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08/27/2010

 

It's a humid Friday afternoon in Beijing, where German Chancellor Angela Merkel is addressing a friendly crowd of 80 students from the Central Party School, the Chinese Communist Party's highest training institution for its officials. A banner on the wall behind her reads: "Welcome, Chancellor Merkel."

But on this day Merkel doesn't have much time for niceties. Of course she admires the country's economic vitality, she says, and is impressed by how quickly China has overcome the financial crisis. But, she adds, it's also important to address the country's deficits -- which she then proceeds to do.

China's protections for intellectual property are not up to Western standards, says Merkel. Besides, she adds, Chinese companies have the bad habit of siphoning off technical expertise from their German partners.

At the end of her speech, the German chancellor hands the future elite of the Chinese Communist Party a few lessons in democracy. There are currently five parties in the German parliament, she says, and although this can be vexing at times, it's also productive, because the multiparty system ensures that every issue and every cause finds a voice. "This is why we ask ourselves: Can one party achieve as much as five parties achieve in our country?"

Merkel's open words in the heart of a one-party dictatorship clearly illustrate how the chancellor -- all diplomatic niceties aside -- feels about Germany's East Asian trading partner. She is well aware of the opportunities in the world's largest market, which is home to 1.3 billion people. But Merkel also knows that business leaders in Germany are starting to feel uneasy about the unstoppable rise of Chinese industry.

Some are already wondering whether the supposedly lucrative China connection will turn out in a few years' time to have been a pact with the devil.

Dependent on Each Other

Germany, more than most other Western industrialized countries, is currently tying its economic well-being to China's recovery. Trade with Beijing is the most important driving force behind the current German upswing. It also explains why economists also foresee a bright future for the German economy in the medium term.

With its luxury cars, machine tools and power plant turbines, German industry offers precisely the products the giant East Asian country desperately wants or needs. But the jubilant mood at German industrial giants like Siemens and BASF has recently been somewhat marred by worried questions. What is the significance of the Chinese starting to compete in more and more high-tech markets? What will be the consequences if the fates of entire industrial sectors are decided in the back rooms of Beijing's party bureaucracy in the future?

And what happens if growth in China proves to be an illusion? The government in Beijing, using the tools of a state-controlled economy, is already trying to prevent the next big bubble from bursting in its real estate market.

"I am aware that a growing portion of the company is dependent on this country," says Dieter Zetsche, the CEO of German automaker Daimler. And that relation of dependency applies both in good times and in bad.

Uninterested in Human Rights

At the end of last week, the human rights organization Südwind revealed that German companies like Aldi, Adidas and Metro, as well as their suppliers in the People's Republic, have some of the worst records when it comes to overtime and exploitation of workers. But the leaders of these and other companies pay little heed to such accusations.

They are also uninterested in the fact that China still imprisons hundreds of thousands of critics of the regime in reeducation camps. But what really keeps German company bosses awake at night is the fear that they themselves could eventually fall victim to Chinese power politics.

Beijing tends to react very sensitively to any form of criticism, as it demonstrated once again last week, when the United States Defense Department issued a report concluding that China is pursuing an expansionist military strategy in Asia. The Chinese state-owned press promptly rejected the report as "aggressive."

Beijing was equally reluctant to accept new statistics indicating that China will surpass Japan this year as the world's second-largest economy. The Chinese leadership announced that the news should not lead anyone to conclude that the country should lose its status as a developing nation -- a status from which Beijing derives financial benefits.

On Its Own Terms

China is seeking to engage with the West, but on its own terms. German companies are beginning to feel the effects of this policy. For instance, they note with concern that there is a growing tendency among the Chinese to blatantly demand the divulgence of industrial know-how in return for the right to do business in China. They are vexed by the country's tight control over access to domestic raw materials while it simultaneous seeks to secure exclusive rights to strategic energy reserves in Africa and Asia. And it irritates them that China is treating traditional German industrial domains as strategic business fields.

Some German entrepreneurs and executives consider it a polite understatement when German Economics Minister Rainer Brüderle complains that China is "not always an easy partner." And some Asia experts even predict that Germany's China connection could trigger the long-term demise of many icons of German industry. They warn that German companies that accept China's embrace could quickly find themselves being squeezed too tightly for their own good.

Doing business in China has already brought about deep-seated changes in German companies. Some small and mid-sized companies -- Germany's famous Mittelstand -- already do more than half of their business in East Asia, and the number of German-Chinese joint ventures continues to grow. Chinese executives have already advanced into the ranks of senior management in a number of German companies. There is hardly a company listed on Germany's blue-chip DAX index that hasn't absorbed a part of the People's Republic -- or perhaps it is the other way around.

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• Next

• Part 1: The Dangers of Germany's Dependence on China
• Part 2: Risky Symbiosis
• Part 3: Growing Demand for German Consumer Goods
• Part 4: Warning Signs for German Industry
• Part 5: Optimizing Imported Technology
• Part 6: War of Nerves
• Part 7: Cultivating a Difficult Relationship