Angela Merkel, Germany’s chancellor, left, shakes hands with Xi Jinping, China’s President, after a news conference at the Chancellery in Berlin, Germany. (Photographer: Krisztian Bocsi/Bloomberg)

Why Germany Is Betting on Trade With China

(Bloomberg) -- When Sabine Herold opened a new Shanghai facility in September, the milestone for her tiny Bavarian glue maker was the culmination of 14 years of careful development — and a sign of how deep and wide commercial ties between Germany and China have become.

Piling into China with Bosch drills, Mercedes-Benz cars and Siemens turbines has made the Asian country Germany’s largest business partner for the past two years. Total trade between the two reached $179 billion in 2017, double the U.K.’s level and triple that of France. Germany’s special status became clear in July, when BASF SE announced a $10 billion plant in Guangdong province — the first large manufacturing site in China entirely owned by a foreign chemicals maker. Now, BMW AG is plowing $4.1 billion into its Chinese joint venture, taking advantage of a new policy to let foreign companies take majority control of their local partnerships. 

“The development in China is so unbelievably fast,” said Herold, managing partner and part owner of Delo Industrie Klebstoffe GmbH, which makes specialty adhesives for smart cards, automotive sensors, and mobile-phone speakers and needs to carefully choose its niches as it vies with giants like DowDuPont Inc., 3M Corp. and Henkel AG. 

Why Germany Is Betting on Trade With China

The fact a company like Delo — with 750 employees and annual revenue of $184 million — can thrive in China’s highly regulated, complex economy shows how successful Germany has been in prying open the market. That’s thanks to decades of focused effort by corporate heavyweights, support from Chancellor Angela Merkel and a unique network of local development centers, where Delo found its footing before branching out on its own. 

German companies are bolstered by institutions such as the country’s Center for Industry and Trade in Shanghai. Like its sister sites in Beijing and the port city of Taicang, the center provides a launching pad for Germany's small exporters, offering administrative services and informal consultation on issues from licensing to human resources.

The three centers, funded by state-backed banks called Landesbanken, are home to almost 300 companies, up from about 200 in 2015. They range from tiny startups to mid-sized enterprises such as headphone maker Sennheiser Electronic, brewer Bitburger and the country’s soccer champions Bayern Munich.

‘Safety Net’

“German companies want to have a ‘safety net’ when going abroad,” Christian Sommer, head of the Shanghai site since 2005, said in his office, decorated with plaques recognizing his contributions to German-Chinese relations. “If you make a mistake in China, it can have an impact at headquarters back in Germany.”

The facilities aren’t just appealing for German companies. Dozens of Chinese cities and regions have lobbied for their own centers, according to Sommer, who envisions as many as 10 new locations to help German businesses push into second- and third-tier cities.

The Shanghai location — where Delo had an office until a few weeks ago — opened in 1994 on the campus of Tongji University, which traces its roots back to a German medical school in the early 1900s. Today, the center occupies an eight-story compound in the city’s technology hub, with 30,000 square meters of office space and four eateries, including a traditional German bakery.

Why Germany Is Betting on Trade With China

Delo has relocated to a three-story building in Shanghai’s bustling Zhangjiang Hi-Tech Park — home to regional headquarters of multinationals such as Siemens AG and General Electric Co. The glue maker quadrupled the size of its previous space, including its biggest lab outside its headquarters in the rural pasture land near Munich. What was once a one-man operation now employs more than 30 people and accounts for almost a third of the company’s global sales. 

“When China succeeds, we’ll be proud to be part of it,” Herold said at a ribbon-cutting ceremony, where about 100 guests were served German specialties such as sausage, sauerkraut and pretzels as well as stir-fried lotus roots with yam and peppers. “This is the right time to be here.”

An important draw for the Germans is President Xi Jinping’s Belt and Road Initiative, which aims to create an economic zone linking Asia with Europe, the Middle East and Africa. While German business leaders see the plan as a potential challenge to the post-war order, it’s a chance they can hardly pass up.

Why Germany Is Betting on Trade With China

“If the Western world doesn’t get its act together in how it designs free trade,” China could snub the international system and turn Belt and Road into “the new WTO,” Joe Kaeser, chief executive officer of German engineering giant Siemens, told Bloomberg TV. “We need to be very mindful about what we deal with here.”

While the ties offer tantalizing opportunities in a country of 1.4 billion consumers that’s shifting from low-cost manufacturing into higher-end technology, Germany’s export-driven economy faces risks as U.S. President Donald Trump steps up his trade war with China. That was evident in Berlin on Thursday when the country lowered its growth forecasts for the next two years, citing “external” weakness. The trade uncertainty comes on top of the perils of Chinese government subsidies to state-owned companies and partners siphoning off know-how.

“The growing dependence on China is a delicate balancing act,” said Juergen Mallon, a professor at the University of Applied Sciences in Kiel. “There's huge opportunities, but also risks.”

While Merkel has traveled to the country 11 times in her 13 years in power, usually with an entourage of corporate executives, relations are complex, and her government has begun to push back over concerns about efforts to co-opt German technology.

In 2015, the country introduced a program it calls “Made in China 2025,” which effectively seeks to supplant Germany as the world’s leader in advanced manufacturing. Since the plan was presented, Chinese investors have spent more than $26 billion acquiring German companies such as robot maker Kuka AG and KraussMaffei Group, a Munich producer of plastic injection-molding equipment.

Why Germany Is Betting on Trade With China

Germany is responding by scrutinizing foreign deals more closely and this summer blocked an attempted Chinese takeover for the first time. Citing security risks, Merkel's administration in August scuppered the purchase of precision engineering firm Leifeld Metal Spinning AG. A few days earlier, the government snapped up a 20 percent stake in power-grid operator 50Hertz Transmission GmbH, thwarting the advances of a Chinese investor.

Despite the political caution, German businesses are unfazed. Half of the 400 companies surveyed by the German Chamber of Commerce in China last year said “Made in China 2025” would have a positive impact on them for the next five to 10 years. With Asia’s long-term growth prospects and the potential for increased trade friction with the U.S., German executives see greater benefit in stronger ties with Chinese companies than with the Americans.

“Because of U.S. policy, Europe and Germany are edging closer to China,” said Frank Hiller, chief executive officer of Cologne-based engine maker Deutz AG, who is working on securing new deals in the country. “As Germans and Europeans we need to see how we can play a role” in China.

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