Since the Covid restrictions were lifted, the hopes of German and European machinery and plant manufacturers for a rapid economic upturn in China have not been fulfilled. The first quarter of 2023 was characterized by lower capacity utilization compared to the previous year.
"Important customer industries are holding back on investments and local governments lack the financial resources for new large-scale projects," said VDMA President Karl Haeusgen in a press briefing in Beijing.
According to a VDMA survey of member companies in April, around 40 percent of respondents still expected the business situation to improve in the following six months. At the same time, companies still hope to achieve their forecast of 6 percent sales growth in China business this year. Last year, the sales of subsidiaries of VDMA member companies in China had increased by an average of 5 percent.
Alternative India
Around 900 VDMA member companies are currently represented in China under their own names, around half of them also with assembly or production operations. 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 involvement and the uncertainties that accompany them, engineering companies are increasingly re-evaluating their involvement.
According to a recent VDMA flash survey (June 2023), the attractiveness of China as a location has noticeably decreased over the past three years. Over the next five years, for example, more companies are planning to build new production capacities in India (17 percent of respondents) or in the ASEAN countries (12 percent) than in China (11 percent). The top country in terms of planned new production capacity is the USA with 22 percent.
China strategy needs repositioning
In a previous survey, 45 percent of VDMA member companies had indicated that they were now rethinking their China strategy. Geopolitical tensions, 'buy local' requirements from the local administration and the general economic slowdown in the Chinese market were cited as the most important reasons for this.
"Again and again, VDMA member companies report obstructions in tenders or projects due to unfair national rules and requirements. In addition, the VDMA takes a very critical view of the data security law with its associated negative impact on our members' business. We therefore have concrete expectations of Chinese policymakers to ensure a level playing field here," says Haeusgen.
In the foreseeable future, the German government intends to present its own China strategy. The VDMA has some expectations of this:
No dismantling of existing export promotion instruments
"There must be no intervention in the export business or even foreclosure of China. However, we are currently seeing measures by the German government to 'discourage' companies. For example, in export credit insurance, supplies from China are no longer desired for projects. In export control, there are significant delays in dual-use licenses and rejections of applications. And in the foreign trade fair program, 60 percent of the China trade fairs for 2024 have been canceled, without consultation with the industry," explains the VDMA president.
Develop strategies to diversify markets
Diversifying sales markets spreads business risks and improves resilience. "Policies can help open up new sales markets 'beyond China,'" Haeusgen said. However, it should not be overlooked that China's market volume (around 10 percent of Germany's machinery exports last year) cannot be compensated for in the short and medium term.
Adjusting export controls in the direction of China
The mechanical and plant engineering sector is waiting with great interest for the changes to export controls for China planned by the German government. "Deleting non-critical product groups could ease the burden on export controls and thus speed up procedures," explained Haeusgen. The industry also needs clarity for the supply of technologies that are currently not subject to export controls, as well as speedy licensing procedures for China as well. "The VDMA would very much welcome and support an open-ended discussion with the German government on export control policy for China," said the VDMA president.
Increased intensity in global competition
Since 2018, the VDMA has recorded a sideways movement in German machinery exports to China, albeit at a high level of around €19 billion (2022: minus 2.3 percent year-on-year). In the first quarter of 2023, exports increased by around 3 percent year-on-year in nominal terms. Overall, the German share of machinery imports in China has fallen from a good 22 percent previously to around 16 percent over the past ten years.
At the same time, exports from China to Germany continue to grow dynamically, reaching a new high of around 12 billion euros in 2022. The intensity of competition is therefore continuously increasing not only in China and on third markets, but also in Europe.
"Due to the strong market interventions and subsidies from the Chinese government, we are unfortunately still very far away from a level playing field," says Haeusgen.
