Germany's industrial sector falters in the race against China's economic advancement
Competing with the Dragon: Germany's Struggle in the Face of China's Rising Industry
The German industry is feeling the heat from its formidable rival, China. Statistics show a concerning trend: German exports fell by 1.7% last year, while Chinese exports skyrocketed by 7.1%. This shift in the economic landscape has left many Economists and experts worried about the future of the German industry.
China's impressive export growth for the eighth consecutive year stands in stark contrast to Germany's significant decline, which began in 2023. Chinese dominance is palpable even in trade fairs like Hannover Messe, where the number of Chinese exhibitors tripled between 2014 and 2021.
The Rising Threat from the East
The shifting global landscape is becoming increasingly apparent in various aspects. For instance, Volkswagen, once a global powerhouse, saw its passenger car sales decrease by almost 15% in 2021. The reason? A substantial drop in sales in China, the world's largest car market. Local electric car manufacturers outpaced German competitors, leaving them far behind.
"China aims to be the technological leader by 2049, perhaps even the global technological leader," says Philipp Böing, an economist and professor at Goethe University Frankfurt and the ZEW Mannheim. Despite some inefficiencies in their political measures, they have been generally effective."
A Strategy of Self-Reliance
China's industrial policies shifted after the initial economic reforms at the end of the 1970s. Initially, China attracted foreign industrial companies and forced them to partner with local companies. Although this was advantageous for the German industry initially, it always aimed for "ziqiang" – self-reliance.
"Foreign managers often didn't realize that their presence in China was merely a means to an end for the Chinese leadership," explains Böing. Chinese companies have taken what they learned from foreign corporations and are quickly closing the gap in industries that Germany has traditionally dominated.
The Apprentice Surpassing the Master
In the digital age, Chinese competitors are making significant strides in areas like digitization, generative artificial intelligence, and electric mobility. In some cases, they have already surpassed German competitors in technology levels. German industrial production has been on a steady decline for a decade, mostly due to high energy prices. This disadvantage is particularly pronounced in energy-intensive sectors like the chemical industry and the automotive sector.
"Electric mobility will make up more than half of the global market by the early 2030s. German manufacturers will have to maintain their strong position in electric drives to survive," warns Jens Burchardt, an industry expert at BCG. Growing Chinese competition in sectors like machinery and the electrical industry is seen as a potential threat, albeit less immediate than energy-intensive sectors.
China's Debt Crisis
However, China's financial growth comes with its own set of challenges. Many Chinese companies have built up large overcapacities with loans, leading to astronomical levels of debt for the private sector, now exceeding 300% of China's GDP. Economists have long cautioned about the impending financial crisis.
"Chinese companies frequently engage in 'loss-making business,' scaling up production at any cost to undercut competitors. While this strategy often involves producing units below cost, it allows them to scale up enough to eventually produce units profitably. This excess production is then exported," says economist Boing.
The Advantage of a Larger Market
The immense Chinese domestic market is an advantage for Chinese companies. In sectors like wind energy, for example, Chinese competitors can amass substantial technical expertise due to the rapid expansion of their own market. "This allows them to find new sales markets outside China, which poses a risk to German companies," warns BCG consultant Burchardt.
In many high-tech areas, Germany still boasts technologically leading industries. "However, China has a significantly larger domestic market for many modern technologies, can produce at a lower production cost level overall, and seems to be less vulnerable to capital market and return pressure," Burchardt points out.
The Looming Battle for Tech Supremacy
The future of this competition is uncertain due to the unpredictable nature of U.S. trade policies under Donald Trump. Economist Boing doubts that a lasting resolution is likely: "This is ultimately a system competition between China and the West, particularly the USA. The outcome of this system competition will be decided by the technological competition."
Despite the challenges, there are opportunities for collaboration, particularly in emerging technologies. For instance, China's manufacturing scale and Germany's engineering expertise could complement each other in areas like green hydrogen. Only time will tell if these partnerships can help Germany navigate the turbulent waters of economic competition in the 21st century.
In the economic realm, the German finance sector is comprehensively impacted by China's growing influence, as Chinese firms, notably in technology sectors like electric mobility and generative artificial intelligence, are swiftly outpacing their German counterparts.
Moreover, the finance industry must grapple with China's burgeoning domestic market, which offers Chinese companies a significant advantage in acquiring technical expertise and competitively pricing their products, potentially threatening German businesses.
