Why German manufacturing is losing in China

This is probably how China's President Xi Jinping imagined it: When the conflict with the USA intensifies, the foreign policy pressure on the People's Republic increases, and at the same time its economy weakens, German companies increase their investments in the Middle Kingdom. According to a quick survey conducted by the German Chamber of Commerce Abroad (AHK) in China in April on the occasion of the tariff war between Washington and Beijing, every second respondent plans to do so.

A quarter of German companies in the People's Republic are also relocating their procurement from the United States to other markets. Only 13 percent of companies, on the other hand, are withdrawing their production from China.

“However, when it comes to large investment plans, we are talking about a manageable number of large German companies,” explains Oliver Oehms, managing director of the AHK in North China.

For example, Bosch is building a research and development center and a production facility for e-mobility in Suzhou for one billion euros. In Germany, however, the automotive supplier and technology group is cutting 6,000 jobs.

BMW sells fewer cars in China

ZF Friedrichshafen has built a factory for e-mobility in Shenyang, among other places. Since 2020, the company has also invested five billion euros in the People's Republic and now operates 50 locations there, boasts ZF's China chief, Renee Wang. In Germany, however, the automotive supplier plans to lay off up to 14,000 employees by 2028. ZF is 93.8 percent owned by the Zeppelin Foundation of the city of Friedrichshafen. The foundation pursues “exclusively and directly charitable and benevolent purposes,” it explains on its website and is therefore exempt from corporate and trade tax.

The decisions for such investments may be understandable. But are they wise? BMW would likely say no. The automaker's profit fell by 26.4 percent in the first quarter because it sold fewer vehicles in the People's Republic. For competitor Mercedes, the decline was even 43 percent. BMW CEO Oliver Zipse assures that it will get better by the end of the year. However, there is not much to support that.

Although the national statistics bureau in Beijing reports that China's economy grew by five percent in 2024, the research firm Rhodium Group assumes that the figures were embellished for political reasons and that the economy of the People's Republic grew by a maximum of 2.8 percent last year.

From January to March 2025, it is said to have grown by 5.4 percent, reports the Mercator Institute for China Studies (Merics) - but only because Beijing boosted the economy in the fourth quarter of 2024 with the equivalent of around 1.4 trillion euros. The money was provided by banks in the form of cheap loans. It also flowed to regional governments, which had financed infrastructure and economic development projects with high loans in previous years.

According to estimates by the International Monetary Fund, the provinces are now in debt to the equivalent of 7.4 trillion euros. This corresponds to 47.6 percent of China's gross domestic product. Many observers are therefore concerned about the stability of the financial system of the People's Republic.

Is the Chinese growth model running out of steam?

With its cash injection, Beijing was also unable to change anything about the burst real estate bubble or the resulting loss of wealth for Chinese households. These will therefore only consume just over two percent more in 2025 than in the previous year, according to the consulting firm McKinsey. "Even if the growth target for 2024 could still be achieved, concerns remain that the Chinese growth model could run out of steam," summarizes Gero Kunath from the German Economic Institute (IW). For 2025, only one of the 22 available forecasts predicts that the growth of supposedly five percent from the previous year will be reached again, says the economist. Rather, it would be 4.4 percent, and in 2026 only 4.1 percent.

This is also due to the tariffs that Washington and Beijing will levy on each other in future trade. On May 11, they agreed that the USA would henceforth demand a rate of 30 percent on goods from China. China has set its tariff at ten percent. For 90 days, both sides initially do not want to collect the tariffs and negotiate how to proceed in the future. But that also means that the trade war could escalate again.

"In China, it will primarily affect exporting companies; especially those operating with small margins, and particularly the middle class," expects Merics chief economist Max Zenglein in an interview with ZDF. Three-quarters of German companies in China are also expected to feel the negative impact of US tariffs, according to participants in the AHK survey. Two-thirds of respondents are also affected by the tariffs introduced by Beijing.

In the automotive industry, 93 percent of German companies in China, and 86 percent in mechanical engineering, expect the tariff dispute to cause them significant harm. One-third of respondents anticipate that their revenue will drop by up to 20 percent. Four out of ten German companies fear that their profits will decrease.

"Investments in China are a fatal mistake"

But why does every second German company want to expand its investments in the People's Republic? "Almost all industrialized nations are holding back on direct investments. Only the Germans are not. They want to be smarter than everyone else once again. They are pursuing their own national course - just like before Russia's invasion of Ukraine in energy policy," notes Bernd Ziesemer in the magazine 'Capital'. This is a fatal mistake that will end badly, expects the long-time editor-in-chief of 'Handelsblatt'.

"The companies from countries like the USA that are leaving China are essentially service providers like law firms, auditors, and tax consultants. They can easily close their laptops and fly home," admits the head of the AHK North China, Oliver Oehms. The German economy, on the other hand, has primarily invested in the Chinese automotive industry, mechanical engineering, and chemistry. "Such investments are not quickly relocated to Bangladesh or Vietnam just because the wind is blowing in your face," says Oehms.

German companies themselves cite other reasons why they must invest in China. Some of them are understandable. The People's Republic is the largest single market in the world. No other can replace it. Some corporations generate huge portions of their revenue there - VW about 36 percent, BMW and Infineon a third, Porsche a quarter of its earnings.

Those who research in the People's Republic usually have problems

It is also credible that those who want to sell in the People's Republic must also produce there. Otherwise, they cannot keep up with the pace of the Chinese market. "In the automotive industry, Tier-1 and Tier-2 suppliers are under such price and time pressure due to ever-shorter innovation cycles that they are increasingly relocating critical value-added steps such as research and development or tool and mold making, which they previously kept at their headquarters in Germany, to China," reports Oliver Oehms from the AHK North China.

But those who conduct research in the People's Republic often have problems transferring data and intellectual property to the actual owner, the parent company in Germany. “Difficulties with intellectual property regularly rank among the top three problems in our surveys on doing business in China,” confirms Oehms.

Therefore, the global competitiveness of the German economy does not necessarily increase by relocating innovations and corporate functions to the People's Republic. For example, if Audi equips models like the E5 with software from Huawei, it makes the vehicle more competitive in China, but not in the USA. It will hardly be sellable there because Huawei is on the list of companies sanctioned by Washington. Many observers are now warning that German companies could also lose their competitiveness through their involvement in China.

In the past 20 years, they have benefited massively from the economic rise of the People's Republic, as they supplied the machines, chemicals, and engineering knowledge that China needed. At the same time, German companies invested massively there. In 2024 alone, they built capacities in production, research, development, and sales in the People's Republic for 5.7 billion euros. That was 45 percent of all investments from the EU. The German automotive industry alone contributed 4.2 billion euros to this.

The German export engine falters

However, the People's Republic no longer needs these investments since the bubble in its real estate market burst in 2021. Since then, its banks have had to invest the savings of Chinese citizens elsewhere. They save a lot. The savings rate of Chinese households is a good 44 percent of GDP, two and a half times higher than that of private households in the USA.

In the EU, the value is 18 percentage points lower. Therefore, a lot of money in China is currently looking for investment opportunities. Most of it flows into the development of production capacities. However, what is produced with these must be exported, as demand in the People's Republic is weak, report Sander Tordoir and Brad Setser from the British think tank Centre for European Reform (CER) in a study from January this year.

The share of the People's Republic in global industrial production has more than tripled compared to 2009 to 18 trillion US dollars. Its share of world trade was just under 15 percent in 2024. That was 17 percent more than six years earlier. In contrast, the German export engine has been faltering for a long time, reports Jürgen Matthes from the IW. “From 2000 to 2015, the annual average growth of real exports of goods and services was still a high 4.5 percent, but from 2015 to 2023 it was only 1.6 percent,” says the head of the International Economic Policy, Financial and Real Estate Markets Cluster at the IW.

Are Chinese companies taking technological leadership?

“The return to export-driven growth has put China on a collision course with Germany,” emphasize Sander Tordoir and Brad Setser from the CER. This is because Chinese companies often produce the same products as German ones - cars and machinery. At the same time, the overcapacities in Chinese industry, combined with high subsidies, translate into prices that are far below those of German providers.

Due to state support, “Chinese companies also consciously accept short- and medium-term losses to capture market share in the long term, and invest in enormously large production capacities before bringing a product to market,” summarizes the research institute Synolytics in a study it conducted in 2024 for the German Mechanical Engineering Industry Association (VDMA).

Chinese companies now often offer better products than German ones. After all, 55 percent of the company representatives surveyed for the current business climate survey by the AHK expect that Chinese competitors will take over technological leadership in their respective industries within the next five years. In mechanical engineering, even more companies say this. Six out of ten of the 500 decision-makers who participated in the VDMA study fear that by 2029 their companies will only be in an average or poor competitive position.

German companies try to keep up with change

German companies are trying to keep up with this change by positioning themselves as partners of Chinese firms in their expansion in the world market, report chief economist Max Zenglein and director Mikko Huotari from Merics in a recently published study. The necessity of de-risking in China would translate for many German companies into an 'in China for China' strategy. 'In doing so, they risk chasing a mirage of market opportunities that ultimately slips out of reach,' warn Huotari and Zenglein.

Automakers and machinery manufacturers are already feeling the effects. BYD has replaced Volkswagen as the best-selling car brand in China. Siemens and Bosch have to compete with Huawei, Haier, and HikVision. 'Even German companies are increasingly sourcing machinery and equipment for their production in China locally from Chinese suppliers,' adds AHK managing director Oliver Oehms.

In Germany, every third industrial company is already responding by relocating production lines abroad to reduce costs. Every second company with activities in China is reducing its production and laying off employees, found Jürgen Matthes and Edgar Schmitz from IW. 'What benefits individual German companies no longer seems to align with what serves the German state. This is a significant break with the traditional harmony between corporate interests and Germany's foreign economic policy, which shaped most of the past three decades,' summarize Max Zenglein and Mikko Huotari from Merics the dilemma.

A total of nearly half a million jobs in Germany depend on demand in China, confirms the research company Rhodium Group. These jobs are increasingly coming under pressure - most quickly and intensely in small and medium-sized companies in the mechanical engineering and automotive industries. In the wake of production cuts, waves of layoffs, and relocations abroad, a 'gradual and 'quiet' industrial decline is likely to threaten,' also summarize Jürgen Matthes and Edgar Schmitz from IW.