Approximately 60% of German businesses operating in China are taking steps to enhance supply chain reliability, with many looking to Southeast Asia as a new frontier.
Chancellor Olaf Scholz’s second visit to China in April 2024 comes at a time when the European Union (EU) is increasingly wary of over-reliance on China, spurred by concerns about economic dependency and unfair competition.
This visit underscores the intricate balancing act Germany faces, as it navigates its relationship with one of its largest trading partners. Scholz’s trip not only reflects Germany’s commitment to maintaining robust trade ties but also highlights its “Strategy on China,” which aims to reduce this dependency while carefully managing the geopolitical landscape.
In 2023, trade between Germany and China reached a staggering €253.1 billion, solidifying China’s position as Germany’s top trading partner for the eighth consecutive year. However, the landscape is shifting. German foreign direct investment (FDI) in China dropped by 30% in the first three quarters of 2023, signaling a significant reassessment of risks by German companies. This decline is particularly noteworthy given the automotive industry’s heavy reliance on Chinese magnesium, a critical component that has previously faced supply disruptions.
Despite these challenges and a growing discourse around “de-risking,” many major German corporations, including BASF, Volkswagen, and Siemens, continue to invest heavily in China. BASF’s ambitious €10 billion chemical complex in Zhanjiang, set to be operational by 2030, exemplifies this commitment. Such investments reflect a paradox: even as discussions about reducing dependency intensify, the allure of China’s vast consumer market remains irresistible.
Germany’s strategy is further complicated by ongoing regulatory concerns. Issues of unequal treatment and local protectionism in China have led the German government to significantly reduce investment guarantees, dropping from €745.9 million in 2022 to a mere €71 million in 2023. This move indicates a cautious approach, acknowledging the rising risks associated with investing in China.
As German companies reassess their positions, Southeast Asia has emerged as a potential alternative. Approximately 60% of businesses operating in China are taking steps to enhance supply chain reliability, with many looking to Southeast Asia as a new frontier. High-ranking German officials, including Foreign Minister Annalena Baerbock and President Frank-Walter Steinmeier, have actively engaged with Southeast Asian nations to strengthen ties, reflecting a strategic pivot in Germany’s economic partnerships.
However, the transition is fraught with challenges. While Southeast Asia offers lower labor costs and potential growth, it also faces significant hurdles, such as reliance on Chinese imports and the dominance of Chinese manufacturing. Relocating operations carries costs and inefficiencies that could deter many businesses from making the shift.
Germany’s path forward is anything but straightforward. The need to balance economic interests with geopolitical realities creates a complex web of decisions. As Scholz’s visit illustrates, while the pivot toward Southeast Asia is crucial for diversifying partnerships, many economic roads for Germany still lead back to China. The situation demands careful navigation to ensure that Germany can protect its economic interests while adapting to a rapidly evolving global landscape.
This balancing act will not only define Germany’s economic future but also its role in a world increasingly shaped by geopolitical tensions and shifting alliances. As the global landscape continues to evolve, Germany must remain agile, seeking opportunities while safeguarding its core interests.
Bahauddin Foizee is an analyst & columnist focusing on the assessment of threat/risk associated with business, economy and investment as well as legal, security, political and geopolitical threat/risk. His articles on these areas as well as on social, environmental, financial and military affairs in the Asia-Pacific/Indo-Pacific and Middle East regions have been widely published.
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