast Chinese
market.
Not only has the opening of China shifted into reverse under
President Xi Jinping, but Chinese firms have moved up the value
chain far faster than many in Germany expected.
Germany's China conundrum is part of a broader challenge
facing Europe: Years of inward-focused crisis fighting have left
the bloc politically divided and ill-prepared to respond to
looming geopolitical and economic challenges. Now the continent
risks being squeezed between a more assertive Beijing and the
"America First" policies of Donald Trump.
In private, some executives liken the situation of German
industry in China to the proverbial frog in a pot of slowly
heating water which ends up boiling to death because it won't or
can't jump out.
Germany's ambassador to China, Michael Clauss, warned at a
meeting with industry chiefs in Berlin last month of "tectonic
changes" in the relationship, according to participants.
"We need to prepare people here for a new era in our
partnership with China," an official at Germany's powerful BDI
industry federation said. "These are still golden times. But
there is a huge amount of concern about what lies ahead."
ROLE OF THE STATE
German companies were among the first in the West to set up
shop in China, giving Germany an advantage as the Chinese
economy took off.
Bilateral trade between the two countries hit a record 187
billion euros last year, dwarfing China's trade with France and
the UK, both around 70 billion. In 2017, Germany ran a trade
deficit with China of 14 billion euros, tiny compared to the
U.S. deficit of $375 billion, or about 346 billion euros.
Bauer AG, which employs 11,000 workers in 70 countries,
built its first production facilities in China in the mid-1990s.
At the time, not a single Chinese firm could make the
sophisticated drilling machines it produces – towering yellow
structures used to build the foundations for skyscrapers, power
stations and airports.
By 2013 Bauer counted 36 Chinese competitors able to make
such machines, a shift the CEO says was accelerated by European
suppliers selling co-designed parts to the Chinese.
A decade ago, the company's Chinese plants generated
revenues of 109 million euros. Sales slumped to less than half
that amount in five of the nine years that followed.
Today, what Bauer and other German firms say they are most
worried about is the role of the Chinese state in the economy.
Last year, China introduced a cyber security law which
tightened state control over internet services, including secure
VPN connections that are used by foreign firms to communicate
confidentially with headquarters. More recently, some German
companies have complained of pressure to accept Communist party
officials on the boards of their joint ventures.
The Bauer boss fears that Xi's "Made in China 2025"
strategy, which identifies 10 key sectors – including robotics,
aerospace and clean-energy cars – where China wants to be a
leader, represents a direct challenge to German manufacturing
dominance.
To keep its edge Bauer says his firm is focusing intensively
on digitalisation.
"It will not be a contest against copiers. It will be one
against innovative engineers who are intent on overtaking us,"
he said. "If we don't start finding answers soon, this can end
very badly."
TRUMP TARIFFS
The German angst over China mirrors that which has prompted
Trump to threaten Beijing with tens of billions of dollars in
trade tariffs.
But because Germany's top firms have become so dependent on
the Chinese market, the government in Berlin has avoided
confronting China head-on.
Back in February, carmaker Daimler DAIGn.DE showed just
how skittish some companies are about upsetting Beijing.
After a backlash in China over a Mercedez-Benz ad on
Instagram that quoted the Dalai Lama – the Tibetan spiritual
leader seen by Beijing as a separatist – Daimler deleted the
post and its CEO Dieter Zetsche wrote a letter expressing deep
regret for the "hurt and grief" his company's "negligent and
insensitive mistake" had caused the Chinese people.
"There is a huge gap between what people in Germany are
saying about China and what they are really thinking," said
Bernhard Bartsch of the Bertelsmann Foundation, a German
research group.
Later this month, Bertelsmann and Berlin-based China think
tank MERICS will host an Oxford Union-style debate on the
motion: "In ten years' time, China will have substantially
undermined Europe's political and economic system"
The mood among German firms operating in China is also
souring.
A survey late last year from the German Chamber of Commerce
in China showed that for the first time in many years, more than
half of its members were not planning investments in new
locations in China. Nearly 13 percent of German firms operating
in China said they could leave within the next two years.
For decades, Germany's approach to China could be summed up
with the motto "Wandel durch Handel" (change through trade).
Now that strategy is in tatters and government officials
joke darkly that the "win-win" relationship has a new meaning:
China wins twice.
"The hope was that closer economic ties would lead to an
opening. Today it is clear this was a false hope," said a German
government official. "They tell us what we want to hear and then
do the opposite."
Berlin is starting to push back. Last year, after Chinese
firm Midea's 000333.SZ takeover of robotics maker Kuka
KU2G.DE sparked an uproar, it tightened restrictions on
foreign investments and launched a push for new Europe-wide
rules for screening takeovers.
In December, Germany's domestic intelligence agency
infuriated Beijing when it accused Chinese counterparts of using
fake social media accounts to gather information on German
politicians - a rare public rebuke that Berlin says was intended
to send the Chinese a message. urn:newsml:reuters.com:*:nL8N1OB13F
A summit between the German and Chinese governments later
this year is likely to reveal a tougher line from Berlin,
officials say.
But they also concede that divisions within the EU and a
wide gap between Europe and the go-it-alone Trump administration
will make it more difficult to force change in Beijing.
"What the Chinese are really worried about is Europe and the
United States working together against them," said the German
official. "In that sense, Trump really is a gift to China."
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(Reporting by Noah Barkin; Editing by Simon Robinson)
((mailto:noah.barkin@tr.com; +49 30 2888 5091; Reuters
Messaging: rm://noah.barkin.reuters.com@reuters.net))