German Businesses Face Difficulty Operating in China

People visit the Volkswagen booth during a media day for the Auto Shanghai show in Shanghai, China, on April 19, 2021. Aly Song/File Photo /Reuters

Two pivotal economic players in Germany, Volkswagen and BASF Group, are faced with serious criticism for their business operations in Xinjiang, China’s westernmost province, where Uyghur genocide allegations continue to arise. Experts contend that German enterprises deeply integrated into the Chinese market are encountering problems.

German chemical giant BASF agreed to accelerate their withdrawal from Xinjiang, after reports exposed BASF partner, Xinjiang Markor Chemical Industry, had been working with state officials to intimidate Uyghur and other minority groups, said a press release by BASF on Feb. 12.

After BASF’s announcement to sell the stakes of its two plants in China’s Xinjiang region, German politicians from the SPD, Greens, and FDP appealed to Volkswagen to do the same, according to a report by the dpa-AFX.

“Xinjiang must become a ‘no-go’ as a location for economic activities for Western companies, including VW,” said Renata Alt (FDP), chairwoman of the Bundestag’s human rights committee, to the Tagesspiegel, said the report.

According to a Human Rights Watch report in early February, “Global carmakers, including General Motors, Tesla, BYD, Toyota, and Volkswagen, are failing to minimize the risk of Uyghur forced labor being used in their aluminum supply chains.”

Economist Davy Jun Huang believed BASF’s move involves merely withdrawing its production facilities from Xinjiang, potentially relocating them to other regions within China.

“The two German behemoths, Volkswagen and BASF, are simply attempting to navigate away from sensitive areas while seeking viable opportunities elsewhere. Their investment in China will likely be more circumspect, rather than a complete withdrawal,” said Mr. Huang to the Chinese language edition of The Epoch Times.

German Enterprises Deeply Integrated

Last year, both Volkswagen and BASF were expanding their investment in China, despite the United States trying to isolate Beijing.

“Earnings from China allowed the company to effectively offset losses from Europe’s high energy costs and stringent environmental rules,” said Martin Brudermüller, BASF’s chief executive, reported The New York Times.

“Executives at Volkswagen privately concede the automaker is in a similar quandary. High energy and labor costs have left the company heavily reliant on sales from China to help underwrite operations in Europe,” said the report.

Vincent Lee, a senior consultant at The Industrial Technology Research Institute, a Taiwan-based think tank, also told The Epoch Times that the majority of foreign investors place greater emphasis on China’s market rather than its production advantages.

He explained that Volkswagen sold around three million cars in China last year, representing 35 percent of its total global sales. “In reality, China has become Volkswagen’s largest single market,” said Mr. Lee.

“In addition, BASF’s annual report showed sales in the Greater China region, mainly in China, constituted about 12.5 percent of its global sales in the first half of 2023,” he said. Furthermore, BASF predicts that by 2030, half of global chemical sales and three-quarters of sales growth will be fueled by its operations in China.

These corporations have been prioritizing the future market potential in China, Mr. Lee said, “Germany’s insistence on businesses adhering to their social responsibilities within supply chains and avoiding ethical breaches doesn’t imply compelling these enterprises to relinquish the Chinese market. But, adjustments in production strategies may be inevitable.”

A man walks past tanks of German chemicals giant BASF at the company's headquarters in Ludwigshafen, western Germany, on Feb. 26, 2019. Uwe Anspach/DPA/AFP via Getty Images

In a recent analysis by Rhodium Group, an American think tank, it is stated that some German industrial sectors—construction, cement, steel, rail, and solar—began feeling the bite of Chinese competition and market access restrictions over a decade ago, leading to bankruptcies and job losses.

“Despite a souring mood, big German firms have continued to invest heavily in China in order to remain relevant in a cut-throat market and to insulate their China operations from escalating geopolitical tensions,” said the Rhodium report.

Mr. Lee foresees that foreign enterprises will reconfigure their supply chains, “Considering both geopolitical and supply chain risks, along with a worsening production environment within China, which is not particularly favorable for foreign businesses, along with the influence of factors such as corporate social responsibility.”

He believes that foreign investments will lean towards a model often described as “in China for China,” wherein the primary focus of production infrastructure is to serve the domestic market of China.

German Technology Theft

Rhodium’s analysis indicated that the German and Chinese economies have shifted from a win-win economic relationship in the first two decades of the 21st century to a zero-sum direction. “In July 2023, the German government published a China strategy that advocated for economic diversification away from China,” said the report.

Mr. Huang told The Epoch Times that Germany, with its significantly advanced technology and managerial approaches, was one of the earliest entrants into the Chinese market, because China required German technology, orders, capital, and management systems.

Nonetheless, after two decades, a significant number of German companies have raised complaints regarding the protection of intellectual property rights, the espionage from Chinese enterprises, and sometimes even governmental entities, occasionally extending to the pilfering of their orders and clientele.

“This poses a major threat to German businesses. The technological prowess has been a key competitive advantage of Germany. The technology theft issues not only impacts their profits but also jeopardizes their existence,” said Mr. Huang.

In the foreseeable future, Germany may face opposition to collaboration with China from the political front. Nevertheless, at the grassroots and corporate levels, there might still be a preference to uphold such cooperation.

However, the prolonged economic decline and growth stagnation in China will force German enterprises to “swiftly reduce or even abandon their presence in the Chinese market without hesitation,” said Mr. Huang.

Cheng Jing and Yi Ru contributed to this report.