China Exports Key to German Economic Success
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7 September 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com
As we noted last week, there are several intriguing aspects to Germany’s current economic growth,
which is not fantastic in absolute terms – 2.2% in the second quarter –
but DOES considerably outshine its EU counterparts,
as well as notching the highest quarterly mark since unification in 1990.
7 September 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com
As we noted last week, there are several intriguing aspects to Germany’s current economic growth,
which is not fantastic in absolute terms – 2.2% in the second quarter –
but DOES considerably outshine its EU counterparts,
as well as notching the highest quarterly mark since unification in 1990.
One of the key DOMESTIC factors we detailed was the so-called “kurzarbeit” or “short-work” system,
in which, UN-like the US above all,
companies don’t simply fire people when things get tough,
but make every effort to keep them on, cutting back their hours or pay, but retaining the bulk of their pay,
a strategy made possible by a fund into which both the government and the employers themselves contribute during good times,
hence available to them during more difficult episodes.
This week, we examine the key EXTERNAL factor for Germany’s export-oriented growth –
its tremendous success in penetrating key niches in China’s industrial powerhouse,
most notably in high-tech capital and luxury consumer goods,
at which Germany both specializes and excels.
Germany, more than most other Western industrialized countries,
has tied its economic well-being to China’s recovery.
Indeed, trade with Beijing is the most important driving force behind the current German upswing.
It also explains why economists 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.
The relationship between Germany and China is beginning to acquire a dimension
that could exert a similar impact on the global economic order
as the relationship between the United States and China.
China’s rapidly growing economy seems to have an almost unquenchable thirst for German-made products.
Although other European Union countries still account for two-thirds of Germany’s more than €800 billion in annual exports,
no other segment of German foreign trade is growing as quickly as the Chinese market.
Exports to China were up by almost 60 percent this year.
Despite this success, 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.
So 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?
As we have noted many times, 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.
But what really keeps German company bosses awake at night is
the fear 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 in mid-August,
The Chinese state-owned press promptly rejected the report as “aggressive.”
Beijing was equally reluctant to accept new statistics indicating
China has surpassed Japan 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 note with concern that there is a growing tendency among the Chinese
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 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.
The contradictions have even crept into the rhetoric of corporate leaders.
When German senior executives are in Beijing or Shanghai,
they have nothing but glowing praise for the country.
But the minute they return to Munich or Düsseldorf,
they complain about industrial espionage
and instruct their personnel departments to avoid hiring Chinese interns at all costs.
The industrial symbiosis between the two countries offers enormous opportunities and carries tremendous risk,
so much so that few German companies can escape its pull anymore.
At a time when the US economy is ailing and Europe is launching more and more austerity programs,
companies ranging from multinationals to small business face a stark choice: China or death.
‘China Was Our Salvation’
Martin Herrenknecht wouldn’t put it quite that way, however.
He takes a more benevolent view of the situation.
“China was our salvation,” says Herrenknecht,
who owns a company of the same name that builds tunnel-boring machines.
“Without China, we would never have made it through the crisis as well as we did.”
According to its figures, the company’s total output declined by only 6 percent in 2009, at the height of the crisis.
No one was let go at Herrenknecht,
nor did the company avail itself of the government-subsidized “short-time working” / “kurzarbeit” program
which helped prevent job losses at many German firms.
It posted €866 million (about $1.1 billion) in sales in 2009,
with 25 percent of revenues coming from Asia.
“China, China, China,” says the white-haired entrepreneur.
“The country is just unbelievably dynamic.”
The main reason Herrenknecht finds the Chinese so dynamic is that
they are constantly digging tunnels –
big tunnels, small tunnels, long tunnels, short tunnels.
Herrenknecht received 19 orders for subway tunnels
and seven orders for railroad tunnels from China last year alone.
He travels to China about once every two months.
His company has nine facilities in the country, with a total of 500 employees.
Herrenknecht still produces electronic and hydraulic equipment at its main plant in Schwanau,
but domestic sales would not have been sufficient to keep the operation running at full capacity in recent years.
“If you want to complete a construction project here, it’ll take forever,” says the entrepreneur.
“In China, on the other hand, it’s hard to keep up with the lightning pace of subway construction.”
But Herrenknecht and other German companies in China didn’t just benefit from a weak euro.
As we noted last week, they have also been more adept at adjusting to conditions in global markets than other European countries,
due largely to the re-structuring initiated by previous Chancellor Helmut Schroeder.
The chief executives of companies in cities like Düsseldorf, Frankfurt and Stuttgart
streamlined their organizations to become more flexible and constantly came up with new products,
while the unions played their part by agreeing to only modest wage increases.
This led to a decline in unit labor costs, an important indicator of an economy’s competitiveness.
German products kept their high quality but became less expensive,
which did not hurt their already strong reputation in global markets.
In addition, its economy complements China’s in several key areas.
Its companies can provide almost anything a growing economy needs to get ahead,
from machine tools to chemical products to turnkey industrial plants.
German companies consequently benefited more than most
from a €400 billion infrastructure program the government of
Chinese Prime Minister Wen Jiabao launched to help stimulate the economy.
Another advantage German companies have is that they became internationalized early on.
Most owners of small- and mid-sized companies were already looking abroad one or two decades ago
to sell their products or produce parts to supply their plants at home.
“For those who have been active in Central and Eastern Europe in the last 20 years,
the step to China isn’t all that big anymore,”
says Axel Nitschke, foreign business chief of the Association of German Chambers of Industry and Commerce (DIHK).
Growing Demand for German Consumer Goods
Nowadays, Germany isn’t just supplying capital goods for the development of Chinese industry.
As the Chinese upper class becomes more affluent,
there is growing demand for consumer goods,
including luxury cars made by the likes of Mercedes, BMW and Audi, high-end kitchens and expensive shoes.
If the Germans have their way, this symbiotic relationship could go on indefinitely.
On the one hand, the Chinese export T-shirts and athletic shoes, flat-screen TVs and CD players to Germany.
In return, German industry sells its high-tech products — cars, aircraft, railroads and machines — to China.
And because the country is so big and so much of its land is still underdeveloped, especially in the rural western provinces,
this mutually beneficial division of labor could continue for years,
generating consistently high growth rates and benefiting German industry.
Whether this dream scenario will play out or not, of course, has yet to be seen.
One thing that would need to happen if it were is that
Germany’s business elite must defend their technological edge
against Beijing’s aggressive advances more vehemently than in the past.
Until now, no one cared much whether Chinese companies were flooding world markets with their counterfeit, mass-produced goods.
In fact, it enabled the Germans to sell even more of their high-tech equipment in China.
But today, as the country becomes more interested in Germany’s traditional industrial sectors,
the protection of intellectual property becomes a question of survival.
More is at stake than a few copied blueprints or the small print on licensing agreements.
The underlying issue is whether the German business model is still viable in the 21st century,
an era that will be strongly influenced by the Chinese.
If German companies manage to maintain their technological edge over the increasingly powerful Asian competition,
doing business in East Asia will still prove to be a blessing for German industry in the future.
But if they relinquish their unique position, they will sooner or later be steamrollered by China’s industrial power.
And if they do, German industrial giants like Siemens and Daimler could end up with little more than a few niche markets in northern Europe.
The German economy faces an enormous challenge,
and yet sometimes it seems as if its business leaders are still reluctant to take on the Chinese.
“We can either do without this huge growth market, or we submit to the Chinese conditions,” says one German auto executive.
“There is nothing in between,” as noted in this extensive feature in Spiegel Online.
And this is precisely why Germany’s latest “economic miracle” may not last as long as it would like.
As long as its economic success remains so closely tied to China,
there are obviously a great number of factors that would have to remain in place.
This is unlikely in general in such a dynamic world economy,
and is especially so when dealing with a country as fast-moving,
as noted above by tunnel-maker Herrenknecht, as China.
And while we have only touched briefly on them here,
a key factor in the German / Chinese – or ANY “economic” relationship – is, of course, the politics.
In this particular situation, Germany is not acting alone – at least for the moment.
Whatever the current sentiments, it remains the “European Germany”
the founders of post-Nazi West Germany always intended it to be.
Its relations with China thus depend not just on two-country dynamics,
but, significantly, with how events unfold in the Euro-zone –
a situation whose twists and turns, let alone outcome, no one can predict.
So however gratifying the current situation may be for both countries,
each one has to act very consciously to make sure it continues – especially Germany.
David Caploe PhD
Editor-in-Chief
EconomyWatch.com
President / acalaha.com
