German firms adapt as China refocuses its economy, industry

As the Asian economy switches its focus to higher-value-added products and services, German firms' exports to nation to evolve

PUBLISHED : Friday, 13 September, 2013, 12:00am
UPDATED : Friday, 13 September, 2013, 3:00am

Confident or complacent, German business executives are bullish about their chances of profiting from China's planned transition to an economy fired by consumption rather than investment.

With Beijing saying it will put the dampener on the nation's long capital-spending boom, Germany will no longer be able to count on windfall gains from exports of the high-quality machinery for which it is renowned.

What's more, mainland manufacturers are likely to pose a growing competitive threat to Germany in some sectors as they abandon low-value-added production and march up market.

Yet, German entrepreneurs express confidence that their time-honoured recipe of constant innovation will continue to pay off.

After all, Germany has managed to increase its share of global manufacturing exports to Organisation for Economic Co-operation and Development countries since 1995, even as China's ascent has eroded the shares of France and Italy.

"There's a lot of competition from China, but thank God the Chinese are not as innovative as we are - they are known for copying things rather than bringing new developments onto the market, so they tend to be a step behind us," said Sabine Herold, co-managing director at DELO Industrial Adhesives, based near Munich.

Europe is not as directly exposed as commodity producers to the changes unfolding in China, which aims to wean itself off resource-intensive heavy industry and the low-skilled assembly of imported components and raw materials.

But the potential repercussions are considerable. China is Germany's fifth biggest market, taking 6 per cent of its exports. By comparison, France ships 3.4 per cent of its exports to China, Britain 3.3 per cent and Italy 2.3 per cent.

With capital goods accounting for more than 40 per cent of German exports, Beijing's determination to depend less on investment seemingly bodes ill. But as some doors close, others open.

Take DELO, whose adhesives are used in mobile phones, smart cards and electronic components. The firm employs 350 people and makes 60 per cent of its €52 million (HK$536 million) in annual sales abroad.

"We notice that our products are no longer just being used in production in China but that these bonded products are also sold to the Chinese market as well," Herold said. "In that sense, China is already a growth market for us."

As living standards in China rise, so does demand for protein. That's good news for firms such as Broekelmann + Oelmuehle, based in the western city of Hamm, which processes oilseeds into edible oils and feedstuffs.

"We're not feeling the slowdown in China," Bertram Broekelmann, the firm's managing director, said. "China is a huge market and it needs to import more and more food because consumption, including of high-quality products, is increasing."

China is a huge market and it needs to import more and more food

And machines will still be needed to make and pack those high-quality food products and consumer goods such as pharmaceuticals.

So, whereas demand for some types of machinery might fall, there should not be a big impact on overall volumes, according to Ulrich Ackermann, head of the foreign trade department at the German Engineering Federation.

Markus Rustler, managing director of Theegarten-Pactec, a manufacturer of confectionery packaging machines based in the eastern city of Dresden, said it was a big opportunity for German machine builders who had the right machines to make products for Chinese consumers. "We have those machines," he said.

The challenge for Germany will be to fend off competition not only from other economies specialising in capital goods, such as Japan and South Korea, but also from China, which has been steadily upgrading its industrial structure.

Medium-technology products such as cranes, refrigerators and gas turbines now account for nearly 40 per cent of Chinese exports, up from 25 per cent in 1995, according to economists at Royal Bank of Scotland. German industry has resisted China's rise to date by focusing on high-performance products, often custom-made, that command correspondingly high prices.

This strategy is likely to continue to pay off for machine tools, according to InterChina Consulting. It expects the domination of the top end of the market by German and other foreign manufacturers to last another couple of decades.

"For China to develop a competitive machine tool industry, important structural and social/behavioural changes are required, which will be difficult and require many years," Long Nanyao wrote in a recent report by the consultancy.

To sharpen their competitive edge, Chinese firms are taking over European rivals to obtain the technology needed to raise their game. Construction equipment typifies the trend. China's two major companies in that sector, Sany Heavy Industry and Zoomlion, have both bought expertise in concrete pump manufacturing, Sany by acquiring Putzmeister of Germany and Zoomlion by acquiring CIFA of Italy.

"As we look back 10 years from now, what we will see is that a significant number of companies that are fundamentally China-domestic today will be calling themselves global companies but with Chinese characteristics," said Gordon Orr, a director in Shanghai with consultants McKinsey.