Decoupling in Duisburg?

Helmut Schmidt, the former German chancellor, was one of a small group of foreigners deemed to be “an old friend of the Chinese people” (601 people from 123 countries were awarded the accolade between 1949 and 2010, the People’s Daily says).

In the late 1960s when Schmidt was serving as defence minister of what was then West Germany, he already had an inkling that China would grow into a world power. He made a long tour of the Pacific hoping to see China from the perspective of the Japanese, the South Koreans and the Thais, Xinhua reports. One outcome of this trip was West Germany’s eventual forging of formal diplomatic relations with China in October 1972 – nine years before the US would do so.

Three years later Schmidt visited Beijing as the German chancellor and met Deng Xiaoping. After some small talk about cigarettes – both men said they got through three packs a day – Deng told Schmidt that China supported the reunification of Germany. In exchange, Germany would support the ‘One China’ principle on Taiwan.

In 1985 Volkswagen became the first Western carmaker to open a plant in Shanghai. Sino-German relations prospered and trade between the two countries blossomed. Just over three decades later China became Germany’s biggest trade partner in 2016 and during Angela Merkel’s 16 years as chancellor she visited China 12 times – the most of any Western leader.

It was no surprise when she joined the ranks of “old friends” or lao pengyao, too.

Yet as the 50th anniversary of re-established ties between Germany and China arrives this month, there are signs of growing strains between the two governments. Questions are also being asked in Berlin about whether Germany should do more to decouple from its most important economic partner and side more closely instead with its most powerful ally, the US.

What has changed in Berlin’s approach to China?

Both China and Germany have been major winners in a more globalised economy. Similar to Washington’s so-called ‘constructive engagement’ with Beijing following the opening of the Chinese economy in the 1980s, German politicians generally came to believe that by integrating into the global economy, China would not only prosper economically but also move closer to adopting some of the more liberal political thinking of the West.

Such a proposition was neatly explained by former German Foreign Minister Guido Westerwelle in 2011, ahead of then Chinese Premier Wen Jiabao’s visit to Berlin.

“It’s thus not only economic issues that are being globalised, but also people’s values, their perspectives. We in Germany call this kind of exchange ‘change through trade’, and we want to keep encouraging it,” Westerwelle said.

In 2014, during a visit from Chinese President Xi Jinping to Berlin, Merkel even decided to bet bigger on the relationship with China, lifting bilateral ties to the level of a ‘comprehensive strategic partnership’.

The depth of the trade and investment relationship has also been underscored by more than 100 partnerships between Chinese and German cities. Take Duisburg. An inland port and industrial hub, it became a ‘sister city’ of China’s Wuhan as far back as 1982. Today it is home to more than 100 Chinese firms and 2,000 or so Chinese students (nearly 44,000 students from China arrived at German universities in the most recent semester, German broadcaster Deutsche Welle reported last month). Although Germany has not formally signed up for China’s Belt and Road Initiative, 35 freight trains run between China and Duisburg every week.

Connections like these are why the German Foreign Ministry has described relations with China as “multi-faceted and intense”, Deutsche Welle notes. But after decades of commercial partnerships and business interlinkages – especially in the car industry – there has been a change of tone as German politicians and the local media have increasingly reframed the China as a ‘systemic rival’.

Ironically, some economists think that China is moving towards Germany’s socio-economic model in key areas. For instance, some of Beijing’s more recent policy blueprints have included a heavy emphasis on vocational training, while Chinese policymakers have also drawn on the German experience in calling for a more stable, rent-focused property market.

In Germany, however, there has been growing criticism of Beijing’s behaviour, especially from those that claim they see a clash between China’s value system and German interests at home and overseas.

The change in mood has partly been driven by longstanding concerns over unfair competition and allegations of technology theft – twin concerns that Beijing has hotly contested.

Yet Reuters also notes that a number of political and business leaders in Germany have come to agree that the nation also needs to avoid overdependence on trade with China. Nor has it helped that Russia’s invasion of Ukraine has further tarnished the long-held maxim of ‘change through trade’, underlining the weakness of the argument that doing business with authoritarian states leads to closer political ties with them.

What form could a newer relationship take?

“Decoupling is the wrong answer. We don’t have to decouple from some countries,” German Chancellor Olaf Scholz told a business conference in Berlin this month.

Yet Scholz himself also described China as a “systemic rival” during a trip to Japan shortly after taking office in December. He is also under pressure from the junior political parties in his three-way coalition government to adopt a more muscular stance towards the Chinese. Tellingly, his administration is planning to publish Germany’s first-ever strategy document on the relationship with China next year.

“I say emphatically we must continue to do business with China. But we also have to ensure that we trade with the rest of the world, look at the rest of Asia, Africa, South America – that’s the opportunity,” Scholz told attendees at the same conference in Berlin this month. “Globalisation has been a success story that enabled prosperity for many people. We must defend it.”

During a G7 ministerial meeting in September, vice chancellor Robert Habeck of the Green Party, also the federal minister for economic affairs, took a more determined line, saying that the country needs a new trade policy with China to reduce dependence on Chinese raw materials, batteries and semiconductors, and promising “no more naivety” in trade dealings with Beijing.

Reuters also reported last month that Habeck was considering curbing some of the guarantees on investment and exports that have underpinned decades of German business in China. In a separate report last week, it reported that Habeck’s ministry is mulling proposals to screen German investment in China too in an effort to limit technology transfers and reduce dependencies in key sectors (such as in the auto industry, for instance).

Annoyed that they hadn’t been consulted on these proposals, senior business bosses from heavyweights including BASF, Deutsche Bank and Siemens have pushed back against them, Reuters added.

In fact, many of these business leaders are expected to travel to China early next month, when Scholz is said to be planning to visit China. That would make him the first G7 nation leader to make the trip since the outbreak of the Covid-19 pandemic, as well as the first Western leader to meet Xi after he is likely given a third term as General Secretary of the Chinese Communist Party this week.

Beijing is reported to have extended invitations to Scholz and French President Emmanuel Macron to visit, along with leaders from Italy and Spain, in a bid to counter American efforts to forge more of a coalition with the Europeans.

Scholz’s visit, if it happens, will also precede the G20 summit in Bali, where Xi may have his first face-to-face meeting with Joe Biden since Biden became US president.

In the meantime, the Chinese foreign ministry has welcomed Scholz’s comments that he doesn’t favour a more dramatic decoupling of ties with China. “We commend these remarks from the European leaders,” a spokesperson said in a regular press conference, noting that senior EU officials have made similar comments. “China also supports globalisation and opposes decoupling.”

German businesses are voting with their euros?

Citing an August report by the German Institute for Economic Research, the Global Times also countered claims of a weakening relationship by highlighting this month that German direct investment in China had hit record highs, surpassing “tens of billions of euros”.

German firms are pouring more of their capital into China, the newspaper insisted, with the latest examples including loans from state-owned Kreditanstalt für Wiederaufbau’s (KfW), which is backing a railway project linking Tianjin with Beijing Daxing International Airport. Last month BASF also inaugurated the first plant at its Zhanjiang verbund (‘integrated production base’) in Guangdong. With pledged investment of €10 billion by 2030, the project will be the chemical giant’s largest investment in China to date. BASF has already forged a joint venture with Sinopec on another verbund in Nanjing but the Guangdong plant will be the first entirely foreign-owned project of its sort.

The facility will be capable of producing more than a million tonnes of ethylene a year. Given prevailing environmental concerns and resistance from nearby neighbourhoods, even Chinese heavyweights such as Sinopec can find it difficult to get the approvals for projects of this scale in populous provinces like Guangdong. So Chinese newspapers have marvelled at how BASF got the green light, noting that the deal came as the centerpiece of a flurry of agreements signed between the two governments at a time when Washington’s trade war with Beijing was fast escalating.

Investment also continues in China’s automotive market, a longstanding priority in the German trade relationship with China. Here Volkswagen has just heralded its biggest deal since entering the market 40 years ago, announcing last week that its software unit Cariad will invest €2.4 billion in a joint venture with Chinese AI chipmaker Horizon Robotics (see here for our Q&A with the AI leader’s founder and CEO).

Cariad will take a 60% stake in the JV, which is seeking regulatory approvals to close the deal in the first half of next year.

The tie-up marks Volkswagen’s acceleration into what it describes as the mobility market of the future, where it sees the Chinese market taking the lead in areas like automated driving and electric vehicles.

The German firm has forged similar alliances with local manufacturers such as BYD. Until recently BYD has made fewer inroads into exporting its own EVs to more developed economies. Yet they may become more of a feature on German roads after another announcement this month in which BYD said it would partner with car rental company Sixt to supply 100,000 EVs to the German firm through 2028. The arrangement will see “several thousand” BYD vehicles delivered to Europe before the end of this year.

More contracts like these are likely to be announced if Scholz does visit Beijing in two weeks’ time and will offer counterarguments to the view that the Chinese and German economies are drifting apart.

Porsche is another example of how German businesses don’t want to talk about a diminished role for sales in the China market. According to the automaker’s listing prospectus last year, Porsche sold nearly 320,000 cars in China in the 42 months prior to its IPO, or more than 30% of its global sales during the period.

Porsche then ran into a public relations crisis in May this year when Chinese buyers complained they had been treated unfairly in comparison with customers in other parts of the world over a problem with steering.

The company blamed a shortage of semiconductors but that didn’t diminish the backlash from drivers, with the carmaker forced into making an abject apology.

In a sign of how the brand wants to stay in the spotlight with local consumers, Porsche has tried to bounce back in its key market in an unexpected way, however, with the launch of a kitchen cleaver called the ‘P22 China Knife’.

Despite being priced at $240, the cleaver soon sold out, becoming a trending topic on Chinese social media.

In a clever piece of marketing, the carmaker’s campaign echoed nicely with another social media furore of a few months ago, when renowned Chinese knife maker Zhang Xiaoquan was lambasted for a faulty product that hadn’t delivered in the kitchen as expected. A customer complained it had broke when she used it to crush garlic cloves (a common use for a cleaver in Chinese kitchens). The manufacturer had initially said the cleaver shouldn’t be used for that purpose, sparking ridicule from netizens.

That explained some of the local mirth when a Porsche spokesperson told local reporters that the P22 could be “used for smashing garlic”.

The effort was clear enough in trying to get back into the headlines in a positive way, as well as strike a chord with local consumers.

Another inference from the cleaver campaign? Judging from the brisk sales of the P22, German craftsmanship is still something that the Chinese admire – and are prepared to pay a premium for.

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