BERLIN – Germany is grappling with a pivotal moment as its industrial backbone faces unprecedented challenges, threatening its status as a global manufacturing leader. Over the past five years, the nation has seen a decline in industrial production that could endanger up to 5.5 million jobs and account for 20% of its Gross Domestic Product (GDP), warns a recent report by the London-based Centre for European Reform (CER).
The backdrop of this crisis traces back to Russia's full-scale invasion of Ukraine, which forced Germany to rethink its reliance on Russian oil and gas. This resulted in skyrocketing energy prices that negatively impacted key industrial sectors such as chemicals and steel. Coupled with post-pandemic supply chain disruptions that have reduced demand for German exports, many sectors are now facing tough times.
Moreover, China's rapid transition from low-value manufacturing to high-tech industries intensified the pressure on German production. Beijing's aggressive “Made in China 2025” strategy aims for global dominance in advanced manufacturing and technology, effectively encroaching upon Germany’s key sectors including automotive, clean technology, and mechanical engineering.
Holger Görg, head of the International Trade and Investment research group at the Kiel Institute for the World Economy (IfW-Kiel), remarked, “China has caught up in several advanced industries ... they are very strong in these areas ... and that is contributing to Germany's poor growth performance.”
The automotive industry has particularly felt the heat, as German carmakers grapple with criticism for their slow innovation and late transition to electric vehicles (EVs). This negligence opens the door to fierce competition from Chinese brands like SAIC Motor and BYD, raising alarm bells for potential layoffs and plant closures.
Though the challenges faced by Germany's chemical and engineering sectors are less publicized, they remain significant. For instance, Chinese companies have ramped up production in polyethylene and polypropylene in recent years, leading to a global oversupply that shrink German companies' profit margins, like those of BASF. Data from the Handelsblatt Research Institute indicates that between 2013 and 2023, the share of chemicals exports from China in the European Union grew by 60%, while Germany's share fell by more than 14%.
Not only that, but the mechanical engineering sector, historically known for precision and quality, is experiencing a decline in market share of industrial machinery exports from 15.2% in 2013 to just 15.2% in 2023. In contrast, China's market share surged to 22.1% from 14.3%. This stark comparison highlights the growing competitive edge of Chinese manufacturers.
The crux of the problem lies in China's significant subsidies granted to key industries, which enable their companies to produce at scales and costs that Western firms struggle to match. Estimates indicate that in 2019, China's industrial subsidies reached approximately €221 billion ($242 billion), with the International Monetary Fund's 2022 report emphasizing that these subsidies primarily benefit the chemicals, machinery, automotive, and metals sectors.
As Claudia Barkowsky, China Managing Director of the German Engineering Federation (VDMA), observed, “German mechanical engineering firms will increasingly struggle to compete as their Chinese rivals offer significantly lower prices, sometimes 50% or even cheaper.” A survey conducted by the German Chamber of Commerce in China found that over half of German companies in China anticipate their Chinese competitors becoming innovation leaders within their sectors in the next five years.
In light of these pressures, experts like Brad Setser, co-author of the CER report, lamented the missed opportunities in German policy adaptations to counter the emerging threats from China. “How can German industry survive the second China shock? Why haven't Germany's previous governments seen this and done more to adjust policy?” he queried.
Germany stands at a crossroads; economists stress the necessity for policy adaptation to retain its competitive edge, emphasizing diversification into stronger sectors such as pharmaceuticals and biotechnology. With recent debates revolving around tariffs and subsidies, the current government, potentially a coalition of conservatives and social democrats, is being urged to leverage trade defenses against heavily subsidized Chinese exports.
Serden Ozcan of the WHU — Otto Beisheim School of Management highlights the need for a major “cultural mindset shift” among politicians and business leaders to adapt to the rapid changes in the global landscape. His criticisms reflect Germany's previous reluctance to confront aggressive competition, contrasting with the more competitive and risk-taking attitude displayed by Chinese firms.
Germany's plans for a massive €1 trillion defense and infrastructure spending initiative over the next twelve years shows promise for boosting its economy. However, critics worry that much of this funding is earmarked for military enhancements, risking the opportunity to invest in burgeoning industrial sectors essential for economic sustenance.
Despite the challenging landscape, Görg urges that Germany maintains its strengths in knowledge generation through innovation and research. His comments indicate a hopeful pathway forward, focusing on areas where Germany still excels. Meanwhile, Ozcan posits that a new generation of CEOs better equipped to navigate these dynamics may herald faster adaptation.
Amidst this industrial uncertainty and shifting policies, Germany's journey toward reclaiming its manufacturing glory remains an urgent question. The intersection of aggressive competitiveness, innovative leadership, and strategic policymaking is where Germany can find a way to navigate through these tumultuous times.
