German Industry Defies Rising Pressure to Limit China Exposure
Several large manufacturers scramble to insulate their Chinese businesses from possible Western sanctions
BERLIN—The German government and European politicians in Brussels are leaning on Germany’s largest companies to reduce their exposure to China. The companies are instead doubling down.
As government pressure intensifies, German companies with sizable Chinese operations in recent months have been scrambling to insulate those businesses from possible Western sanctions.
They are seeking to boost local production to rely less on imports from Germany, striking deals with Chinese suppliers to make their supply chains more local and building alliances with Chinese companies.
The efforts aim to protect these businesses’ market shares, shield their profits and ride out a worsening of the political tension between China and the West—especially the U.S.
In the latest sign of such tension, the European Commission, the European Union’s executive body, last week announced a probe into alleged unfair subsidies of China’s auto industry. China has become one of the world’s largest car exporters and a credible competitor to German carmakers, especially in the electric-vehicle segment. Still, German carmakers have criticized the EU probe, which they fear could open them to retributions by Beijing.
Earlier this year, the German government told German companies they should reduce their exposure to China to diminish the German economy’s reliance on exports to the country. Germany is heavily dependent on international trade, which has weakened as global tension has risen, bringing growth in Europe’s largest economy to a halt this year.
On Tuesday, the Bundesbank, Germany’s central bank, warned against the significant economic risks of German industry’s exposure to China, saying that more than 40% of German companies that rely on critical materials from China have done nothing to reduce their dependence on materials and components so critical to production at home that factories would stand still if their supply were interrupted.
“In view of rising geopolitical tensions and the associated risks, companies and policy makers need to rethink the structure of their supply chains and the further expansion of their direct investment activities in China,” the Bundesbank said in the report.
Instead of pulling back, however, German companies with the most to lose from Western efforts to isolate Beijing have doubled down on their involvement, trying to insulate their Chinese factories so they can keep churning out products regardless of the global political climate.
BASF, the big German chemicals company, is investing up to 10 billion euros (equivalent to about $10.7 billion) in China through 2030. As part of the push, it recently broke ground on a plant in Zhanjiang, China, to make synthetic gas and hydrogen for local use. The plant is expected to go online in 2025.
BASF said the facility is part of its Verbund site in Nanjing, China, a large chemical production site with interlinked product chains from basic chemicals to consumer products.
The site was established in 2005, one of six Verbund plants that BASF operates around the world, including two in the U.S. The expansion ensures that BASF can produce in China what it needs to continue to grow in the Chinese market.
Siemens Chief Executive Officer Roland Busch said earlier this year that the company was investing around €140 million in China as part of a €2 billion global investment push this year. He vowed to defend the company’s share of the Chinese market and continue to invest there.
The main ringfencing effort has come from automakers such as Volkswagen, BMW and Mercedes-Benz.
Thanks to their local-for-local strategy—which gives priority to local production for foreign markets—German automakers exported 254,607 vehicles to China in 2022, a fraction of the volume of vehicles they produced there, according to the German Association of the Automotive Industry. VW alone produced 3.2 million vehicles in China, as many as it made in Europe.
In July, VW said it would invest $700 million in Chinese EV maker XPeng, taking a nearly 5% stake in the company, to jointly develop and build EVs. Ralf Brandstätter, CEO of VW’s China business, said such partnerships “are an important building block in the Volkswagen Group’s ‘in China for China’ strategy.”
VW CEO Oliver Blume, speaking to reporters on the sidelines of the Munich auto show earlier this month, said the company would invest more in China, especially because VW needed Chinese technology for the Chinese market, partly in response to the growing tensions with the West and the emergence of separate technology standards.
“The ecosystems in the West and China are growing apart,” he said. “That means we have to clearly adapt to the situation.”
VW said that, over the past few years, it has built up local sourcing to well over 90% of the components and materials used to manufacture its vehicles made in China.
BMW, the German luxury automaker, celebrated the 20th anniversary of its Chinese joint venture, BMW Brilliance Automotive, earlier this year with the announcement that its next-generation electric car, the Neue Klasse, or New Class, would be produced beginning in 2026 in China for Chinese customers, rather than exported from Germany. The joint venture sources components and materials for local production from around 430 local suppliers, BMW said.
BMW is also investing in high-voltage EV battery development and production in China for new-generation EVs, and it has also expanded its research-and-development center in Shenyang for increased local design and development.
In part as a consequence of these strategies, German investments in China have risen after years of decline, while German exports to China have softened.
Germany’s share of foreign direct investment in China by the EU and the U.K. rose to 52% in 2022 from 46% the year before, according to data provided by Rhodium, a research group. The data also show that the automotive industry accounted for 68% of EU-U.K. direct investment in China last year, up from 50% a year earlier.
Citing the latest data, the Bundesbank said China-based subsidiaries of German companies generated sales of €382 billion and €23 billion in profits. The Bundesbank said China accounted for 22% of German industry’s global sales and 15% of its income.
“German carmakers view China as existential, from a revenue perspective but also for the technological transition to electric vehicles. They are frogs in a slowly heating pot of water that won’t jump out, out of fear that their survival chances would be even worse outside the pot,” said Noah Barkin, a Rhodium analyst.
The Rhodium report shows that automakers and their suppliers account for the largest share of European foreign direct investment in China, followed by food processors, pharmaceutical companies, chemicals and consumer-products manufacturing.
“It is worth remembering that Ford and GM both continued operating in Germany during World War II,” one senior industry official said, in a comment aimed at pointing out what some European executives see as a U.S. double standard when it comes to dealing with China.
When the U.S. went to war with Germany in 1941, General Motors and Ford Motor maintained ownership of their assets in Germany, according to historians. The companies have rejected allegations that they colluded with Adolf Hitler, saying they lost management control of the businesses. After the war, they retook direct control of their German businesses.