German business leaders clash with Berlin over China policy

BERLIN, Oct 13 (Reuters) – German business leaders caused an uproar last month when they learned that the economy ministry proposed to screen all corporate investments entering China as part of a series of new measures.

The investment proposal was quickly shelved, a ministry source and a business leader told Reuters.

Senior business leaders later hit back in a meeting with Economy Minister Robert Harbeck, annoyed that they had not consulted adequately on proposals to make business less attractive to China, which could have major ramifications for German companies.

Although no conclusions were drawn during the September video call. Two attendees recounted the meeting on Jan. 21, revealing anxiety within the German board about the government’s push to recalibrate relations with China.

Executives at the meeting included the chief executives of chemicals giant BASF (BASFn.DE), Deutsche Bank (DBKGn.DE) and industrial group Siemens (SIEGn.DE), two sources said. The companies declined to comment.

The economy ministry declined to comment when asked about the meeting. The Green Party, which runs the ministry, has long advocated a tougher stance on China, and Habeck said last month that Germany would take a tougher stance on trade.

One participant and a government source said the ministry’s proposal for investment screening was motivated by a desire to limit the transfer of certain technologies and avoid increasing reliance on certain sectors.

“We can only warn Germany against staying away from China,” said Markus Jerger, head of the Mittelstand association, part of a coalition representing more than 900,000 small and medium-sized companies that form the backbone of Europe’s largest economy.

“It would be wrong to interrupt the activity of the German economy in China, as the Ministry of Economics wishes or is trying to do,” said Jaeger, who also attended the meeting with Habeck.

Politicians and executives in Germany generally agree that the country needs to reduce its economic reliance on China, given their concerns about industrial espionage, unfair competition or human rights abuses — concerns that Beijing strongly objects to are unfounded.

The Russian invasion of Ukraine also hits a long-standing German dictum that economic interdependence will help open up authoritarian states, and makes Berlin more focused on how to balance profit and risk in its relations with those countries.

But when it comes to China, companies say the sticking point is how Germany can reduce its reliance on China without doing more damage to an economy already facing recession next year — and without drawing a backlash from Beijing.

“The Locals”

Cracks have also emerged within the tripartite coalition government that took office in December and is due to release Germany’s first China strategy document next year.

The small Greens and Liberal Democrats are more hawkish than Prime Minister Olaf Scholz’s Social Democrats (SPD), which wants to avoid sparking an American-style Cold War.

“Decoupling is the wrong answer. We don’t have to decouple from certain countries,” Scholz, who plans to visit China later this year, said on Tuesday. “I stress that we must continue to do business with China.”

German investment and trade in China hit record levels in the first half of 2022, with big companies saying there is no doubt about exiting the world’s second-largest economy.

Instead, BASF and corporate giants such as carmakers BMW (BMWG.DE), Mercedes-Benz (MBGn.DE) and Volkswagen (VOWG_p.DE) are pouring more money into China to build independent local suppliers chains, in part to protect their business from geopolitical disputes and trade wars.

A BASF spokesman said: “Through the ‘local localization’ strategy, we have stabilized our regional portfolio in the best possible way against external influences.”

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

“It is impossible to completely unravel China and Europe,” said Tobias Just, a spokesman for Mercedes-Benz, which sells three times as many cars in China as in the U.S. The largest shareholders are two Chinese entities.

“Our strategy is local, not just for geopolitical reasons, but also natural hedges, proximity to core markets and cost efficiencies,” Just said.

BMW and Volkswagen also told Reuters they supported plans to increase investment in long-term operations in China.

However, Rhodium Research said smaller European companies were increasingly reluctant to accept the risk of investing in China.

A spokesman for the economy ministry said it was closely monitoring the investment behavior of German companies as part of its strategic considerations in dealing with China.

“Steep learning curve”

In meetings with Harbeck, big business leaders tried to show they were not naive about China and were looking to diversify while doubling down on existing businesses, said two attendees who spoke on the condition of anonymity.

Harbeck has pledged to continue the dialogue with the business community and has scheduled another meeting for the first quarter of next year, the two said.

“His learning curve was steep and he was very open,” said one. “The problem is that he starts at the bottom.”

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

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

But other proposals have sounded alarm bells in the business world, as it fears the measures will put them at a disadvantage in what remains the world’s fastest-growing major economy, despite an expected slowdown next year.

Reuters reported last month that the economy ministry was considering export restrictions and investment guarantees as part of its new China strategy.

Small and medium-sized businesses in Germany have warned it will hit them hard – and much harder than corporate giants with more financial muscle.

“If government support for exports is removed, then I estimate that 50 to 70 percent of our members may no longer have the guts to enter the market,” said Jerger of the Mittelstand Association.

Business leaders said they were relieved that Berlin should liaise with them more closely on any China measures, eventually discussing the matter with Habeck in person.

Some executives said they were lobbying Berlin to encourage companies to find new markets, such as through a new free trade agreement, rather than seeking to limit their business in China.

“Instead of punishing companies doing business with China, it is better to incentivize business with other countries,” said Ulrich Ackermann, head of the trade department of the German VDMA engineering association.

reputational risk

Business leaders told Reuters they were concerned that even the debate over possible policy changes had affected their relations with China, which urged Berlin not to politicize trade.

Rhodium’s Agatha Kratz said German companies may also have underestimated the reputational risk of doubling down on China, especially in terms of how their actions are perceived in the United States, which is now Germany’s largest export market.

“They still have too much hope of being able to resist Chinese pressure and U.S. pressure on trade barriers,” Kratz said.

China became Germany’s largest single trading partner in 2016, accounting for nearly 10 percent of the country’s 2.6 trillion euro ($2.5 trillion) trade last year.

But even under former Chancellor Angela Merkel, who has led several major business delegations to China, the honeymoon period is fading as the ruling Communist Party tightens its grip on society and the economy under President Xi Jinping.

The surge in Sino-U.S. tensions over Taiwan is another wake-up call for Berlin this year.

While administration officials say Germany’s economic ties to Russia have not stopped Berlin from pushing for sanctions on Ukraine, some lawmakers worry that it may be harder to get tough on Beijing if there is any conflict in Taiwan.

“If the unthinkable happens now, we won’t be able to impose sanctions, we’ll just have to wait and say, ‘You can’t do that’,” said SPD MP Markus Toens.

(1 USD = 1.0245 EUR)

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 Clark

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