For decades, German managers have given little thought to political risks when doing business with China. But they are growing with the Beijing leadership’s increasingly aggressive threats against Taiwan.
According to a study by the Prognos Institute, German industry is also heavily dependent on the geopolitically uncertain China when it comes to importing its primary products. This applies, among other things, to data processing, chemistry and electrical equipment, as the experts at the consulting institute write in the paper published on Thursday. They therefore recommend that companies order more from less risky states.
The main source of the analysis are the German import statistics. “Intermediate services” are goods that the domestic industry needs and processes for its production – be it chemicals, computer chips or car parts. The study was commissioned by the Bavarian Business Association (vbw) in Munich.
Last year, the German economy sourced around eleven percent of its inputs from China, making the People’s Republic the most important single procurement market. In the paper, a “risk traffic light” shows those countries marked in red that are either currently at war, such as Russia against Ukraine, or are threatening other nations with war, such as China in the case of Taiwan.
Risk of default due to geopolitical tensions
However, according to Prognos, Chinese imports play a larger role in several industrial sectors that are important for Germany than the average of eleven percent would suggest. Accordingly, in 2022 the German economy imported almost a fifth – 19 percent – of its requirements for chemical intermediate products from China. “This is associated with a certain risk of failure due to geopolitical tensions,” write the authors.
In data processing, a third of the components and devices required were imported from China. The situation in this area is made more complicated by the fact that, according to Prognos, Taiwan follows in second place with a nine percent import share. In the event of a Chinese attack on the democratic island state, deliveries from both countries would be at acute risk. Beijing considers independently governed Taiwan to be its territory.
When it comes to preliminary products for electrical equipment, the Chinese import share is 22 percent. Batteries and accumulators are cited as an example in the study, 38 percent of which were purchased in China.
The authors therefore advise companies to send their buyers to other, less risky countries and regions of the world. The study recommends, among other things, to look to India for chemical products, to look for car tires and other plastic products in Thailand, for construction supplies in North America and for electrical equipment in Mexico, to name just a few examples.
Diversification of supply chains is “the order of the day,” said Bertram Brossardt, managing director of the contracting company vbw. “Our study shows that we have additional markets in almost all areas that can strengthen local production chains.”
Source: Stern
