Economic Superpower Chinese Expansion Has Germany on the Defensive

The German economy has grown dependent on China in a development that is now coming back to haunt it. With a global trade war brewing, it will be impossible for the government in Berlin to please both Beijing and Washington. It's time for a new strategy. By DER SPIEGEL Staff

picture alliance / Zuma Press

China has already taken a significant step into Germany. In the Rheinhausen district of Duisburg, trains are now rolling across the site where steelworkers once fought unsuccessfully to save their mill in 1987 while shipyard cranes stack up containers on the banks of the Rhine River. This is the precise point where the New Silk Road, China's massive infrastructure project, comes to an end.

The site in Duisburg is known as Logport I and it is one of the largest container ports in Europe. Twenty-five trains arrive each week at Terminal DIT, also known as the China Terminal, after having traveled the more than 10,000 kilometers from Chongqing across Kazakhstan, Russia, Belarus and Poland.

Four years ago, Chinese President Xi Jinping visited the inland port. The engine of a train that arrived from China that day was decorated with red paper dragons for the occasion and Erich Staake, CEO of the Duisburg port, was also on hand.

Staake, who, like the Chinese president, was born in 1953, sees the rail connection as a boon both for the port and for the entire region, which badly needs it. "We want to grow," he says. "China and the New Silk Road offer us great potential." One way of seeing it is that the trade route brings China and Germany that much closer together.

There is, though, another way of seeing it: Namely that the multibillion-dollar project provides the Chinese with a kind of bridgehead in Europe from which they are pushing their expansion across the Continent and broadening their economic influence.

So which is it? An opportunity or a threat?

It isn't easy to find an answer to that question -- and that itself is telling. Chancellor Angela Merkel's visit to China this week will have a different flavor to it than her previous 10 visits to the country. The relationship between the two countries has changed in the interim and is no longer as balanced as it once was.

Until recently, the relationship had seemed almost symbiotic and the roles were clear: Germany sold high-end machinery and vehicles in China, including more than 5 million automobiles in 2017 alone. In return, China exported furniture, refrigerators and electronic devices to Germany at unbeatably low prices. But now, China has reached adulthood much more quickly than expected.

Not all that long ago, China was a developing economy, seen by industrialized countries in the West as a gigantic market where they could sell their goods. Then, it became the world's factory, a place with inexhaustible resources. Now, however, it has matured into a powerful competitor capable of leaving Germany in its dust. Chinese companies are developing intelligent machinery and production facilities; they are building cars, many of them with electric motors; and they're making inroads into sectors that used to be Germany's private domain. China has figured out how to copy Germany's successful model and is now becoming a danger to the original.

'The Mechanics Have Changed'

Mikko Huotari was one of the first to identify this development several years ago. Huotari is a scholar at the Mercator Institute for China Studies (merics), a think tank in Berlin. The old logic which held that "China needs us" is no longer true. In fact, he says, the situation has flipped: Germany is increasingly reliant on China as the country increasingly becomes a driver of global innovation. "The entire mechanics of the system have changed."

Just how confident, or perhaps even aggressive, the Chinese have become can be seen when they buy companies in Germany. They used to target second-tier firms, but in recent years, the focus has increasingly shifted to key industrial players. "Germany is home to around 1,000 mid-sized companies that are global leaders in their sectors. The Chinese want access to them," says Kai Lucks, head of the Federal Association of Mergers & Acquisitions in Germany.

Recently, Chinese buyers have even shown an appetite for companies listed on the DAX, Germany's blue-chip stock index. In February, billionaire Li Shufu quietly acquired a 10 percent stake in Daimler. Dieter Zetsche, the company's chairman of the board, believes that an additional large Chinese investor may also acquire a stake in the company: the state-owned firm BAIC, Daimler's Chinese partner. Politicians and executives are beginning to wonder what large company might be targeted by Chinese investors next.

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Along with those investments, uncertainty has been growing. And it's not just coming from the Far East. Reliant as it is on exports, the German economy is sensitive to shifting trends in global trade and Merkel's visit to China this week is coming right in the middle of a period of transition. China is growing stronger, America has become unreliable and Germany has to figure out what its new role will look like.

The economy has become used to seemingly eternal growth in the Far East, with exports to the region almost tripling in the last 10 years. But what will happen once China begins building high-tech machines of its own or exporting its own electric vehicles? That's the point when German industry will quickly become painfully aware just how dependent it has become on China.

At the same time, though, German companies are confounded by the erratic course currently being charted by the U.S. president in Washington. If Donald Trump chooses to introduce punitive tariffs on steel and aluminum imports on June 1 and the EU retaliates, Germany will become even further alienated from America, which is still its top export market. This development likewise poses a significant risk to the domestic economy.

And everything is overshadowed by the potential of a trade war between the Western superpower and the Eastern superpower. The Trump administration accuses China of unfair trade practices and massive theft of intellectual property. As a consequence, he has threatened to introduce punitive tariffs worth $150 billion and China has vowed to respond in kind should he do so.

If both countries follow through, Germany would find itself in a hopeless -- and extremely dangerous -- position directly between the front lines. If Germany makes concessions to one side, the other side will be displeased. The country must find a solution to this dilemma, but it isn't clear what that might look like. How might a new trade strategy look, particularly with regard to China?

THE WAKE-UP CALL

There is a date that marks the turning point in Chinese-German relations: May 18, 2016. That was the day that the Chinese company Midea announced its intention to takeover KUKA, a global leader in industrial robotics. Union leader Armin Kolb says that the news initially terrified him. "I'd by lying if I said otherwise," he says.

Kolb is head of the works council at KUKA. When the announcement came two years ago, 3,000 employees gathered at the Augsburg factory, he recalls, all of them concerned about what the new ownership had planned for the company -- whether they would break it up, move some departments elsewhere or even close the whole thing down. The possibilities seemed endless.

Today, two years later, Kolb seems unperturbed. Midea has committed to retain the company headquarters, refrain from moving or closing factories and to preserve jobs. The agreement is valid until 2023. "We got the best deal we possibly could," says Kolb.

The brawny works council head is in his mid-50s and he will soon celebrate 40 years working for KUKA, having started in 1978 as a lathe operator in Hall 2. Today, the building is used to demonstrate what the factory of tomorrow will look like. A mobile transport system moves an automobile door toward a group of four robots, which identify the part, bend their arms toward it and begin welding. "There's not much milling and lathing around here anymore," Kolb says.

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KUKA is considered a pioneer of Industry 4.0, the digitally networked economy. That's why the Chinese purchase of the company became a political issue, almost as if Beijing had bought the Brandenburg Gate in Berlin and painted it red.

At the time, Germany's EU commissioner, Günther Oettinger, said that KUKA cannot be allowed to fall into Chinese hands because it "is a successful company in a strategic sector that is important for the digital future of European industry." Germany's economics minister at the time, Sigmar Gabriel, was also concerned. His ministry sought to encourage German multinationals like Siemens or Bosch to make a bid of their own, but they all declined. And the owners of KUKA went ahead with the sale.

Widespread Angst

The deal was a wake-up call for economic policymakers in Germany. It wasn't the first time that Chinese buyers had gone on a shopping spree in the country, with companies from China already having acquired such big-name and highly specialized firms as KraussMaffei and Putzmeister. But the KUKA sale triggered widespread angst.

It is unclear why. Up to that point, the experiences of companies with Chinese ownership had been largely positive. A study conducted by the Hans Böckler Foundation found that companies under Chinese ownership were largely satisfied with their new employers. The investors from the Far East, the study found, largely stayed out of day-to-day decisions, refrained from closing factories, invested in new facilities and created more jobs.

Currently, the foundation is working on an update of the study. And while it hasn't yet been completed, it is safe to say that the management boards and works councils that have thus far been surveyed aren't quite as enthusiastic about their Chinese investors as they once were. "Cracks have appeared," says Oliver Emons, one of the researchers involved in the study. Pressure on jobs has increased, he says, while new ownership has begun playing a greater role and some are clearly primarily interested in acquiring know-how.

China experts refer to it as the "Haier Strategy," named after the home appliance manufacturer based in Qingdao. For years, the company systematically swallowed up its competitors. Yet in doing so, the company was less interested in the profits that could by made through the acquisitions. Rather, they wanted the brands, the technologies and the sales reach they provided. Today, Haier is a global market leader, with every fifth freezer sold coming from the Chinese company.

It remains to be seen if KUKA is facing a similar future. For the time being, at least, there are no indications at the company's Augsburg headquarters as to who the new owners are. The name Midea is nowhere to be found, not even in the stationery small print. And the white-orange company flags are still flying above the entrance. Only briefly, back in January, were red flags to be seen here -- but they were from the labor union IG Metall, waved during a warning strike.

There has also been continuity in the company's upper echelons. Till Reuter has been CEO since 2009 and during a recent dinner at a robotics trade fair in Hannover, he asked those present if anything had changed under Chinese ownership. They all shook their heads.

A Trojan Horse on the Factory Floor

For Reuter, though, one thing has changed. Once a month, he flies to China to take part in Midea board meetings at company headquarters, located in Shunde, just outside of Hong Kong. Reuter says that Midea allows KUKA to grow much more quickly than would otherwise have been possible, such as in robots for mobile phone factories or to assist during operations in hospitals. "We see a huge potential there," he says.

Thus far, KUKA's specialty has been customers from the automobile industry: The company's products have been deployed in German car factories for decades. The firm has acquired unique insight into manufacturing processes in those factories, how models are chosen, and the technologies employed. But ever since KUKA's change in ownership, some clients have expressed reservations, concerned that their company secrets could fall into the wrong hands. Nobody, after all, wants to invite a Trojan horse onto the factory floor. KUKA executives have increasingly found themselves having to promise that the company remains trustworthy. When such concerns are raised, Reuter points out Midea's contractual obligation to protect client data. "It is something I vouch for."

KUKA is a German company that pays its taxes here, the CEO insists, the only difference being that it has a Chinese owner. During the trade fair in Hannover in April, the chancellor once again dropped by the KUKA stand, which Reuter welcomes as "an important signal." Naming former SAP head Henning Kagermann to the supervisory board, with his excellent political connections, can also be seen as a trust-building measure.

On the other hand, though, the robotics company will be investing primarily in Shunde in the coming years, in the form of a new, 400-million-euro production facility. KUKA will develop new products at the site and produce around 75,000 robots per year there by 2024 -- three times as many as in Augsburg.

The future of robotics -- and of KUKA -- it seems, is in China. That much is clear, even if the deal with Midea to retain the company's current headquarters in Augsburg runs for another five years.

THROWING DOWN THE GAUNTLET

KUKA is exactly the kind of company that China is looking for. After all, the country has a plan. Few in Germany took much notice when Beijing announced it in the form of a document called "Made in China 2025." Written in the rather unwieldy terminology of communism, it describes how China intends to become an economic superpower. It was essentially the equivalent of throwing down the gauntlet to the West.

The plan calls for transforming China into a "major manufacturing power" by 2025, reaching an "intermediate level among world manufacturing powers" by 2035 and becoming "the leader among the world's manufacturing powers" by 2049, the centennial of the founding of the People's Republic. The master plan does not allow for potential economic crises. "Advanced technology is the sharp weapon of the modern state," President Xi said in a 2013 speech that offers a powerful expression of the country's new industrial strategy. "Our technology still generally lags (behind) that of developed countries, and we must adopt an asymmetrical strategy of catching up and overtaking."

What he means is that he wants to make more rapid progress than others in 10 key fields: information technology, automation and robotics, aerospace and aeronautics, oceanographic engineering and high-tech shipping, high-speed rail, electric vehicles, electric power equipment, agricultural machinery, new materials, pharmaceuticals and medical equipment.

In contrast to previous long-term plans, the 2025 strategy seeks a global reach. Its goal is that of leaving behind Western competitors and transforming domestic companies into international champions. It is a blueprint for restructuring the country's economy, from the factories to the laboratories, from industrial production to the service sector, from state-owned factories to privately owned businesses.

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