Sino-German trade ties shift toward local integration

Germany is reporting its economy is growing again after years of stagnation as key parts of its industry broaden their horizons.

Real GDP in Europe's largest economy grew 0.4 percent quarter-on-quarter in the first quarter and a further 0.3 percent in the second, according to Germany's Federal Statistical Office.

The figures point to a tentative recovery, but domestic constraints and external shocks continue to cloud the outlook. Heat and drought have sent water levels plunging on the Rhine, a vital commercial waterway, while tensions in the Middle East have driven up energy and raw material costs, squeezing energy-intensive industries.

Against this backdrop, German businesses are searching more urgently for new sources of growth. No single declaration shows that industry has found an answer to its problems. Instead, a new direction is emerging through a series of major corporate decisions across sectors, each for different reasons.

In March, chemical giant BASF inaugurated its Verbund site in Zhanjiang, Guangdong province — a sprawling 4-square-kilometer complex representing an investment of 8.7 billion euros ($10.08 billion).

The investment is particularly striking as Germany's chemical industry grapples with high energy costs, subdued demand and concerns over industrial competitiveness at home.

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

Completed on schedule and below its original budget, the site runs entirely on renewable electricity. BASF will sell most of its output directly to customers in China under its "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 view China, their largest trading partner. Instead of manufacturing mainly 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, with R&D, manufacturing and innovation taking place in China alongside sales.

"Staying competitive in China can, in turn, strengthen their competitiveness globally," he said.

Eberhard J. Trempel, director-general of the German Global Trade Forum Berlin, said China remains an "indispensable market" for key German industries, including machinery, automobiles and chemicals.

Its scale can help German companies lower costs and stay competitive globally, while its strengths in electric mobility, batteries, renewable energy and digital infrastructure offer opportunities for technological cooperation.

For Bayer, another German industrial heavyweight, China is increasingly important not only for the size of its pharmaceutical market but also for its innovation.

Bayer has expanded an innovation network linking Chinese biotech firms, universities and research institutions with its global pharmaceutical development system. In May, the company held an R&D Open Day in Beijing, calling China an integral part of its pharmaceutical research strategy.

Dynamic system

Stefan Oelrich, a member of Bayer AG's board of management and head of its Pharmaceuticals Division, said 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," he said.

The shift in language is significant. Bayer no longer sees China simply as a market for medicines developed elsewhere.

"Innovation capabilities in China are a strategic pillar of Bayer's global innovation strategy," Oelrich said.

Engineering and technology group Bosch established the Bosch Robotics Center China in January, focusing on embodied AI and humanoid robotics. The company aims to combine its expertise in sensors, software, drives and industrial automation with China's manufacturing capacity, supply chains, industrial data and fast-growing robotics ecosystem.

"China is a source of highly qualified talent and strong innovative capacity," then-Bosch chairman Stefan Hartung said in April.

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

For some of Germany's biggest industrial companies, China is evolving from primarily a sales market into a base for manufacturing, technology development and testing new business models.

The attraction is clear. With its vast consumer market, complete manufacturing ecosystem and rapidly advancing innovation landscape, China remains difficult for German industry to ignore despite growing competition and geopolitical uncertainty.

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 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 10 to 15 percent each time cumulative 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," Chen said.

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

Thomas Koenig, a senior China affairs expert at the German Chamber of Commerce and Industry, sees less contradiction in these trends than the headline numbers might suggest.

"Despite geopolitical headwinds, China remains a vital market," Koenig said, adding that the overall outlook is "one of cautious optimism".

"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 China-Germany economic ties was that Germany sold machinery, automobiles and other sophisticated industrial products to a rapidly industrializing China, said Jian Junbo, director of the Center for China-Europe Relations at Fudan University.

Shi echoed the view, saying the relationship was traditionally seen as highly complementary, with China providing a vast market and manufacturing capacity while Germany supplied automobiles, machinery and chemicals.

"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."

China's emergence as not only a consumer but also a producer, technology developer and increasingly powerful competitor represents a "paradigm shift" for German business, Trempel said — from "made in Germany for China" toward "local for local".

German companies are increasingly conducting R&D in China rather than merely adapting products developed in Germany. Shorter development cycles are also encouraging them to tap Chinese supplier ecosystems and digital platforms, Trempel said.

Koenig highlighted smart manufacturing, medical technology, renewable energy and the circular economy as areas with considerable potential 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.

zhangzhouxiang@chinadaily.com.cn