The hopes of German and European mechanical and plant engineering for a rapid economic upswing in China have not been fulfilled since the lifting of the Covid restrictions. The first quarter of 2023 was characterized by lower capacity utilization compared to the previous year.
“Important customer industries are reluctant to invest, and the local governments lack the financial means for new large-scale projects,” explained VDMA President Karl Haeusgen in a press conference in Beijing.
According to a VDMA survey of member companies in April, around 40 percent of those surveyed still assumed that the business situation would improve over the next six months. Nevertheless, the companies still hope to be able to achieve their forecast of 6 percent sales growth in China business this year. Last year, the sales of the branches of VDMA member companies in China increased by an average of 5 percent.
India becomes the alternative
Around 900 VDMA member companies are currently represented in China under their own names, around half of them also with assembly or production. According to initial estimates, these companies provide at least 150,000 highly qualified and well-paid jobs in China. However, due to the growing geopolitical tensions with Chinese participation and the associated uncertainties, mechanical engineering companies are increasingly reassessing their involvement. According to the latest VDMA flash survey (June 2023), the attractiveness of China as a location has noticeably decreased over the past three years. In the next five years, more companies are planning to set up new production capacities in India (17 percent of those surveyed) or in the ASEAN countries (12 percent) than in China (11 percent). The front runner in the planned construction of new production capacities is the USA with 22 percent.
Reorganization of the China strategy
In a previous survey, 45 percent of the VDMA member companies said they were now rethinking their China strategy. The main reasons given for this were geopolitical tensions, ‘buy local’ requirements from the local administration and the general economic slowdown on the Chinese market.
“Again and again, VDMA member companies report obstacles to tenders or projects due to unfair national rules and requirements,” complained Haeusgen. “In addition, the VDMA is very critical of the Data Security Act and the associated negative effects on our members’ business. We therefore have concrete expectations of Chinese politicians to ensure a level playing field here.”
Expectations of the German China strategy
The federal government wants to present its own China strategy in the foreseeable future. The VDMA attaches a number of expectations to this:
No dismantling of existing export promotion instruments
“There must be no intervention in the export business or even isolation from China,” emphasized the VDMA President. “Currently, however, we are seeing measures by the federal government to ‘discourage’ companies. In export credit insurance, for example, supplies from China are no longer desirable for projects. In export control, there are significant delays in dual-use permits and refusals of applications. And in the foreign trade fair program, 60 percent of the China trade fairs for 2024 were canceled without consulting the economy.”
Develop strategies to diversify markets
Corporate risks are spread and resilience improved by diversifying sales markets. “Politics can help to open up new sales markets ‘beyond China’,” said Haeusgen. However, it should not be overlooked that China’s market volume (around 10 percent of German machine exports last year) cannot be compensated for in the short and medium term.
Adjust export controls towards China
The mechanical and plant engineering sector is awaiting the changes to export controls for China planned by the federal government with great interest. “By eliminating non-critical product groups, the export control could be relieved and the procedures could be accelerated,” explained Haeusgen. The industry also needs clarity for the delivery of technologies that are not yet subject to export controls, as well as speedy approval procedures for China too. “The VDMA would very much welcome and support an open-ended discussion with the federal government on export control policy for China,” said the VDMA President.
Global competition with China is increasing in intensity
Since 2018, the VDMA has recorded a sideways movement in German machine exports to China, albeit at a high level of around 19 billion euros (2022: minus 2.3 percent compared to the previous year). In the first quarter of 2023, exports increased by a nominal 3 percent compared to the same period last year. Overall, the German share of machine imports in China has fallen from a good 22 percent to around 16 percent over the past ten years. At the same time, exports from China to Germany continue to grow dynamically and have reached a new high of around 12 billion euros in 2022. The intensity of competition is therefore increasing not only in China and on third markets, but also in Europe.
“Due to the strong market interventions and subsidies on the part of the Chinese government, we are unfortunately still a long way from a level playing field,” summarized Haeusgen.
