China Germany Relations – Post Brexit Takes the EU Helm

German Chancellor Angela Merkel’s China visit on the eve of Brexit reaffirms Beijing-Berlin ties at a time of crisis in the European Union.

Just when the United Kingdom has decided to reduce its market access to the European Union (EU), China is pushing hard for the EU to fulfil its promise of greater access. As the China trade leaders point out, China’s accession to the World Trade Organization (WTO) in 2001 came with the assurance that the EU would grant market economy status after 15 years, thus reducing a host of trade regulations in areas such as anti-dumping. With the deadline looming in December, and the EU divided on how to acknowledge China’s market economy status, all eyes were on German Chancellor Angela Merkel’s recent whirlwind tour of China for an indication of how the EU’s leading economy is going to solve this dilemma.

On her ninth visit to China, Merkel arrived in the nation’s capital in force, trailing a delegation of six federal ministers, five state secretaries and a 20-member business council. Merkel met with President Xi Jinping, Premier Li Keqiang and Chairman of the National People’s Congress Zhang Dejiang in Beijing before traveling on to Shenyang. While Chinese media covered the visit with fanfare, the German public followed Merkel’s every step and industry leaders hung on every word as the German-China business nexus hit the spotlight.

Many consider Germany as the de facto ruler of the EU, the world’s leading exporter of goods and services with an estimated €1 billion a day of trade flowing between China. Merkel points out that Europe does not dispute commitments to China on market economy status, but admits there is work to be done at the EU level to structure the deal. While macro issues on a global playing field are the domain of diplomats, the focus for the German and Chinese industrial complex is on growing business ties. With billion dollar China deals in the works for the likes of change to Deutsche Bank, Airbus, Daimler, robot maker Kuka and wind turbine producer Wind MW, this picture remains bright with opportunity.

Shenyang, the heavy industry dynamo of Liaoning Province and home to a BMW factory, was Merkel’s last but most interesting stop. German companies have taken steps to construct a China-Germany Industrial Park in the northern city and Merkel’s visit was a sign of support for the creation of deeper industrial ties. The Chancellor sees parallels between Liaoning’s development and that of the German Ruhr region, which grew into a modern heavy industries base after the Second World War.

Strategic Partners

Europe’s future relationship with China – one of its most important strategic partners – will be determined to a large extent by the rapidly evolving bilateral relationship with Germany. Germany, which sends more than half of EU exports to China and receives nearly a quarter of its imports, remains Beijing’s top trade partner. Trade increases between China and Germany during the last decade – in particular exports – have exceeded all expectations and are cause for celebration in Berlin.

Christoph Schnellbach, lecturer at the Political Science Department, and Joyce Man, German Chancellor Fellow at the Center for Applied Policy Research, both at University of Munich, assert Germany considers China as a key in a multi-polar world and China sees Germany as the leading EU power. In Germany and China: Embracing a Different Kind of Partnership? Schnellbach and Man state, “Nowhere is the relationship clearer than in trade. Over the years, China has overtaken other countries as a market for German goods. Today, it stands fourth behind France, the UK and US.”

In 2015, bilateral trade between Germany and China was worth nearly €163 billion, according to the German Federal Foreign Office. However, the 2015 weakness of the Chinese economy has led to the first decline in exports since 1997. While German exports to China fell by around 4.5%, to more than €71 billion in 2015, German imports from China in the same period grew nearly 15% to about €92 billion, according to the German Federal Statistical Office.

From small and medium-sized enterprises to the world’s foremost multi-nationals, Germany understood long before other European countries the trade and business opportunities offered by China and other emerging economies. After the creation of the Eurozone Sino-German relationship started to make even more sense. At the time, the German economy became more dependent on exports to Asia and, above all, to China. However, it is during the tenures of Merkel and Xi that business ties reached a new level. China is now far more than just a location for production with a gigantic domestic market. German businesses see the country as a valuable partner in the development of complex technologies.

High-level visits, meetings and diplomatic agreements have been numerous in the past few years and many more are in the works. In December 2015, Foreign Minister Wang Yi and Foreign Minister Frank-Walter Steinmeier held the first round of the China-Germany Strategic Dialogue in Berlin. March 2016 marked the first official visit to China in more than a decade by a German President, Joachim Gauk. The September G20 Summit in Hangzhou is another decisive item on the economic cooperation agenda, with 5,000 Mainland staff on hand at Huanglong Stadium to welcome the world’s heads of state.

Still, even the closest of partners have their disagreement. On the business front, the spotlight is trained on Midea Group Co.’s €4.6 billion offer for Kuka AG, a leading maker of industrial robots. The bid made by its biggest home appliance maker has become emblematic of China’s aggressive plans to expand overseas. Merkel did not express any real objections to the Midea bid for Kuka, despite all the recent attention in the German press, but she did note that a German counterbid could be in the works.

When receiving an honorary doctorate from Nanjing University, Merkel spoke indirectly on the subject of China’s desire to enter sensitive sectors of the German industrial machine, “Reliable and transparent regulations are of the utmost importance to innovative companies, in particular in sectors that we in Germany define as Industry 4.0. Collaboration in the high tech sector is largely a question of trust.”

Going Global Strategy

Despite the usual ups and downs, Germany and China are likely to find a common ground. Even as the current economic crisis threw Europe into turbulence, the Sino-German relationship continues to flourish as seen in investments. “By 2015, German companies have invested around US$25.5 billion in China,” explains Peter Rothen, Consul General of Germany in Shanghai. “At the same time Chinese FDI into Europe is growing annually, and Germany features strongly in the overseas investment plan. Though Chinese companies have invested only a total of US$6.6 billion in Germany, that amount is growing rapidly.”

There is clear evidence of a significant increase in Chinese business activities in Germany, due in part to the Chinese government’s Going Global strategy, which encourages and supports investment by companies abroad. According to a State Council report, China is keen to increase German investments in its ultimate goal to grow global FDI to between US$1 to US$2 trillion by 2020. Sectors of the greatest interest include mechanical engineering, electronics, consumer goods and information and communications technology – all sectors in which Germany excels in terms of talent and expertise.

Ironically, one of the biggest China M&As with Germany took place in China. In late 2015, Deutsche Bank, the leading bank in Germany and one of the largest in the world, agreed to sell its entire 20% stake in Beijing-based Hua Xia Bank to insurer PICC Property & Casualty Co. in a US$4 billion deal. In March 2016, Deutsche Bank became the first foreign bank to establish host-to-host connectivity with Bank of China to deliver international cash management (ICM) services to corporate clients. According to Banking Technology, the ICM platform enables Bosch China, its first customer, to make domestic and international payments in local as well as foreign currencies.

The German automotive sector has perhaps made the most headway in a domestic market that is focused on consumption. One of the most valued joint ventures in China, SAIC Volkswagen manufactures car brands such as Škoda, Touran, Lamando GTS and the limousine Phideon. While continuing to strengthen its business in traditional auto markets, the SAIC-VW joint venture is increasing its interest in the field of new energy vehicles to meet the more environmentally conscious preference of local consumers.

Reflecting the investment and commitment of SAIC-VW to the auto market, the joint venture is considered to be one of the country’s biggest sales success stories. “In 2015, SAIC Volkswagen achieved a sales volume of over 1.8 million units, ranking tops in the China passenger vehicle market,” states Holger Santel, Vice President at SAIC Volkswagen Sales Co. Ltd. “The VW brand alone sold over 1.5 million units, and remains the sales champion of any car brand in the domestic market. In first half of 2016, we continued to top the list of sales in passenger vehicles and we have expect this trend to continue.”

SAIC-VW has certainly earned this elite status given its commitment to invest in production and marketing. With production bases in Shanghai Anting, Nanjing, Yizheng, Ningbo, Urumqi and Changsha, SAIC-VW has an annual production capacity of nearly 2 million units. Nor is the flow of investment stopping. The company is actively upgrading the Anting factory to set up an advanced manufacturing system that complies with the latest environmental standards in an effort to maintain its market leadership position.

Many German companies in China have found a market niche by leveraging their capabilities in technology. The more ambitious companies look for new ways to make the most of their strengths in innovation. Schüco China, founded in Beijing in 1999, is one such company, a global market leader for intelligent window, door and façade systems that is now active in six sales regions with offices in 20 cities.

With more than 100 Chinese partners, Schüco has watched China become one of its largest overseas markets. “Our goal is to increase our share in the Chinese high-end market through a rapid business expansion,” says Günter Strauss, Executive Director for Schüco China, which opened a Showroom and Training Centre in Shanghai in June. “We bank on high quality German technology adapted to the local market. Our core and winning solution has never changed: apply Made in Germany to the Chinese market. As a leading provider of a future-oriented building technology, we are focused on innovative green ideas for energy building.”

EMBA and MBA photos

Education Focus

Fair dialogue cannot exist without shared cultural values and educational models. This is the reason Germany is looking towards China to expand its reach in the field of education. The European School of Management and Technology (ESMT) is one of the trailblazers in this process of school internationalization. A private university based in Berlin with an additional location near Cologne, ESMT has made its name as a business school based in Europe’s strongest economy serving students with a curriculum composed of business education programs from around the world.

ESMT’s international character makes China a natural destination for the school. “The Chinese are especially interested in learning more about Made in Germany. They want to understand how German industries and SMEs are so successful and eager to share best practices. As China becomes more globalized, we would like to intensify efforts to grow our student base,” concludes Professor Joerg Rocholl, President of ESMT Berlin, which has increased its presence on social media outlets Weibo and Youku to provide a new business perspective. “Chinese leaders can use executive education to explore challenges others have faced and learn how to be better leaders in a shorter period of time. Germany is primed to assist in this education process as the industrial cooperation continues to blossom.”

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