The economy in China is weakening, geopolitical tensions are increasing the risks. Even after moving away from the zero-Covid policy, German companies are struggling in China business.
Poor market prospects in China and geopolitical tensions mean that German companies in China are pessimistic about the future. After the end of the zero-Covid policy in the People’s Republic, the mood has not improved as hoped, according to a survey by the German Chamber of Commerce in China (AHK), which was presented in Beijing on Thursday. More than half of the companies expect the industry to develop “unchanged or worse” this year. Almost every third fears a drop in profits. When it comes to investments, there is a clear reluctance.
“The sluggish development of the market and the ongoing geopolitical tensions have put hopes for a rapid improvement in the business environment into perspective,” said Jens Hildebrandt, executive board member of the Beijing Chamber of Commerce. “Local companies continue to localize and diversify to accommodate changing geopolitical conditions and minimize their exposure.”
Depressed business climate
Relations between China and Germany are particularly strained by the Chinese backing for Russia in the Ukraine war, its threats against democratic Taiwan and German considerations to reduce dependence on China business. The economic prospects for the second largest economy are also darkening. China’s foreign trade has declined 6.2 percent since the beginning of the year. Exports fell an unexpectedly sharp 7.5 percent in May, raising new concerns about growth.
The depressed business climate is also likely to be discussed at the German-Chinese government consultations on June 20 in Berlin. For the new head of government, Li Qiang, it will be the first trip abroad since he took office in March. Before the political talks, a delegation of top representatives of the German Chamber of Industry and Commerce (DIHK), headed by DIHK President Peter Adrian, started a “constructive-critical dialogue” with the Chinese side in Beijing in order to address the current problems.
More than a third (35 percent) of German companies expect the situation for their industry to deteriorate further this year. Profit expectations are also falling: 32 percent of companies expect a decline of more than five percent. In the August 2022 survey, it was only 22 percent.
Nevertheless, more than half (55 percent) intend to continue investing in China in the coming years. However, the number is significantly lower than during the 2020 and 2021 pandemic, when it was more than 70 percent. And if companies invest today despite all this, they do it predominantly (62 percent) to remain competitive in the Chinese market. However, 17.7 percent want to reduce their investments, which is significantly more than in 2020 and 2021.
57.8 percent of the companies name poor expectations for market development as the biggest problem. 42.2 percent fear the growing geopolitical tensions with sanctions, export controls, the Ukraine war and the conflict over Taiwan. Chinese efforts to become more independent from other countries are also cited by 28.4 percent as a reason for cautious investment.
Supply chain diversification
In order to reduce their dependence on China because of the risks, German companies are increasingly pursuing localization (27.4 percent), but also diversifying their supply chains away from China (20.5 percent). Almost a fifth (18.8 percent) suspended planned investments. Another 18.4 percent are diversifying their investments into countries other than China. 16.3 percent are also planning for the “worst case” in order to be able to withdraw completely from China if necessary.
In the survey, in which 288 member companies of the chamber took part in May, 63.2 percent expressed the hope that the Chinese government would boost consumer confidence in order to stimulate the economy – including through direct subsidies. 29.2 hope to be treated equally with Chinese companies in public tenders.
From the German side, they want an end to the “bottleneck” in the processing of visa applications for their Chinese employees to enter Germany. After the pandemic, the consular offices are not yet sufficiently staffed. 76 percent of companies are affected by the long lead times.