German business leaders clashed with Berlin over China policies

BERLIN, Oct 13 (Reuters) – German business chiefs were left in an uproar last month after a proposal by the economy ministry to scrutinize all company investments in China as part of new measures.

The investment proposal was soon dropped, a ministry source and a business leader told Reuters.

Senior business leaders, frustrated by a lack of consultation on proposals to make trade with China more attractive to German companies in a potentially transformative way, have pushed back on talks with Economy Minister Robert Habeck.

While no conclusions were reached in the Sept. 21 video call, the meeting, described by two participants, sheds light on the anger in German boardrooms about the government’s push to mend relations with China.

The executives who attended the meeting were the CEOs of chemical giant BASF ( BASFn.DE ), Deutsche Bank ( DBKGn.DE ) and industrial group Siemens ( SIEGn.DE ), the two sources said. The companies declined to comment.

The Economy Minister declined to comment when asked about the meeting. The Green Party, which leads the ministry, has been advocating a tougher stance on China, and Habeck said last month that Germany would take a tougher line on trade.

The investment screening proposal floated by the ministry is motivated by the desire to limit some technology transfer and avoid dependence on certain sectors, said one of those present at the meeting and a government source.

“We can warn Germany not to back away from China,” said Markus Jörger, head of the Mittelstand Association, a union representing more than 900,000 small and medium-sized companies.

Jörger, who was present at the meeting with Habeck, said, “It is the wrong way for the German economy to take a break from China’s activities, as the Economy Ministry wants or is trying to do.”

Politicians and executives in Germany widely agree that the country needs to reduce its economic dependence on China, fears of industrial espionage, unfair competition or human rights abuses – which Beijing has vehemently denied.

Russia’s invasion of Ukraine has long been Germany’s loudest voice that economic support will help unlock authoritarian regimes, and Berlin’s focus is on weighing the benefits against the harms of its relationship with them.

But when it comes to China, businesses say the sticking point is how to reduce dependence on Germany without further damaging its recession-hit economy next year and provoking retaliation from Beijing.

‘Local for Local’

Fissures are emerging in the tripartite coalition government that took office in December and is due to publish Germany’s first China strategy document next year.

Even smaller parties, the Greens and the Free Democrats, are more aggressive than Chancellor Olaf Scholz’s Social Democrats (SPD) to avoid a US-style Cold War with China.

Scholes, who plans to visit China at the end of this year, said on Tuesday that “alignment is the wrong answer. We should not separate from some countries.” “I say emphatically that we must continue to do business with China.”

German investment and trade in China reached record levels in the first half of 2022 and big businesses said there was no question of pulling back from the world’s second-largest economy.

Instead, giants such as BASF and carmakers BMW ( BMWG.DE ), Mercedes-Benz ( MBGn.DE ) and Volkswagen ( VOWG_p.DE ) are plowing more money into China to create independent domestic supply chains, partly to ring-fence their operations from geopolitical tensions. and trade wars.

“With a ‘local for local’ strategy, we better stabilize our regional portfolio from external influences,” said a BASF spokesperson.

Mercedes-Benz, Volkswagen, Volkswagen, BMW and BASF together account for one-third of European investment in China in 2018-2021, according to a study by New York-based research firm Rhodium Group.

“It’s impossible to discount China and Europe completely,” said Tobias Just, a spokesman for Mercedes-Benz, which sells three times as many cars in China as in the U.S. and counts two Chinese entities as major shareholders.

“Our strategy is local, not just for geopolitical reasons, but also for natural hedges, proximity to major markets and cost benefits,” he said.

BMW and Volkswagen told Reuters they were planning to invest more in their long-standing Chinese operations.

Rhodium’s research shows that small European companies are increasingly reluctant to accept the growing risk of investing in China.

A spokeswoman for the economy ministry said it would closely monitor the investment behavior of German companies and strategically consider how to deal with China.

‘SteeEP Learning Curve’

In conversations with Habeck, big business leaders have tried to show that they are not naive about China and are looking to do things differently, while doubling down on existing jobs, said the two participants, who did not want to be named.

Habeck has promised to continue discussions with the business community and another meeting is planned for the first quarter of next year, the two people said.

“He has a steep learning curve, he’s very open,” said one. The problem is that it starts at the bottom.

The economy ministry declined to comment when asked about next year’s meeting or Habek’s comments.

Some of the steps Berlin has said it wants to take to reduce its dependence on China are not controversial, such as finding new sources of some key commodities, such as rare earth metals.

But despite an expected slowdown next year, other proposals have raised alarm bells in the business community as they fear the measures will still lead to a competitive crisis in the world’s fastest-growing major economy.

Reuters reported last month that the Ministry of Economy is considering curbing export and investment guarantees under China’s new strategy.

Germany’s Mittelstand companies warn that this will hit them hard – and harder than corporate giants with more financial firepower.

“If government support for the export business were to be withdrawn, I estimate that 50% to 70% of our members would probably not be brave enough to enter the market,” said Gerger of the Mittelstand Association.

Business leaders said Berlin should be more forthcoming with them on any Chinese moves, and were relieved to finally take the matter up in person with Habeck.

Some executives said that instead of seeking to curb their business in China, companies were wooing Berlin to encourage new markets, such as through new free trade agreements.

“Instead of punishing companies when doing business with China, the right approach would be to encourage business with other countries,” said Ulrich Ackermann, head of the business division of the VDMA engineering association in Germany.

reputation risk

Business leaders told Reuters that even the debate over possible policy changes was already affecting relations with China, urging Berlin not to politicize trade.

According to Agatha Kratz at Rhodium, German companies have underestimated their reputational risk of doubling down in China, especially in how their actions are perceived in the United States, now Germany’s largest export market.

“They still have some hope that they can withstand Chinese pressure, but American pressure is a barrier to trade,” Kratz said.

China in 2010 It became Germany’s largest single trading partner in 2016 and accounted for nearly 10% of the country’s 2.6 trillion euro ($2.5 trillion) trade last year.

But even during former Chancellor Angela Merkel’s many trips to China, which brought large business delegations, the honeymoon was fading as the ruling Communist Party tightened its grip on society and the economy under President Xi Jinping.

Sino-US tensions over Taiwan are another wake-up call for Berlin this year.

Government officials say Germany’s economic ties to Russia have not stopped Berlin from pushing for sanctions against Ukraine, but some lawmakers worry that it could be difficult to keep up with Beijing in a conflict over Taiwan.

“If the unthinkable happened, now, we wouldn’t be able to impose sanctions, we could just point the finger and say, ‘You can’t do that,'” said Markus Tons, a lawyer for the SPD.

($1 = 1.0245 EUR)

Reporting by Andreas Rinke, Victoria Walderse and Sarah Marsh in Berlin; Additional reporting by Ludwig Burger in Frankfurt, Alexander Hübner in Munich and Eduardo Baptista in Beijing; Editing by David Clarke

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