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Decoupling can be painful. Germany found that out the hard way after weaning itself off its dependence on cheap Russian gas following the 2022 invasion of Ukraine.
Now German companies from Volkswagen and BMW to BASF and Mercedes-Benz are facing what could be a stiffer challenge: a potential scaling back of ties with China, once one of the main sources of their profits. The corporate and political winds appear to be blowing increasingly in that direction.
Friedrich Merz, the frontrunner to become German chancellor in elections next month, warned companies that China was part of an “axis of autocracies” and that investing there involved “great risk”. “My heartfelt request to all companies . . . Limit the risk you take in order to avoid endangering your own company if it triggers an immediate write-off,” he said last week.
That appears to mark a change from the rhetoric of current chancellor Olaf Scholz, who has vaguely talked of “de-risking” from China but also lobbied for better market access for German companies on a trip last year to Beijing together with business leaders. There is also pressure from the US, increasing with Donald Trump’s presidency, for Germany to choose a side between Washington and Beijing.
For big German companies, this might all be beside the point. A decision on China ties may not be entirely in their hands to take.
The potential from China’s huge population and its rising middle class enticed German carmakers and metal bashing industrial companies to expand in the country, overriding any worries about geopolitical tensions or human rights concerns.
But long-standing correlation between Chinese economic growth and German exports to China has broken down since the Covid-19 pandemic. German exports to China increased faster than to any other major trading partner from 2015-20 but have fallen back since.
German companies, particularly the carmakers, face huge market pressure in China. For years derided as producing cheap, clunky cars, Chinese manufacturers — admittedly heavily supported by the state — have shot past their German counterparts in developing electric vehicles.
German carmakers’ EV market share in China was just 4 per cent in 2024, the lowest of any country, according to the German Association of the Automotive Industry. This matters as EV sales in China are more than double those in Europe, US, Canada, Japan and South Korea combined.
One non-German automotive boss thinks that German manufacturers need to give up on China, an especially difficult thing given how lucrative the market has been for them in the past. “Their share is pretty much going to zero. It will be painful,” he adds.
The issue is how painful and fast the process will be. VW delivered 4.2mn cars in China in 2019, making €4.4bn in operating profit. By 2023, those figures were down to 3.2mn deliveries and €2.6bn in operating profit.
Overall, sales of foreign brands in China have fallen to a record low of less than 40 per cent market share, down from more than 60 per cent in 2020, according to data from Shanghai consultancy Automobility. China still represents between a quarter and almost half of sales for VW, BMW and Mercedes suggesting more suffering could come.
German carmakers are keen to protect what they have, however, leading to some strange developments. Analysts estimate German groups such as VW may have to fork out hundreds of millions of euros to Chinese rivals to buy carbon credits to meet new EU pollution rules for this year.
Then there is the spectacle of BMW and Mercedes joining Chinese manufacturers in suing the EU over tariffs on EVs from China. Ola Källenius, chief executive of Mercedes, also told the FT this month that the EU should instead try to encourage Chinese carmakers to open more plants in Europe.
German carmakers are also pushing back against an EU ban on the sale of new fossil-fuel cars from 2035. All of which raises the question of whether German reluctance to decouple from an autocracy is driving EU policy in an unwanted direction.
“German dependency on Russian gas slowed the transition to renewable energy. I’m worried now they are slowing our transition to EVs,” says one European industrial boss.
How this German de-risking or decoupling plays out will be one of the main European corporate stories of the coming years. Can its companies avoid a lose-lose situation, where they find themselves squeezed out of the Chinese market and/or outcompeted by Chinese rivals at home?
richard.milne@ft.com
