China Is Devastating the Last Stronghold of German Industry
Midsize companies that employ millions of workers are now shedding jobs and relocating overseas to cut costs
- German “Mittelstand” manufacturers face severe competition as China closes the quality gap and offers lower prices, leading to job losses and a trade deficit.
- German industrial output declined by about 10% between February 2022 and early 2026, and industry loses over 10,000 jobs monthly, according to EY.
- China’s “10,000 Little Giants” initiative, backed by state subsidies, aims to replace German firms, prompting EU leaders to seek new trade-defense powers.
FRANKFURT—For decades, thousands of niche, world-class manufacturers that form the backbone of the German economy relied on an unassailable moat: unmatched quality. Now that moat is drying up.
The Mittelstand—a broad tier of midsize manufacturers, mainly specialized in capital and intermediate goods and reliant on exports—once thrived by making machines for factories everywhere. But China is now closing the quality gap and offering prices as low as half those of their European rivals.
As panic spreads among German manufacturers, layoffs are rolling through formerly prosperous towns and villages with no living memory of a downturn. The moment could become a political turning point for a country whose wealth was largely created by the Mittelstand, or “middle-class”—shorthand for the inner core of Europe’s largest economy.
For the first time in decades, Germany now imports more advanced capital goods from China than it exports there. Manufacturers are suddenly on the defensive, not just in China and elsewhere, but also at home. Many Mittelstand firms are idling workers, cutting jobs or shifting production, including to China.
Patric Burkhart, managing director of machinery manufacturer Aura, based in southwest Germany with 115 employees and around $30 million in annual revenue, said Chinese competition had surged over just the past six months, causing orders to dry up.
Aura makes heating equipment that is built into bigger industrial machines, such as presses, ovens and extruders—which make everything from plastic bags and window frames to car parts and snacks.
A Chinese competitor recently emerged in the market, creating strong price pressure, Burkhart said. To win projects with the incumbent German and Japanese manufacturers, he said, “I have to be very creative.”
German industry is losing more than 10,000 jobs every month, according to a May report by EY. Industrial output declined by around 10% between February 2022 and early 2026, with energy-intensive sectors plunging by more than 15%.
Germany’s trade balance with China in capital goods slid from a surplus of roughly 750 million euros to a €500 million deficit between mid-2024 and August 2025 on a 12-month rolling average, according to New York-based Apollo Global Management. Germany’s machine-tools exports to China slumped by around one-third in the first quarter from a year earlier.
If European policymakers don’t take tougher measures to protect industry, “you could see a very rapid decline of the German Mittelstand,” said Noah Barkin, senior adviser at the research firm Rhodium Group.
European leaders are seeking new legal powers to hit back at China. China’s overall goods exports to Germany alone have jumped 17% this year through May compared with the year prior, and those to the European Union have increased 16%, according to dollar-denominated data from Chinese customs.
China has increasingly leaned on manufacturing to drive economic growth following an epic property-market collapse. Facing weak demand at home and overflowing warehouses, factories are aggressively selling overseas, driving the nation’s trade surplus to a historic $1.2 trillion last year.
This evolution was a deliberate, state-backed engineering feat. Under its “10,000 Little Giants” initiative, the Chinese government funneled massive subsidies, tax breaks and state resources into thousands of specialized midsize firms, explicitly designed to replace Germany’s famed “hidden champions.”
There are still German companies that make products that China needs, said Barkin. These include Trumpf, a maker of lasers, and Zeiss, which manufactures optical devices used in medical machines and chip-making equipment. But Beijing is trying to address those dependencies and produce those goods.
When a manufacturer in Eastern Europe or South America sets up a new plant, they can now buy the entire ecosystem—the injection machines, robotic arms, dryers and cloud management software—directly from a single, unified Chinese vendor.
“China has already eaten much of German industry’s lunch and is preparing to start on dinner,” the Centre for European Reform, a London-based think tank, bluntly warned in a recent report.
Compounding the crisis are high energy prices and weak demand in Europe, deflationary pressures in China that lower export prices, and a yuan many economists believe is undervalued.
Competition is particularly fierce in sectors where scale matters, such as heat pumps or autos, said Clemens Fuest, president of the Ifo Institute for Economic Research, a think tank. More specialized firms are faring better for now. “It is hard to say where this will end,” Fuest said.
Mittelstand businesses, which long prided themselves on a die-hard free-trade ethic, have recently started requesting government protection from state-backed Chinese firms.
Chinese competitors already control one-third of global production in the machinery sector, said Oliver Richtberg, head of foreign trade at the Machinery and Equipment Manufacturers’ Association, or VDMA, a lobby group whose members employ one million German workers. The tipping point is fast approaching, Richtberg said: “If they get to 40% or 50%, we won’t have any levers left.”
The EU has launched a record number of trade cases against Beijing over the past two years, but those measures cover a fraction of total Chinese imports. Broader and tougher trade defenses discussed at a June summit meeting in Brussels will likely take a year or more to materialize.
Michael Suess, a longtime Siemens executive and now executive chairman of Swiss coatings manufacturer Oerlikon, said the German Mittelstand is in trouble mainly because of high costs at home and a new generation of family entrepreneurs he sees as lacking ambition.
“Yes, China is getting more competitive,” Suess said. But “Germany needs real reforms, we have to get out of our comfort zone.”
Still, over three-quarters of German mechanical engineering companies see competition from China as the biggest strategic challenge worldwide, according to a survey published in January by Hamburg-based consulting firm Infront.
Back at Aura, Burkhart said Chinese, Japanese and even German customers increasingly want him to manufacture in China. One motivation is cost. For Chinese manufacturers, there is also rising political pressure to transfer value creation to China.
Burkhart, who once produced exclusively in Germany, now makes 20% of his products in China. That share could increase to 70% if nothing changes in Europe, he said.
“We’re in a very sticky situation,” he said. “It is a historic change that brings the whole society under pressure.”
