Local for local: a paradigm shift for business

German companies compete, innovate, and develop in China to sharpen their global competitiveness.

Germany's economy has returned to growth in 2026, but whether Europe's largest economy has finally left years of stagnation behind remains far from certain.

According to the Federal Statistical Office, Germany's real GDP expanded by 0.4 percent quarter-on-quarter in the first three months of the year and by another 0.2 percent in the second quarter. While the figures point to a tentative recovery after years of economic weakness, a combination of domestic constraints and external shocks continues to cast a shadow over the outlook for the second half of the year.

The situation is being worsened by climate change, with heat and drought sending water levels plunging on the Rhine, which is one of Europe's most important commercial waterways. Near Cologne, the receding water levels that have disrupted inland shipping have been so severe they exposed a 500-kilogram unexploded United States World War II bomb.

Germany's energy-intensive industries are facing another squeeze as conflict in the Middle East has pushed up energy and raw material costs. The Leibniz Institute for Economic Research at the University of Munich (ifo Institute) has estimated that the energy shock alone could shave about 0.4 percentage points off German economic growth this year, while exports to the US fell 14.2 percent month-on-month in June with uncertainty created by US tariff and trade policies.

Eberhard J. Trempel, director-general of the German Global Trade Forum Berlin, has argued that Germany's competitiveness is being weighed down by high energy and raw material costs, heavy tax and social-security burdens, high labor costs, slow approval procedures, and a shortage of skilled workers.

Against this backdrop, German businesses are searching more urgently for new sources of growth.

Strategy by increments

There has been no single declaration that German industry has found a new answer to its problems at home. Instead, the direction becomes visible through a series of major corporate decisions made in different sectors for different reasons.

On March 26, German chemical giant BASF officially inaugurated its newly built Verbund site in Zhanjiang city, Guangdong province, a sprawling industrial complex covering around 4 square kilometers and representing an investment of 8.7 billion euros ($10.15 billion). The investment is particularly striking because it comes as Germany's chemical industry has struggled with high energy costs, subdued demand, and concerns about industrial competitiveness at home.

"Zhanjiang shows what the future of chemistry looks like: efficient, digital, and sustainable by design," BASF CEO Markus Kamieth said at the inauguration.

The project was completed on schedule and below its original budget, and the site is powered entirely by renewable electricity, and most of what it produces will be sold directly to customers in China under BASF's "local-for-local" strategy.

"This investment shows confidence in the world's largest chemical market in the long run," Kamieth said.

The decision reflects a broader shift in how some German companies think about China as its largest trading partner. Rather than manufacturing primarily in Germany and shipping products eastward, they are increasingly putting production, research and development closer to Chinese customers.

Shi Shiwei, director of the Research Center for Europe at the University of International Business and Economics in Beijing, said: "German companies are increasingly embracing a local-for-local strategy, not only selling in China but also conducting research and development, manufacturing, and innovation there. Staying competitive in China can, in turn, strengthen their competitiveness globally."

Trempel said China remains an "indispensable market" for key German industries including machinery, automobiles, chemicals and electrical engineering. Its scale can help German companies lower costs and maintain global competitiveness, while Chinese ecosystems in electric mobility, batteries, renewable energy and digital infrastructure also offer opportunities for technological cooperation.

The same logic extends beyond traditional heavy industry. For Bayer, another German industrial heavyweight, China is increasingly important, not simply because of the size of its pharmaceutical market, but because of what is being invented there.

The company has been expanding an innovation network that links Chinese biotech companies, universities, and research institutions with Bayer's global pharmaceutical development system. In late May, Bayer held an R&D Open Day at the Beijing center, describing China as an integral part of its pharmaceutical research strategy.

Stefan Oelrich, a member of the board of management of Bayer AG and head of its Pharmaceuticals Division, told China Daily that China has "one of the most dynamic innovation systems in the pharmaceuticals industry".

"China's pharmaceuticals market is, and will remain, a strategic priority for Bayer, and we are continuing to deepen our innovation footprint there," Oelrich said.

The shift in language is significant. Bayer no longer describes China only as a destination for medicines developed elsewhere.

"Innovation capabilities in China are a strategic pillar of Bayer's global innovation strategy," Oelrich said. "We see China not only as one of our most important markets, but increasingly as an innovation engine feeding directly into our global pipeline."

China's biotech industry, academic institutions, clinical capabilities, and digital infrastructure would therefore remain central to Bayer's long-term strategy, he said.

"If we want to remain at the forefront of our industry, we need to be where innovation happens. China is clearly one of those places, and an increasingly important one."

A similar message has come from Bosch.

The German engineering and technology group established the Bosch Robotics Center China in January, focusing on embodied artificial intelligence and humanoid robotics. The company hopes to combine its own expertise in sensors, software, drives and industrial automation with China's manufacturing capacity, supply chains, industrial data and rapidly developing robotics ecosystem.

"China is a source of highly qualified talent and strong innovative capacity," then Bosch chairman Stefan Hartung told China Daily at the company's annual media day in April this year. "The Chinese market has requirements unlike those in almost any other market, and this leads to enormous customer focus, great speed, and intense competition."

Adapting to circumstances

Despite operating in different industries, BASF, Bayer, and Bosch have each made moves that have culminated in a turn toward China.

For some of Germany's biggest industrial companies, the country is evolving from primarily a sales market into a place where products are manufactured, technologies developed and new business models tested.

The attraction is easy to understand. China, the world's second-largest economy, expanded by 5 percent in 2025. With its vast consumer market, complete manufacturing ecosystem and rapidly developing innovation landscape, the country remains difficult for German industry to ignore despite growing competition and geopolitical uncertainties.

Behind the trust is the unusually broad and dense industrial ecosystem of China, which brings together suppliers of sensors, electronics, batteries, motors, precision components and production equipment with software developers and engineering talent, thus creating convenience and lowering costs.

In a report published last year, Reuters cited a source as saying that iPhone manufacturing costs in India remained 5 to 8 percent higher than in China, with the gap reaching as much as 10 percent in some cases.

Semiconductor industry analyst Chen Jing said the experience-curve concept developed by Bruce Henderson at Boston Consulting Group in the 1960s holds that production costs fall by 10 to 15 percent each time cumulative industrial output doubles.

" That rule applies accurately today to China, because other economies cannot match its ability to spread costs across such enormous production volumes, making it highly attractive to investors from major European economies."

Pragmatic new ties

But the economic relationship is not becoming simpler. German exports to China fell by more than 12 percent year-on-year in the first half of 2026 to less than 37 billion euros, even as German exports overall rose 3.7 percent. Chinese companies, meanwhile, have become challengers in sectors once regarded as German industrial strongholds.

Thomas Konig, senior China affairs expert at the German Chamber of Commerce and Industry, or DIHK, sees less contradiction in those trends than the headline numbers might suggest.

"Despite geopolitical headwinds, China remains a vital market," Konig told China Daily. "Over 50 percent of German companies operating here state that the Chinese market is of central importance to their global competitiveness."

The era in which foreign companies could count on rapid, double-digit Chinese growth may have passed, he said, but that does not make China less relevant. Instead, it is changing the nature of the relationship.

"The overall outlook is one of cautious optimism. The era of breakneck, double-digit growth may be over, but a new chapter is beginning," Konig said.

German companies' role in China is changing, Konig pointed out, saying: "German companies are no longer just selling to China; they are innovating in and with China to strengthen their competitiveness here and globally."

For decades, one of the simplest descriptions of Sino-German economic relations was that Germany sold machinery, automobiles, chemicals and other sophisticated industrial products to a rapidly industrializing China, said Jian Junbo, a professor and the director of Center for China-Europe Relations, Fudan University.

Shi Shiwei echoed this.

"The China-Germany economic relationship was traditionally seen as highly complementary, with China providing a vast market and manufacturing capacity while Germany supplied sophisticated products in sectors such as automobiles, machinery and chemicals," Shi said. "But as Chinese companies become increasingly competitive in electric vehicles, machinery, green technologies and other fields, the relationship is evolving into one characterized by complementarity, competition and cooperation at the same time."

The fact that China is not only a consumer but also a producer, technology developer, and increasingly powerful challenger is described by Trempel as a "paradigm shift" for German business: from "Made in Germany for China" toward "local for local".

German companies are increasingly conducting research and development in China rather than merely adapting products developed in Germany. Shorter development cycles — particularly in electric vehicles, batteries, software, and AI — are encouraging them to use Chinese supplier ecosystems and digital platforms, he said.

At the same time, the flow of knowledge is becoming more two-way. Innovations developed under China's intense competition and cost pressure can increasingly feed back into products for European and global markets.

Konig pointed to smart manufacturing, medical technology, renewable energy and the circular economy as areas offering considerable scope for deeper cooperation.

"From electric mobility to industrial efficiency, from medical care to smart AI programs, there remains substantial room for German and Chinese companies to work together," he said.

That assessment closely resembles what German executives themselves are doing, but none of the experts interviewed suggested ignoring the difficulties facing China-Germany economic relations.

Konig said German companies continue to seek greater market access and better treatment, more transparent regulatory processes and reliable intellectual-property protection. Export controls on rare earths are another immediate concern.

"German companies need to continue adapting to the demands of the Chinese market to remain competitive," he said. "The governments of both sides must help to set guardrails for this cooperation and to protect the interests of their respective companies."

Trempel likewise argued that closer cooperation comes with risks ranging from unequal market access to geopolitical tensions and competitive pressure. But he rejected the idea that risk reduction should become an argument for dismantling economic ties.

Risk assessment, he said, has always been part of business. Companies routinely decide where risks are acceptable and where they are not.

For Germany, he argued, the more sustainable approach is to protect genuinely critical technologies and infrastructure while continuing cooperation in areas where the two sides have common interests.

"A pragmatic deepening of cooperation can serve as a catalyst for recovery, provided it is accompanied by fair framework conditions," Trempel said.

For Konig, the same pragmatism is visible in companies' long-term commitment to China.

"From a German business perspective, our commitment to this market is pragmatic, strategic, and long-term," he said.

zhangzhouxiang@chinadaily.com.cn