When German company representatives met up in Beijing last month to talk about business in China, the mood fluctuated between anger and disappointment. German corporations and mid-sized companies, spoiled from years of dreamlike growth rates, grow increasingly frustrated with a government that favors its own firms, lacks the will to implement much needed reforms and even encourages cyber espionage.
It was particularly the representative of German engineering giant Siemens who vented his anger. Siemens was exposed to hacker attacks on a near daily basis and no department was safe from the threats, the representative said according to a person present at the meeting.
But Siemens isn’t the only company struggling in times of sluggish Chinese growth. Across industries, German firms are faced with a slew of new regulations and cut off from vital market access. Increasingly, they also become the target of cyber-attacks on their intellectual property in moves directed by Chinese companies and the state to transform China into a high technology center.
Jörg Wuttke, president of the European Chamber of Commerce in Beijing, even speaks of an “end of the golden years” in China.
Under pressure from falling growth rates, rising debt and global economic uncertainty, President Xi Jinping rather opts for the protection of China’s domestic industries and workers.
And indeed, some corporations already decided to withdraw from the Far-Eastern market altogether. At the end of last year, Deutsche Bank completed the sale of its stake in Chinese Hua Xia Bank, which it acquired 10 years ago. Back then, it was still hoping for an opening of China’s financial market to international competitors.
And European wind turbine makers, such as Germany’s Nordex and Swiss Repower, have left China altogether, complaining about consistently losing out to Chinese competitors in tender processes.
First company results already show the downturn to be real: Siemens’ China revenues dropped by a whole 6 percent to €6.4 billion ($6.82 billion) in the 2016 business year, which ended on September 30. Siemens' China business, which already dropped by 4 percent in 2015, took a hit from falling orders in the train technology and wind energy sectors.
Siemens warned that there is little hope for the trend to change. Lower economic growth, as well as possible changes to the Chinese real estate market, harbor a significant risk, Siemens said. “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 from November.
Foreign companies, whose customers are state-run firms, really suffer. Stefan Kracht, head of consulting firm Fiducia
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 subjected to a far-reaching anti-corruption sweep by Mr. Jinping, who wants to crack down on graft and nepotism in the industry.
But Chinese managers, afraid of making mistakes under the scrutiny of the state, hold off on any decisions, making it difficult for German companies to find an investment partner. “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.
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 validity of these figures is limited. Chinese Prime Minister Li Keqiang himself admitted that economic growth is mainly calculated based on three rather questionable factors, as opposed to an actual broad economic overview: electricity consumption, railroad freight transportation and the expansion of banking loans.
The bleak outlook is already having a negative effect on investments. While German companies spent €8.2 billion on their China business in 2013, they only invested €4.3 billion last year. And the downward trend is one to stay, according to the German-Chinese Chamber of Commerce in Beijing. Half of the German companies asked in a survey said they did not plan any investments in the next two years. A year earlier, only 40 percent said so.
One group hit particularly hard by the changes in the Chinese economy is that of Germany’s carmakers. Volkswagen, Daimler and BMW, spoiled by yearly sales growth rates of more than 20 years, suddenly have to content with 6 to 8 percent growth.
At the start of 2017, China scrapped tax reductions on small-engine cars and the government mulls plans for a compulsory electric-vehicle quota. 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 through new-energy vehicles by 2018. The proportion would rise to 10 percent in 2019 and 12 percent in 2020, Bloomberg reports. Volkswagen’s China head, Jochem Heizmann, recently called the plans a “challenge.”
Car suppliers don’t have a much easier time. Engineering and electronics firm Bosch, for example, can feel the competition creep up. While Stuttgart-based Bosch still is the industry leader in China, many of its products are simply too expensive for Chinese customers under current market conditions. While the quality of products produced by local competitors does not compare to the original “Made in Germany,” it is sufficiently good for Chinese buyers and, most importantly, much cheaper.
Fearing public protest, the government scrapped plans to reform the Chinese steel sector to cut overcapacities.
To improve their products, Chinese competitors stoop to anything. Siemens by far isn’t the only company complaining about hacker attacks. Other firms, such as Bosch and semiconductor maker Infineon, also report nearly daily attempts to sniff out their corporate secrets.
As a result of the changes, exports to China, once a rapidly expanding pillar of German growth, have dwindled. It is especially German engineers that have scaled down their deliveries. Engineering exports to China dropped to around €11 billion, compared to more than €12 billion in 2015, mainly driven by a fall in machine tools.
Adding to economic uncertainties is the fear over a looming real estate bubble. The Chinese government in recent years tried to boost development by loosening investment regulations and pumping money into gigantic infrastructure and property projects. The volume of construction loans ballooned by 50 percent in 2016.
Alerted by growing concerns, the government 3 years ago pledged to encourage sustainable economic development by introducing reforms to open the Chinese economy to foreign players and to allow Chinese groups to do more business abroad.
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 the focus was still a “China First” policy.
Fearing public protest, the government scrapped plans to reform the Chinese steel sector to cut overcapacities, for example. Oversupply of the commodity pushes down global steel prices and reduces steel makers’ revenues across the globe.
The regulatory environment continues to be challenging, even though, as foreigners, we'd actually like to do more. Uwe Michel, head of Allianz's Asia business
Michael Clauss, Germany’s ambassador in Beijing, is all too aware of companies’ complaints and swiftly called on Xi to put his money where his mouth is.
Instead, China introduced stricter rules on yuan transfers, which the nation’s official public news agency Xinhua rejected to be described as capital controls. But in fact, it becomes increasingly harder for foreign companies to transfer their Chinese profits home. Concerned over outflowing capital, 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.
Insurance groups, such as German Allianz or the Munich Re subsidiary Ergo, are facing bureaucratic hurdles of an entirely different nature. Just like foreign car producers, insurers have to join forces with a local partner to be allowed to do business in the country. And the Chinese government only approves policies for specific regions in the country.
Ergo, for example, has been granted to sell cash-value life insurances in the North-Eastern region of Shandong, but the business is hardly profitable. Ergo recently secured a second license for the Jiangsu region, but executives are said to have mulled a total retreat from the Chinese market. Such plans have been scrapped for now, however, sources said.
“The regulatory environment continues to be challenging,” said Uwe Michel, who is the head of Allianz’s Asia business. “Even though, as foreigners, we’d actually like to do more,” Mr. Michel added.
Allianz, Europe’s largest insurer by market capitalization, sells life, property and health insurances in China. While the group declines to release official earnings figures for the country, experts estimate that the insurer earns more than twice as much with the sale of life insurances in significantly smaller Indonesia. Allianz maintains that its Chinese life insurance business was profitable last year.
But overall, the profit situation has worsened among foreign companies in China. According to a recent survey by the European Chamber of Commerce in Beijing, only 24 percent of respondents said they believed their China business to be more profitable compared to their global average. 41 percent of the surveyed companies said they planned to reduce costs as a result.
Left with little room to maneuver, western companies are upping their pressure. Joerg Wuttke, president of the European Chamber of Commerce in China, is calling for reciprocal access to the Chinese market for European firms. Ambassador Mr. Clauss is openly calling for more reforms in Chinese newspaper, urging officials to keep their promises.
“You have to press hard to achieve changes in behavior,” said a Chinese advisor in Beijing, who did not want to be named.
But pressing hard only is a theoretical option for German business executives, as most managers are afraid of backlashes. China’s market is still too important to risk a fallout with its omnipotent government.
Matthias Kamp and Lea Deuber are correspondents with WirtschaftsWoche, a sister publication of Handelsblatt Global. Mr. Kamp covers company news out of Munich and previously was WirtschaftsWoche's China correspondent from 2006 t0 2011. Ms. Deuber is WirtschaftWoche's Shanghai-based correspondent and reports on the country's political and economic development. Additional reporting by Anke Henrich. To contact the authors: [email protected] and [email protected]