Economy: How the world is becoming more Chinese
China’s international expansion has called the German government into action. In mid-July, the federal government passed a “China strategy” for the first time, which is intended to standardize state reactions to China’s economic, diplomatic and military actions in the future.
A key point that is barely addressed in the strategy is overseas acquisitions of Chinese companies. Corporations from the second-largest economy buy know-how and brands from abroad in order to strengthen their own economy. The Chinese automaker Geely has just made a new mark. The company already controls Volvo to attack at home and around the world with technology and design from Europe. But those who buy cars with combustion engines from Renault will also give the Chinese strong support in the future. In July, Renault spun off its internal combustion engine and hybrid drive business into an equal joint venture with Geely.
As the third shareholder, the duo secured a financially strong partner who has an interest in keeping combustion engines on the road a little longer: the Saudi oil company Aramco. Speaking of cars: The British brand MG, which is just bringing an electric car onto the market, belongs to Shanghai Automotive Industries (SAIC).
However, one of the first giants from the Middle Kingdom to draw attention to itself in Germany is the household appliance manufacturer Midea. In 2015, the privately held company initially bought the household appliances and air conditioning business of the Japanese technology group Toshiba. At the end of 2016, the company then swallowed up the German industrial robot manufacturer Kuka, a deal that caused criticism even then. This is because an important future German company came under Chinese influence.
In the meantime, a number of other well-known brands have become de facto Chinese. Midea’s local rival Haier was active abroad even earlier, taking over the household appliance divisions of Fisher & Paykel (New Zealand), Sanyo (Japan) and General Electric (USA) between 2012 and 2016, for example.
The computer giant Lenovo is particularly active. The company not only took over Motorola, but also IBM’s computer division, including the legendary ThinkPad computer. It still exists today, but from Lenovo. Parts of the computer business of the Japanese companies NEC and Fujitsu also survive in Chinese hands.
Why China’s strategy worries other countries
If it weren’t for Chinese companies, the takeovers would hardly cause a stir. But China’s economic policy has made other countries feel attacked. The very soberly formulated German China strategy reflects the growing concerns of a growing number of countries.
For the German government, China is “partner, competitor and systemic rival at the same time”. This means that Germany has also come to a realization that Japan and the USA have already made the basis of their policies: China attracts foreign companies and technologies or acquires them through its own companies in order to achieve two goals: “to reduce its own dependence on other countries and at the same time increase the dependence of international production chains on China,” according to the federal government.
That is of course China’s right. But of course other countries also have the right to reduce their dependency on China: “de-risking” is the keyword that stands for the diversification of supply chains. The irony: the complaints about barriers in the Chinese market and forced technology transfer are not new. However, the reaction would have been far less violent if the communist leadership in Beijing had not repeatedly stirred up concerns in recent years.
Under head of state and party leader Xi Jinping, China has become increasingly aggressive militarily and is increasingly threatening Taiwan to return the island, which is regarded as a renegade province, to the Middle Kingdom by force if necessary. Added to this is increasing oppression and growing ethno-nationalism.
Politics outside of China was really startled by the willingness of those in power in Beijing to use China’s dominance of strategic raw materials and products as a means of exerting political pressure. Japan was the first victim in 2010. South Korea and Australia have also suffered severe economic losses from economic penalties imposed by Beijing for unfavorable behavior.
In the case of South Korea, this was the deployment of a missile defense system against the growing threat of North Korean nuclear weapons. Australia had dared to call for an independent investigation into the causes of the corona pandemic. In early July, Beijing responded to the German government by imposing export controls on materials such as gallium and germanium.
Criticized: the “civil-military merging”
The uneasiness about corporate takeovers stems from the fact that in recent years the Communist Party has further blurred the previously blurred lines between private and state-owned companies. The German government’s China strategy mentions one aspect, the “civilian-military merging,” which is intended to promote the deep integration of private companies into the military economy.
This military-industrial complex differs from Western forms in its breadth and consistency. The American think tank “Center for a New American Security” found in a study that this mobilization of companies, universities and research was “surprisingly broad” and encompassed all areas from big data to infrastructure and logistics.
The US think tank Hudson Institute recently clarified Xi’s marching orders at an event: “China is preparing for war”. More precisely, an attack on Taiwan and thus a war with the USA, and not only militarily. A war economy is deliberately built up, which private companies cannot avoid in case of doubt. Because in the Chinese version of a dictatorship of the proletariat, the leadership can easily force companies to cooperate. Through party cells, she already has great influence in the executive floors.
How big is China’s influence in Germany?
The extent of China’s influence on German companies is another question. According to an analysis by “Die deutsche Wirtschaft” from 2021, 274 German companies were Chinese-owned at the time. In addition to Kuka, this also includes companies such as the mechanical engineering company KraussMaffei, the forklift manufacturer Still, the concrete pump manufacturer Putzmeister, the fashion brand Tom Tailor, the service provider LSG Lufthansa Service Holding and the Steigenberger Hotels.
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This puts China in eleventh place among foreign owners, far behind the USA. It is noteworthy that Chinese companies are primarily buying into sectors that are important for both China and Germany: Mechanical engineering comes first, followed by the automotive industry in third place, just behind consumer goods manufacturers.
According to the management consultancy EY, based on Chinese data, Germany was in sixth place in 2022, together with South Korea, with 28 companies purchased, behind the USA, Great Britain, Australia, Japan and Singapore. This is all the more remarkable given that the number of Chinese mergers and acquisitions (M&A) abroad has plummeted.
China’s foreign investments increased this year by 0.9 percent to 146.5 billion US dollars. However, M&A deals fell 52 percent to just $28.7 billion, the lowest level in recent years. Part of the drop could be due to fewer deals being released, according to management consultant EY.
Asia is still the main destination for Chinese investments
But the downturn began even before the corona pandemic. However, Chinese companies still invested most of their money in Asia. Popular destinations include the technology nations of Japan and South Korea. However, Southeast Asian countries such as Indonesia, Vietnam and Thailand are also increasingly attracting Chinese companies. On the one hand, the rapidly increasing labor costs at home are enticing Chinese manufacturers to move to low-wage countries. On the other hand, they hope to conquer the markets there and at the same time to deliver to the US supply chain, which is increasingly cut off from China.
The trend continued in the first quarter of 2023: the M&A volume of Chinese companies abroad is declining. However, the number of deals continues to be dominated by the telecommunications/technology and advanced production technologies/mobility sectors. The largest investments this time were in the second sector, indicating the global offensive by Chinese electric car manufacturers.
Even without the critical political superstructure of China’s strategy, the movements at the bottom of the economy must worry established export nations like Germany and Japan. Because Chinese companies are developing into strong competitors in important sectors. But the crucial question is: How do the top dogs react to the challenger, with reforms and progress or with protectionism? The German government’s China strategy does not yet provide a comprehensive answer to this.
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