By Tom Fairless
An informal partnership that kept Germany's economy tethered to
China's for decades is unraveling, threatening Berlin's--and
Europe's--post-pandemic recovery as the Asian giant stages a
powerful comeback.
The relationship that saw Germany provide China with the
machines to power its economy helped the German economy recover
rapidly after the financial crisis. But German business leaders say
the model is no longer working as China turns from partner to
rival.
Germany should see its gross domestic product shrink by between
5.8% and 7.1% this year according to German public- and
private-sector economists--better than most other Western economies
but much worse than China's expected 2.5% growth.
While Germany's exporters are benefiting from a recovery in
international trade, they aren't getting the lift from China that
they did a decade ago. In July, German exports were up from June
but still 11% lower from a year earlier. China's exports have
exceeded last year's levels for two months.
This divergence, economists and German business leaders say, is
partly the result of Beijing's strategy to encourage manufacturers
to produce more sophisticated machinery that is more competitive
with high-end German capital goods that were previously
unmatched.
For many German exporters, this doesn't just mean that selling
in China is becoming more difficult. It also means Chinese
companies are popping up more as rivals elsewhere. One firm that is
feeling the pain is Herrenknecht AG.
For 15 years after the turn of the century, the maker of
high-end tunnel borers--multistory factories that lay wires and
concrete as they dig into the earth--became a mainstay of
infrastructure projects across Asia, snaking beneath metropolises
from Beijing to Shanghai.
The family-owned company's revenue rose almost sevenfold between
2000 and 2015, to around EUR1.3 billion--or the equivalent of about
$1.5 billion--with up to a fifth made in China, creating thousands
of jobs at its manufacturing facilities in southwest Germany.
Over the past four years, though, Herrenknecht's annual sales
have fallen by about 5%. China's large construction firms have
developed their own borers and don't need to buy its machines, the
company says. A major rival in the large-machine market, Ohio-based
Robbins Co., recently merged with China's Northern Heavy Industries
Group.
"Chinese companies are ever more competitive in international
markets, offering abnormally low prices," said Achim Kuehn, a
Herrenknecht spokesman. "It's surprising for Europe how quickly
they have come."
This year could mark a tipping point in Germany's relationship
with China, its largest trading partner and a longtime focal point
of its global diplomacy.
For almost two decades, China needed German industrial robots,
factory equipment and vehicles to become the world's foremost
consumer goods manufacturer. German companies took double-digit
sales growth to China for granted. For a few years early in the
century, this helped Germany become the world's largest exporter of
goods, ahead of both China and the U.S. It also allowed Germany to
hold on to its manufacturing jobs even as swaths of industry in the
U.S. and elsewhere migrated to China.
Now, Chinese companies are supplying wind turbines in France,
buses in Norway, power grids in Poland and advanced industrial
machinery across the world. In Sweden's capital, a Chinese group
recently secured a contract to dig three tunnels for the Stockholm
metro.
In key segments of advanced manufacturing, including
infrastructure equipment, China has closed the gap with German
firms, said Karl Haeusgen, chairman of HAWE Hydraulik SE, which
says it has seen more competition from China for its hydraulic
valves and pumps used in wind turbines and machines.
"China is not a developing country, not at all. It's an
established, top-notch manufacturing country," Mr. Haeusgen
said.
Because the government has managed to control the coronavirus's
spread and due to its policies to support the economy, Chinese
exporters are now grabbing a larger share of global exports while
other countries remain hamstrung by the pandemic.
"It's only a matter of time until Chinese firms are number one,"
said Ulrich Ackermann, managing director for foreign trade at the
VDMA Mechanical Engineering Industry Association.
Germany's share of world trade in mechanical engineering
goods--a sector that employs about 1.3 million Germans--shrank to
16.1% from 19.2% in the decade through 2018, while China's share
rose to 13.5% from 8.5% over the period, according to VDMA
data.
China has since continued to expand its share of global markets
most relevant to German engineering firms, such as infrastructure,
according to a study published last month by Baker McKenzie, a law
firm.
In December, a Chinese engineering group, CRRC Tangshan Co., won
a EUR50 million contract to build 18 trains for Metro do Porto, the
light-rail network in Portugal's second-largest city. It was the
first train-building contract for a Chinese company in the European
Union, beating out Siemens AG of Germany, among others. Officials
thought the trains seemed sturdy and looked almost Italian by
design, according to a person familiar with the decision.
Jorge Morgado, a spokesman for Metro do Porto said the Chinese
bid won based on factors including price, technical quality and
design, and came in at EUR6.5 million less than Metro do Porto's
initial estimate to buy the trains.
Stefan Brandl, chief executive of ebm-papst Group, which builds
electric motors and fans used in cars and household devices, said
the new reality dawned on him three years ago, when he noticed an
increase in the quality of competing products from China.
China remains the company's second most important market after
Germany, but the company's Chinese sales had stagnated for months
even before the pandemic kicked in, after previously growing
regularly at double-digit levels, he said.
At large trade fairs that are starting to reopen around Germany,
Chinese companies had until recently shown up with small,
old-fashioned stands, said Tim Loeschner, a German who is general
manager of NGC Europe, the local unit of China High Speed
Transmission Equipment Group Co. Now, he says, "you can't tell the
difference between many Chinese and German manufacturers."
Chinese exhibitors at the Hannover industry trade fair, one of
the world's largest trade shows for investment goods, made up
almost a fifth of the total last year compared with 13.6% in 2015,
according to the organizers.
In 2019, German exports to China rose at their weakest pace
since 2015, according to government figures. Even as the Chinese
economy now rebounds from its coronavirus trough, German firms
aren't benefiting as much as they did after the 2008 financial
crisis, said ebm-papst's Mr. Brandl. He expects his company's
Chinese sales to decline by 3% to 4% this year and only return to
their precrisis level next year.
Germany's midsized engineering companies, often family-owned and
bank-financed, are facing off against giant state-funded Chinese
companies that benefit from vast economies of scale and produce
everything in-house, said Sebastian Bauer, managing director of
Bauer Maschinen GmbH, an industrial equipment manufacturer based in
Bavaria.
"Industrial machines are not a luxury good. Customers are
interested in both quality and price," said Mr. Bauer.
Even Germany's storied auto industry is under siege. China's
Contemporary Amperex Technology Ltd., known as CATL, is now the
world's largest producer of batteries for electric vehicles. CATL
is building a battery factory in Germany that will be about three
times the size of Tesla Inc.'s Gigafactory, to supply European car
makers.
Meanwhile Germany's Bosch GmbH, the world's largest automotive
supplier, has said it wouldn't build batteries for electric cars,
even though its business in combustion-engine components is fading.
Instead, it said it was cooperating with CATL to build
batteries.
Analysts estimate that batteries account for about 40% of the
cost of an electric car. The German government estimated in a
report last year that nearly half the country's 870,000 auto jobs
could vanish with the switch to electric vehicles.
Last year, Bogestra AG, which operates in the cities of Bochum
and Gelsenkirchen in the Ruhr Valley--Germany's rust belt--became
the first public transit company to order electric buses from
China. The 20 buses from BYD Auto Co. will join older buses from
Mercedes-Benz and Czech manufacturer Solaris Bus & Coach SA. A
Bogestra spokesman said the company's decision to go with BYD was
based on the sales price, the cost of operating the vehicles and
quality.
Many German executives still see China as their largest market.
Yet in private, they say they are running out of patience with
bureaucratic obstacles, forced technology transfers, subsidies and
assorted protectionist barriers long seen as the price for
accessing the market. Some are calling for Berlin to mimic
President Trump's tough approach to Beijing.
"U.S. aggressiveness is useful because it means Germany can take
positions that would have looked aggressive two years ago but now
look reasonable," said Jeromin Zettelmeyer, a former senior German
economics ministry official who is now deputy director for strategy
at the International Monetary Fund in Washington.
German officials have recently signaled a more assertive
diplomatic stance toward China. They say the nation will switch its
focus toward Asian democracies including Japan and South Korea,
amid disputes with China over issues ranging from fair access to
its market to human rights.
Norbert Röttgen, a political ally of Chancellor Angela Merkel
who chairs Parliament's foreign affairs committee, said China would
only need Germany as long as Germany retained its technological
edge.
"My fear is that this window is closing, China is progressing in
achieving more and more technological leadership, and we are
stagnating, " he said.
William Boston in Berlin contributed to this article.
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
September 17, 2020 06:46 ET (10:46 GMT)
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