China trade End of a Golden Age

German firms doing business in China are having to endure lower growth, stagnating reforms, new regulations and a ‘China first’ policy, not to mention industrial piracy. Conditions are so bad that some of the biggest companies are talking about pulling out.
Quelle: Bloomberg
German car makers under pressure in China: A VW sign at the Beijing International Automotive Exhibition last year.

In the small meeting in Beijing, the mood behind the closed doors fluctuated mostly between anger and disappointment. Representatives of mid-sized German companies were meeting with larger Chinese firms to talk about the outlook for business in China. The tension was understandable: German corporations and mid-sized companies are increasingly frustrated with a government that favors its own firms, lacks the will to implement much needed reforms and doesn’t do enough to prevent industrial espionage, hacking and copyright theft.

According to a person present at the meeting, a representative of German engineering giant Siemens vented his anger. Siemens was exposed to hacker attacks on a near daily basis and no department was safe from the threats, he fumed.

The Siemens representative was not alone. Long gone are the days when German business managers had only praise for China, a country where German firms could guarantee ongoing growth. The frustration cuts across all branches of German industry.

The downturn could get worse, if Chinese authorities fail to reform. Siemens, Annual report 2016

Automakers are nervous because Chinese authorities appear to want to establish quotas for what they can sell in the country. Technology companies can only watch while both state and corporate interests try to tap into their knowledge in an attempt to transform China into a center for high tech. Insurance agencies have been waiting, literally, years for the liberalization of regulations that would allow them to enter the market.

Some German companies have seen the writing on the wall. At the end of last year, Deutsche Bank sold its stake in the Hua Xia Bank, acquired ten years ago when there were still hopes that the Chinese banking sector might open up to the world. European wind turbine makers, such as Germany’s Nordex and Swiss Repower, have left China altogether, complaining that only Chinese companies were getting the orders.

No wonder then that Jörg Wuttke, president of the European Chamber of Commerce in Beijing, is already talking about the “end of the golden years” in China.

Recent financial results show the downturn is real: Siemens’ China revenues dropped by 6 percent to €6.4 billion ($6.82 billion) for the 2016 business year, ending September 30. Siemens' China business, which had already fallen by 4 percent for 2015, took a hit from falling orders in the train technology and wind energy sectors.

Siemens has warned that there is little hope for improvement. Lower economic growth, as well as possible changes to the Chinese real estate market, suggest there is significant risk. “The downturn could get worse, if Chinese authorities fail to reform the state-owned enterprises in the industry and banking sector and to further liberalize and open the economy,” the company said in its 2016 annual report.

German gas and engineering group Linde faces headwinds as well. Demand in the Chinese steel and chemicals sector is dwindling and most of Linde’s industry peers in the country are state-owned. These state-owned groups are currently being subjected to a far-reaching anti-corruption sweep by Chinese leader, Xi Jinping, who wants to crack down on graft and nepotism in the industry. So Chinese managers, afraid of making mistakes under state scrutiny, are holding off on decisions, making it difficult for German companies.

“Foreign companies, whose customers are state-run firms, really suffer,” said Stefan Kracht, head of consulting firm Fiducia, which has offices in Hong Kong and Shanghai.

One group hit particularly hard by the changes in the Chinese economy are Germany’s carmakers. Volkswagen, Daimler and BMW, spoiled by annual sales growth rates of more than 20 percent in the past, suddenly have to contend with only 6 to 8 percent growth. And even those growth rates are looking wobbly now.

At the start of 2017, China raised the sales tax on smaller-engined cars after previously lowering it to support local auto makers, and the government is also mulling plans for a quota on zero-emission vehicles; these so-called ZEVs are usually all-electric cars. Under the draft law, carmakers that produce or import more than 50,000 vehicles a year would be required to ensure that at least 8 percent of sales are generated by ZEVs. The proportion would rise to 10 percent in 2019 and 12 percent in 2020, Bloomberg reports.

And while German carmakers produce a lot of hybrid vehicles, they don’t make as many all-electric ZEVs and would find it hard to ramp up production in time. Volkswagen’s China head, Jochem Heizmann, recently called the plan “a challenge.”

Car parts suppliers are in a similarly difficult situation. While the Stuttgart-based engineering firm, Bosch, is still the industry leader in China, many of its products are simply too expensive for Chinese customers under current market conditions. The quality of products produced by local competitors does not compare to the German originals, but they are of a high enough standard for Chinese buyers and, most importantly, much cheaper.

Additionally, Chinese competitors may not play fair when it comes to improving their own products and there are suspicions of digital industrial espionage. Siemens isn’t the only company complaining about hacker attacks. Other firms, such as Bosch and the semiconductor maker Infineon, also report nearly daily attempts to hack into their company computers.

The regulatory environment continues to be challenging . As foreigners, we’d actually like to do more. Uwe Michel, Head of Asia division, Allianz SE

Insurers like Germany’s Allianz or the Munich Re subsidiary Ergo are facing hurdles of an entirely different, bureaucratic nature. Just like foreign car makers, insurers have to work with a local partner to be allowed to do business in the country. And the Chinese government only approves specific policies for specific regions in the country.

For example, Ergo is allowed to sell life insurance in the north-eastern region of Shandong, but the business has not been profitable. Although Ergo recently secured a second license for the Jiangsu region, executives recently considered a total retreat from the Chinese market, although in the end, the idea was never followed up on.

“The regulatory environment continues to be challenging,” said Uwe Michel, head of Allianz’s Asia business. “As foreigners, we’d actually like to do more.”

Allianz, Europe’s largest insurer by market capitalization, sells life, property and health insurance in China. While the group won’t release official figures for the country, experts estimate that the German insurance giant earns more than twice as much selling life insurance in Indonesia, a much smaller territory. Still, Allianz’ Chinese life insurance business turned a small profit last year.

As a result of all of the above changes, exports to China, once a rapidly expanding pillar of Germany’s trade growth, have dwindled. The German engineering sector, in particular, has felt this. Engineering exports to China dropped to around €11 billion in 2016, compared to more than €12 billion in 2015. Those most impacted were in the machine tooling sector.

The same is true of capital going the other way, with the bleak outlook already having a negative effect on German investment in China. While German companies spent €8.2 billion on Chinese business in 2013, they only invested €4.3 billion last year. And the downward trend is here to stay, according to the German Chamber of Commerce in China. In a survey they conducted, half the German companies approached said they did not plan any investments in the next two years. A year earlier, only 40 percent said that.

Last year, the Chinese economy officially grew by 6.7 percent. Party officials estimate it will grow by at least 6.4 percent this year, but the significance of those figures is questionable. Chinese Premier Li Keqiang himself admitted that he would rather economic growth be assessed using indicators like electricity consumption, railroad freight capacities and growth in bank loans, than on general figures on growth. The indicators he favors certainly showed growth – but this was mostly because of giant, state-funded infrastructure projects as well as the Chinese real estate market.

There is plenty to worry about in the latter as a looming real estate bubble forms. In recent years, the Chinese government has tried to boost development by loosening investment regulations and pumping money into infrastructure and property projects. The volume of construction loans ballooned by 50 percent in 2016.

Amid growing concerns, the government pledged to encourage more sustainable economic development instead, by introducing reforms and opening the Chinese economy up to the world.

But despite President Xi’s passionate plea for free trade at the World Economic Forum in Davos last month, not much has changed. Business leaders complain that the focus remains on “China First.”

For example, the government, fearing public protest, scrapped plans to reform the Chinese steel sector. That’s despite the fact that oversupply pushes down global steel prices and reduces steel makers’ revenues everywhere.

China has also introduced stricter rules on yuan transfers, which the nation’s official public news agency Xinhua insisted were not “capital controls.” Concerned over capital migration, China’s central bank introduced new rules under which banks and other financial institutions will have to report all domestic and overseas cash transactions of more than 50,000 yuan ($7,201), compared with 200,000 yuan previously, Reuters reported, citing a statement. The new law, taking effect in July this year, is a response to dwindling foreign currency reserves, which tumbled to a six-year low of $3.052 billion in November. Money is leaving the country because apparently locals no longer trust the local economy and are trying to move their money elsewhere. But in fact, what the move has also done, is make it harder for foreign companies to transfer their Chinese profits home.

Overall, profits are proving more difficult for foreign companies to achieve in China anyway. According to the aforementioned survey by the German Chamber of Commerce in China, only 24 percent of respondents said they believed their China business to be more profitable compared to other businesses around the globe, on average. Of the surveyed companies, 41 percent said they planned to reduce costs as a result.

Left with little room to maneuver, western companies can only try and pressure their Chinese counterparts.

Michael Clauss, Germany’s long time ambassador in Beijing, is all too aware of companies’ complaints and has called on President Jinping to put his money where his mouth is. In fact, whenever he is interviewed by local media, Mr. Clauss repeats that local officials should keep their promises.

Mr. Wuttke, president of the Chamber of Commerce, is calling for better reciprocal access to the Chinese market for European firms. “You have to push hard to change behavior,” said a Chinese advisor in Beijing, who did not want to be named.

But pushing hard isn’t always the best option for the German business executives themselves. Most international managers are afraid of a backlash that would see their businesses suffer. China’s market is still too important to risk fallout with its omnipotent government, and pressure from one side often invites pressure from the Chinese side too.


Matthias Kamp and Lea Deuber are correspondents with WirtschaftsWoche, a sister publication of Handelsblatt Global. Mr. Kamp was WirtschaftsWoche's China correspondent from 2006 to 2011 and Ms. Deuber is WirtschaftWoche's Shanghai-based correspondent. Additional reporting by Anke Henrich. To contact the authors: [email protected] and [email protected]